National Insurance Law Forum

Write Good, Pay Less

Mike Aylward — Fri, 05 Feb 2010 17:05:30 -0500

Just as truth is often said to be the first casualty of war, bad grammar is often the first victor in coverage battles. Such has recently been the fate of the quaint but venerable doctrine of the last antecedent, whereby clauses in a contract are interpreted in accordance with the words or phrases that immediately precede them rather than words that are more remote.

Two courts have considered this doctrine in reaching opposite conclusions with respect to whether standard CGL “personal and advertising injury” coverage for “publication of material that invades a person’s right of privacy” extends coverage to junk fax claims. The issue in these cases was whether it is the “publication” that is invasive or the “material.” Junk faxes, while annoying, rarely contain secret or confidential information such that their content could be said to invade a privacy interest. On the other hand, the legislative history of the TCPA suggests that Congress was concerned about protecting the seclusion interest of private citizens in banning such communications.

In State Farm General Ins. Co. v. JT’s Frames, Inc., B215457 (Cal. App. January 27, 2010), the Second District Court of the California Court of Appeal rejected the insured’s argument that the annoying receipt of telefaxed communications constituted a “publication” invading the recipient’s privacy. Rather, the court ruled that the “last antecedent rule,” as well as the context of the coverage itself, made clear that it was the “material” that the insured published that must invade the insured’s privacy rather than the manner of communication.

A contrary view was taken by the Florida Supreme Court in Penzer v. Transportation Ins. Co., No. SC08-20608 (Fla. January 28, 2010). On a certified question from the Eleventh Circuit, the court concluded that sending 24,000 unsolicited blast fax advertisements fell within the common dictionary meaning of “publication” as involving the distribution of material to the public. Further, the court ruled that the faxes themselves were “material,” noting that “material” may mean both solid objects as well as the content of said objects. Finally, the court found that the unhappy recipients of these faxes had suffered an invasion of privacy, rejecting any suggestion that the policy’s reference to “right of privacy” created any material distinction. Accordingly, piecing these conclusions together, the Florida Supreme Court found that the insured’s conduct involved the publication of material that violated a person’s right of privacy.

Transportation argued that the doctrine of the last antecedent required a contrary conclusion. Relying on this doctrine, Transportation had argued that the phrase “that violates a person’s right of privacy” modified the term “material” as opposed to “publication” and thus coverage should only arise when it is the content of the material that violates a person’s right of privacy. The Florida Supreme Court disagreed. First, it ruled that this doctrine was not an absolute rule of contract interpretation and that, in this case, the clause “that violates a person’s right of privacy” is applicable as much to “publication” as to “material.” Furthermore, the court found that even if the phrase only modified the term “material,” the receipt of an unsolicited blast fax could still invade a homeowner’s privacy interest in seclusion without regard to whether the content of the material had also violated the privacy interest in secrecy.

As the Tenth Circuit recently cheerfully observed in Payless Shoesource v. Travelers Co., Inc., 482 F.3d 976 (10th Cir. 2009, “we know that grammatical rules are bent and broken all the time and we will not enforce the more grammatical interpretation of a contract when evident sense and meaning require that a different construction.” In rejecting a Kansas policyholder’s reliance on the last antecedent rule, the Tenth Circuit declared in Payless that “while misplaced modifiers are syntactical sins righteously condemned by English teachers everywhere, our job is not to critique the parties’ grammar, but only, if possible, to adduce and enforce their contract’s meaning. Here, a punctuation peccadillo notwithstanding, the meaning of the parties’ contract is unambiguous.”

Nebraska Supreme Court Rules oN Pollution Coverage Issues

Mike Aylward — Fri, 05 Feb 2010 15:14:04 -0500

One of the perils of appellate advocacy is asking a court to take on too many complicated issues at once. Inevitably, some issues don't get the attention they deserve or are dealt with as an after-thought. Such is the case with an environmental coverage opinion that the Nebraska Supreme Court issued today in Dutton-Lainson Co. v. Continental Ins. Co., No. S-09-164 (Neb. February 5, 2010).

First the headlines:

--Insured's shipment of drums to various landfills all arose out of one "occurrence" (handling of solvents)

--Loss allocated on a "time on the risk" basis (months)

--Insured's agreement to accept liability before giving notice deemed to be prejudicial.

--PRP letter is a "suit"

--Insured's dumping of drums was an "accident."

The discussion of allocation is particularly interesting. It appears that the court was assuming that only years in which disposal activity actually took place should be triggered. As a result, it ruled that if each of the sites was treated as a separate occurrence, the insured would lose CNA's coverage, since the disposal activity at some sites ended before its policies were issued. Conversely, the court rejected CNA's argument that the trial court should have tacked 30 years onto the denominator for allocation, as the clean up won't be finished until 2017. The Supreme Court ruled that the trial court correctly looked to the period (1947-87) when the contaminants were deposited, rather than the estimated time for the clean up. So is this an "exposure" trigger ruling?

The court also suggests that it might have agreed with Dutton that a "joint and several" approach was appropriate if the insured could have shown the amount of damage allocable to each year in question. But isn't the basic premise underlying the policyholders argument that long-tail claims involve indivisible injuries that all of their insurer are jointly liable for if they owe anything at all?

The "occurrences" analysis is also interesting. Even though the sites in question were operated independently of each other, the court ruled that they all involved the same underlying cause, namely the insured's manufacturing processes, without which the insured would not have had waste TCE/TCA that had to be disposed of. This is, at least to the best of my knowledge, the first state supreme court in which separate waste sites have been held to arise out a single "occurrence." Given the growing number of rulings on this issue, the limited case authority cited (two opinions from the Third Circuit and an old federal trial opinon from Massachusetts) is odd indeed.

Bottom line: a great result but one that reflects some incomplete analysis that may create headaches for carriers in other cases in the future.

Western District of Washington Rejects Jurisdictional Challenge to Insurer's Request for Declaration of Coverage Obligations

Diane Polscer — Fri, 22 Jan 2010 19:21:13 -0500

In Canal Indemnity Co. v. Adair Homes, Inc., 2010 U.S. Dist. LEXIS 590 (W.D. Wash. January 4, 2010), the court denied an insured’s FRCP 12(b)(7) motion to dismiss for failure to join an indispensable party. The insurer, Canal Indemnity, brought the declaratory judgment action against its insured, Adair Homes, to determine whether two commercial general liability policies it had issued provided coverage for certain faulty construction claims.

The insured, a home builder, argued that its subcontractor, GEM Construction, and its three insurers were necessary parties because in their absence the insured would not be able to obtain a “complete and adequate adjudication of the insurance coverage potentially available to it.” As one of the subcontractor’s insurers was, like Adair Homes, a Washington resident, joinder would defeat diversity jurisdiction. Accordingly, the insured argued, the federal case should be dismissed for inability to join an indispensable party, and the coverage issues should be resolved in state court.

The court rejected the insured’s argument for three, primary reasons. First, the court determined that the absence of the other insurers would not prevent a declaration of the extent of Canal Indemnity’s coverage obligations to Adair Homes. Second, the court cited Ninth Circuit case law for the proposition that “where a party is aware of an action and chooses not to claim an interest, the district court does not err by holding that joinder is unnecessary.” Because the subcontractor was “almost certainly aware of the instant declaratory judgment action and yet ha[d] not asserted” any interest in joining the action, joinder of it “and its insurance carriers” was not necessary. Third, a declaration of coverage obligations under the Canal Indemnity policy, the court found, would have “no bearing on a decision regarding [the subcontractors’] insurance carriers’ obligations under their policies.” Thus, the subcontractor and its insurers had “no independent, legally protected right at stake in this proceeding” and were not necessary or indispensable parties.

The court’s discussion of the necessary and indispensable party rules should be helpful to insurers and their counsel attempting to discern the necessary parties to coverage actions. It should be noted that the court emphasized the fact that the subcontractors’ three insurers were in a fundamentally different position than Canal Indemnity. Whereas Adair could only hope to establish additional insured rights under the subcontractors’ policies, it had a direct coverage relationship with Canal Indemnity. This difference does not appear to be, and likely should not be, critical to the court’s decision, but the emphasis on this difference leaves open the possibility that the court would later decide that other, primary insurers may be necessary parties to a coverage action between an insured and one of its primary insurers.

Oregon's Supreme Court Examines "Proof of Loss" in ORS 742.061

Diane Polscer — Tue, 19 Jan 2010 20:01:23 -0500

In Parks v. Farmers Insurance Company of Oregon, 2009 Or. LEXIS 1014, filed on December 24, 2009, the Oregon Supreme Court examined what constitutes “proof of loss” in the context of ORS 742.061, which requires an insurer to pay an insured’s reasonable attorney fees if (1) the insurer fails to settle the insured’s claim within six months of the date that the insured files a “proof of loss,” and (2) the insured brings an action against the insurer and recovers more than any tender that the insurer has made. The Court held that the insureds had filed “proof of loss” when they telephoned their insurer’s agent seeking help with the cost of cleaning up methamphetamine contamination at an insured rental property. The Court’s holding reversed that of the Court of Appeals which had concluded that as the methamphetamine contamination was excluded from coverage under the particular policy, the insureds’ telephone calls about the methamphetamine contamination could not constitute “proof of loss.”

In 2003, the insureds learned that the police had discovered a methamphetamine lab in their rental property. In April and May of 2003, the insureds telephoned their insurer’s agent seeking help with the cost of the decontamination. The insureds filed an action against their insurer for breach of the insurance contract after the agent informed them that the policy excluded coverage for the contamination damage. In December 2003, the insurer offered to settle all of the insureds’ claims after learning that the property had also sustained damage from vandalism. The insureds accepted the offer and a judgment was entered. The insureds then filed a petition for attorney fees under ORS 742.061, claiming that the April and May 2003 telephone calls constituted “proof of loss” within the meaning of the statute and that they took place more than six months before the insurer’s settlement offer. The insurer contended that the telephone calls did not qualify as “proof of loss” of the claims that were subsequently settled because “proof of loss” must be in writing, and because the information conveyed in the telephone calls pertained only to methamphetamine damage excluded from coverage under the policy.

Addressing the insurer’s first contention, the Court concluded that to hold that “proof of loss” for the purposes of ORS 742.061 must involve a writing was incompatible with the Court’s functional definition of “proof of loss” articulated in its prior opinions as “[a]ny event or submission that would permit an insurer to estimate its obligations (taking into account the insurer’s obligation to investigate and clarify uncertain claims) qualifies as ‘proof of loss’ for purposes of [ORS 742.061].” Addressing the insurer’s second contention, the Court noted that, that the insureds’ complaint against their insurer for breach of the insurance contract included a broad allegation for “accidental physical damage.” The Court found that, while not immediately obvious, that that term could refer to methamphetamine contamination just as easily as it could to vandalism damage. The Court found that as the insurer refused to pay a claim for methamphetamine contamination, but then, more than six months later, agreed to settle “all claims alleged in this matter,” the insurer had, in fact, settled a methamphetamine damage claim for which the insureds’ telephone calls had conveyed sufficient information to constitute proof of loss for the purpose of ORS 742.061, and the insureds were entitled to their attorney fees under the statute.

The Decade That Was

Mike Aylward — Wed, 13 Jan 2010 09:07:53 -0500

And so we bid farewell to the decade that was. Hasta la vista, AIG, ATLA, “earwigging,” Bernie Law, contingent commissions, Dick Scruggs, Eliot Spitzer, Eric Dinallo, the FAIR Act, GilbertHeinz; Hank Greenberg, John Garamendi, junk faxes, Mel Weiss, PHICO, Ramani Ayer, Reliance, Royal, Sears Tower, 70 Pine Street, the Sopranos, “wardrobe malfunctions,” W.R. Grace and Y2K

2009: The Year of The Ox

Top New Claim Threat:                    Chinese Dry Wall
Furthest Fall from Grace:                Tiger Woods
Athletic Achievement:                      Tim Tebow
Coolest New Gadget:                       I Phones
Hottest Coverage Issue:                   Allocation

The 10 Most Important Coverage Rulings of 2009

Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009).

In a case of first impression, the Illinois Supreme Court has ruled that a liability insurer had the burden of proving that separate injuries arose out of a single “occurrence.” The court ruled that although an insured has the burden of proving that a loss is covered in the first instance, the issue of limits was more of a limitation on coverage for which the insurer had the burden of proof. In keeping with Nicor, the court declared that the losses would be viewed as separate “occurrences” if they were the result of separate and intervening human acts or each act increased the insured’s exposure to liability. The case involved the death of two boys who died of hypothermia after getting trapped outdoors in wet sand on a neighbor’s property but were not discovered until days later. While stating that the two deaths might well have involved a single “occurrence” if the injuries had occurred closely together in time and space, the court found that it was impossible to prove how the boys died. As the insurer had failed in its burden of proof, the court held that the claims must be treated as involving separate “occurrences.”

Comment: This case introduced a novel issue to the evolving body of case law construing whether multiple injuries could be grouped together under a single “occurrence” limit. Prior to Fay, no court had considered the effect of the burden of proof on such issues and to whom the burden should be assigned. It is hard to escape the conclusion that the court stretched to reach a conclusion that maximized coverage in a case with such sad facts but that may have unimagined consequences in the years to come in less sympathetic cases.

Boston Gas Company v. Century Ind. Co., 454 Mass. 337, 910 N.E.2d 290 (2009)

In a startling decision of significant consequence to the future of environmental and mass tort claim disputes in Massachusetts, the Supreme Judicial Court has ruled that a federal district court erred in assigning the cost of cleaning up pollution from a former MGP to a single policy issued in the 1960s. On the threshold question of “all sums v. pro rata,” the court held that allocation was consistent with the policy wordings and public policy considerations. Further, in considering what type of allocation formula should be applied, the court adopted a pure “time on the risk” approach, rejecting suggestions that it should use an Owens-Illinois approach that would take total limits into account, or an “unavailability” analysis that eliminated certain years from the denominator for calculating these percentages. Finally, in cases such as this where the first layer of coverage was written through policies with self-insured retentions, the court declared that the insured need only pay a proportional share of the SIR for each triggered policy.

Comment: Boston Gas not only transformed the playing field for allocation disputes in Massachusetts, it marks an important milestone in arguing against “unavailability” as a basis for limiting the period within which losses must be allocated. It also now creates an odd claims environment in which insureds may argue for a narrow definition of “trigger of coverage,” whereas insurers may claim that periods of time are triggered that in the past might have been disputed as involving losses in progress and the like.

Corban v. U.S.A.A., No. 2008-IA-00645 (Miss. October 8, 2009)

While agreeing that damage from a “storm surge” is subject to a water damage exclusion in a homeowner’s policy, the Mississippi Supreme Court ruled in this case that a lower court had erred in declaring that wind and water claims are necessarily excluded pursuant to the policy’s anti-concurrent causation language. The Mississippi Supreme Court ruled that the anti-concurrent causation language should only apply in cases where excluded and covered perils act in conjunction at the same time to cause direct physical damage resulting in loss whereas, in this case, wind and flood had occurred in sequence causing different damage and resulting in separate losses. Whereas the trial court had interpreted the “in any sequence” language in the clause broadly to mean “sequentially,” the Supreme Court declared that this interpretation was in conflict with other provisions in the policy and thus gave rise to an ambiguity. Accordingly, the court concluded that the anti-concurrent causation clause had no application for losses caused by wind peril and that an insurer may not abrogate its coverage obligations for such losses by the occurrence of a subsequent excluded cause or event, such as wind. As a result, the court found that the insured was entitled to coverage for any wind damage that occurred prior to the storm surge and that the storm surge itself could not be a cause, directly or indirectly, of wind damage that occurred before or after the storm surge. In such cases, the court ruled that the policyholder must prove that its property has suffered a direct physical loss, at which point in time the burden of proof shifts to the insurer to prove, by a preponderance of the evidence, that the causes of losses are excluded. .

Comment: Corban represented something of a set back for first party insurers after numerous successes on the “wind v. water” issue in the Fifth Circuit. At the same time, the Mississippi Supreme Court did not go as far as policyholders would have preferred and has left in place significant evidentiary burdens that must be satisfied in order to gain coverage for such losses.

Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, 47 Cal.4^th 302 (2009)

The California Supreme Court ruled that an unreasonable belief on the part of a policyholder that he was acting in self-defense when he assaulted a third party did not give rise to an “accident” triggering the insurer’s duty to defend. Whereas the Court of Appeal had ruled that a duty to defend arose on the basis that an unreasonable belief in self-defense described conduct that was properly characterized as “non-intentional tortious conduct,” the court rejected the insured’s argument that whether there was an “accident” should be determined from the perspective of the injured party. The court ruled that language in the insuring agreement defining “accident” as an event “which takes place without the foresight or expectation of the person acted upon or affected by the event” should not be read in isolation and must be interpreted in accordance with the policy’s definition of “accident,” which makes no reference to the perspective of the injured party. A contrary interpretation, as the court pointed out, would result in even acts such as child molestation being treated as an “accident” since the child neither expected nor intended the molestation to occur. The court distinguished its 1966 opinion in Gray as interpreting the scope of a policy exclusion for intentional injuries as distinguished form the policy’s insuring agreement noting that the issue in this case was whether the unreasonable self-defense fell within the policy’s coverage for an “accident” not whether it fell within a particular exclusion. The court also rejected the insured’s argument that an assault could be an accident because of a provocative act by the injured party was unforeseen and unexpected.

Comment: This is an enormously significant opinion for California practicioners, albeit one whose importance does not appear to have been recognized by many. In the five decades since Gray, California courts have steadily expanded the circumstances in which insurers are presumed to owe a duty to defend. Indeed, the law had progressed to the point where the Court of Appeal had actually ruled in an earlier phase of this case that the insurer’s refusal to defend was bad faith. The opinion will also do much to stem the tide of cases around the country in which courts have found a duty to defend, notwithstanding intentional act exclusions, based on self-serving claims by policyholders that the assault was undertaking in self-defense.

Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267 (Ind. 2009).

Rejecting a policyholder’s argument that a 3 year delay in tendering the defense of an environmental liability claim did not prejudice the insurer and should therefore be reimbursable, the Indiana Supreme Court has ruled that issues of prejudice are irrelevant to the right of an insured to recover pre-tender costs. As the insurer could not defend a case of which it was unaware, its duty to defend did not arise until it was finally put on notice. The court emphasized the limitations of its holding, pointing out that the case did not involve an effort by an insurer to avoid its defense obligation altogether, nor was it a question of the adequacy of notice or whether the insured had some reasonable basis for having failed to give notice at an earlier date.

Comment: Dreaded not only confirms the Indiana Supreme Court’s recent drift back towards the center but sets forth a helpful analysis of the pre-tender issue that would well be emulated by courts around the country. Far to many courts (often with the assistance of over-eager insurer counsel0, have confused the principle of “tender” as a pre-requisite to the contractual duty to defend arising with the rules governing timely notice. A failure to tender a claim on time may also preclude coverage on the grounds of late notice, depending on the rules concerning proof of prejudice in a given state, but prejudice has nothing to do with the insurer’s retrospective obligation to reimburse for defense costs incurred in the interim.

Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009).

The First Circuit has ruled in this Massachusetts case that a federal district court erred in granting summary judgment to a liability insurer for claims arising out of the discharge of fumes from defectively-installed carpet tile and related materials throughout the plaintiff’s building. The court ruled that the resulting “locker room” smell had resulted in physical injury to tangible property, rejecting the insurer’s contention that there must be tangible injury to the building structure itself. Having found “property damage,” the First Circuit declared that its finding of physical injury to tangible property precluded the application of the “impaired property” exclusion apart from the fact that it was not clear that the property in question could be restored to use merely by repairing, replacing, adjusting or removing its product or work. Nor did the “your product” exclusion apply given the allegations of property damage beyond the carpeting installed by the insured. The court ruled that the concrete sub-floor over which the carpet had been installed was “real property” and thus excluded from the definition of “product” in Exclusion K. Treating the sub-floor as part of the insured’s product, as the District Court has found, would, in the First Circuit’s view “stretch too far the contours of what an insured might reasonably understand.”

Comment: This is a very dangerous case. The First Circuit, which heretofore has taken a relatively conservative approach to the scope of “business risk” claims, went out of its way to find “property damage” and narrow the scope of such exclusions This is also one of the first federal appellate cases to find “property damage” in the context of a liability policy based on the presence of fumes and unpleasant odors in a home. Insurers may expect to see the case widely-cited in the future in sick building and mold cases.

Lexington Ins. Co. v. AGF Ins., Ltd., UKHL 40 (July 30, 2009)

In its final act before becoming the British Supreme Court, the House of Lords declared in this case that just as British reinsurers would not have understood in 1977 when they agreed to facultatively reinsure a portion of Lexington’s first party DIC insurance of Alco that the Washington Supreme Court would one day rule that Lexington was “jointly and severally” liable under Pennsylvania law for the cost of cleaning up pollution at Alcoa’s facilities, neither should “follow the settlements” clauses in the certificates require reinsurers to pay for loss occurring outside the reinsured period. While declaring that the law of Washington is not “perverse” (ha!), the High Court declared that not only was the Washington court’s decision to apply the law of Pennsylvania instead of Massachusetts wrong but that the reinsurance agreements were not merely agreements to indemnify Lexington for all of its liabilities but rather separate contracts subject to English law and the understanding of the parties at the time, which therefore limits the reinsurers’ duties to losses solely occurring during the policy period and not extending to principles of “joint and several liability.”

Comment: Only time will tell how much of an impact this ruling had in undermining the relationship of trust that had developed between domestic insurers and the London Market in the century since the San Francisco Earthquake. While resting on substantial legal authority, the decision of the House of Lords struck most U.S. insurers as inconsistent with the principles underlying the follow the settlements doctrine, at least as the doctrine had evolved in the U.S. during the past decade.

Plastics Engineering Co. v. Liberty Mutual Ins. Co., 759 N.W.2d 613 (Wis. 2009)

On certified questions from the Seventh Circuit, the Wisconsin Supreme Court ruled in this case that an insured has no duty to pay for orphan shares and may assign its entire loss to a single insurer on an “all sums” basis. Further, the court ruled that each individual claimant’s exposure to asbestos constituted a new “occurrence” rejecting the insurer’s argument that it was the insured’s manufacture and sale of asbestos-containing products without warning that was the “cause” of these losses. On the other hand, the court agreed with Liberty Mutual that its “non-cumulation” clause was not in violation of Wisconsin Statute Section 631.43(1) as it is not an “other insurance” clause and as the disputed question involves successive policies rather than the concurrent coverages to which the statute applies. Justice Gableman dissented on the allocation issue, arguing that the policy itself limited coverage to losses occurring during the policy period and required pro rata allocation on a “time on the risk” basis. He also disagreed with the majority’s conclusion that the duty to defend could not be pro-rated, arguing instead that Plenco had chosen to be self-insured for certain periods and must therefore bear a proportional share of its own defense costs. He also argued that joint and several liability had no application in these circumstances since there were no other insurers for Liberty Mutual to be jointly liable with or seek contribution from.

Comment: With this opinion, the Wisconsin Supreme Court gave new hope to policyholders, who had up until then lost a series of significant “all sums” appeals around the country. At the same time, Wisconsin joined the majority view that individual claimants may not be grouped together as a single “occurrence.” What is left unstated in the opinion is whether insureds may stack separate policy limits or, as in Keene, are limited to the single “occurrence” limit in the policy year to which each separate “occurrence” is assigned.

Safeco Ins. Co. of America v. White, No. 2009-Ohio-3718 (Ohio August 4, 2009),

The Ohio Supreme Court has ruled that allegations of negligent supervision may trigger coverage even where the actual injuries result from an excluded illegal or intentional act. The court ruled that exclusions that preclude coverage for injuries that are expected or intended by an insured or that arise out of an insured’s intentional or illegal acts do not preclude coverage for independent theories of negligence, even where they are predicated on the commission of those intentional or illegal acts.

Comment: This is a disappointing opinion, especially as changes within the composition of the Ohio Supreme Court in recent years had suggested that it might be less aggressively pro-policyholder in its approach to coverage disputes than its opinions in cases such as Vanliner and B.F.Goodrich might have foretold. The opinion also runs against the trend in most states, wherein courts have declined to find coverage for the parents and supervisors of violent individuals.

Tri-Etch, Inc. v. Cincinnati Ins. Co., 49 SO2-09-01-CV-8 (Ind. July 21, 2009).

The Indiana Supreme Court has ruled that the negligent failure of an alarm company to carry out its contractual responsibilities, leading to the kidnapping and death of a store employee, failed to seek recovery for an “occurrence.” The court ruled that claims like this that are based on the insured’s negligent performance of commercial or professional services should be covered, if at all, under E&O policies but were not covered by the CGL. Nor was the fact that the liability action was tried on a tort theory rather than a claim for breach of contract dispositive. The Court separately ruled that Cincinnati was entitled to assert late notice as a defense to coverage, notwithstanding the fact that it had denied coverage on other grounds, observing that “there is no reason why an insurer should be required to forego a notice merely requirement merely because it has other valid defenses to coverage.”

Comment: A surprising and encouraging opinion, not least because it comes from the court once thought lost to insurers. As with Kvaerner in Pennsylvania, this opinion sketches out broad rules limiting the scope of liability insurance coverage for disputes that are best left to the contractual dealings between the parties.

Illinois Allows Subrogating INsurer to Recover Section 155 Fees

Mike Aylward — Mon, 11 Jan 2010 11:24:46 -0500

Illinois law makes no express provision for awarding attorney’s fees to prevailing parties. However, Section 155 does allow recovery of such fees in cases where the insurer has acted vexatiously or unreasonably. A recent opinion of the Illinois Appellate Court has broadened this remedy to include insurers who pursue equitable contribution claims on behalf of their insureds.

In Statewide Ins. Co. v. Houston Gen. Ins. Co., No. 1-07-1798 (Ill. App. December 14, 2009), a divided panel of the First Division ruled that “the remedy under Section 155 is intended for the protection of both the insured and the assignee who succeeds to the insured’s position.” Accordingly, the court ruled that an insurer pursuing equitable contribution claims on behalf of a mutual insured was entitled to recover over $260,000 in attorney’s fees for successfully prosecuting the claim. Writing in dissent, Justice Garcia argued that the prosecuting insurer in this case was not a judgment debtor or otherwise entitled to pursue a claim under Section 155. Justice Garcia argued that if Statewide had an independent obligation to provide a defense to its insured under its own policy, it was not entitled to seek relief under Section 155 for the insurer’s purported vexatious delay since it did not succeed to the same position of the insured under the disputed policy.

This recent Illinois opinion may be contrasted with a 2009 opinion of the Supreme Judicial Court of Massachusetts in which the SJC ruled that an insurer that obtains a declaration that another insurer owed a duty to defend their mutual insured had no right to recover its DJ fees, even though the claim concerned subrogated rights that would otherwise have entitled a prevailing policyholder to a few award. In John T. Callahan & Sons, Inc. v. Worcester Ins. Co., 453 Mass. 447, 902 N.E.2d 923 (2009), the court ruled that the public policy underlying the exception to the “American Rule” that it had enunciated in cases such as Gamache, is not intended “to punish wrongdoers or to reward those who act responsibly” but rather “is a policy designed to protect the insured’s right to receive the full benefits of its liability insurance contract.” Since the insured had in fact received the full benefits of its contract, the court held that there was no right of equitable subrogation to be pursued by Zurich. In any event, the court ruled that Zurich had, in fact, received a benefit since the other insurer had ultimately been forced to reimburse it for half of the costs of defense and settlement.

2006, 2007, 2008 - Looking Back Over The Decade

Sara Thorpe — Sun, 10 Jan 2010 21:23:42 -0500

As we round out review of what happened over the past decade in the insurance coverage world, I agree with Mike’s inventory as it pertains to California. (If you are interested in year by year summaries of California cases, please respond to this blog or send me an email as we collected those cases.) I would add one notable case to the decade highlights. There is little appellate authority in the area of "number of occurrences" and thus this decision was very important.

In London Market Insurers v. Truck Insurance Exchange (2007) 146 Cal.App.4th 648, the California appellate court held that the policy language before it and common sense led to the conclusion that all of the asbestos claims were not one occurrence. This case had a significant impact on not only the primary insurers’ obligations in that particular case (because there were no aggregate limits in many of the primary policies), but on many pending asbestos coverage cases.

All decade long people pondered what would be the next asbestos, when it turns out that asbestos is the next asbestos. . . Asbestos claims continue to cost companies and insurers millions, . . . make that billions of dollars, and the litigation is not only in the defense of the claims, but in the coverage litigation as insurers and insureds sort out who owes what to whom.

The Decade That Was: 2008

Mike Aylward — Sun, 10 Jan 2010 19:13:55 -0500

2008: The Year of The Rat

New Nasty Claim Threat: Swine Flu

Athletic Achievement: Michael Phelps

Furthest Fall from Grace: Eliot Spitzer

Coolest New Gadget: Kindle

Hottest Coverage Issue: Concurrent Causation

The Eight Most Important Insurance Coverage Rulings of 2008

Acuity v. Bagadia, 750 N.W.2d 817 (Wis. 2008)

The Wisconsin Supreme Court ruled in this case that allegations that a software company infringed the copyrights and trademarks of Symantec by marketing and distributing knock-off copies of Symantec’s security software through advertisements that featured the copyrights and trademarks of Symantec triggered Coverage B. The court ruled that the copyright claims were clearly covered but that trademark infringement was also covered as involving the infringement of a “title.” The court ruled that various dictionaries defined both “title” and “trademark” as involving distinctive marks or descriptions. Furthermore, the court found that this infringement had occurred in the course of the insured’s advertising. The court observed that as “advertising” was susceptible to both a broad and narrow interpretation, it would be deemed to be ambiguous and should be construed in favor of coverage. The court found that the insured’s activity in accepting sample orders from existing customers and then sending those customers samples in unmarked sleeves comports with the broad definition of advertising that it had adopted as involving a “solicitation of business.” Finally, despite the fact that the insured had earlier settled similar claims against Continental Casualty for a payment of $165,964, the court refused to order that Acuity receive an off-set for this payment due to factual questions with respect to what CNA had paid for and why.

Comment: With this case, the Wisconsin Supreme Court undid years of favorable Seventh Circuit jurisprudence and did for Coverage B what it had been doing to Coverage A in the years since American Girl. As with the “W” states in general, the Wisconsin Supreme Court seems to relish the opportunity to pioneer new territory for which it can claim coverage.

Bi-Economy Market v. Harleysville Ins. Co. of NY, 10 N.Y.3d 387, 886 N.E.2d 127 (2008).
Panasia Estates v. Hudson Ins. Co., 10 N.Y.3d 200, 886 N.E.2d 135 (2008)

In these cases, the Court of Appeals ruled for the first time that a policyholder may recover consequential damages against property insurers if the insured shows that the damages were foreseeable and contemplated by the parties at the time of contracting. the court ruled that lower courts had erred in dismissing a property owner’s claim that the failure to his business resulted from the insurer’s bad faith refusal to pay a fire loss, holding that such damages were reasonably foreseeable and contemplated by the parties. Likewise, in, the court ruled that the contractual exclusion for consequential losses did not preclude such awards. Three dissenting judges accused the majority of allowing a backdoor claim for punitive damages without the requisite proof of egregious conduct that the court has required since Rocanova. Further, the dissent argued that the whole idea of consequential damages had no place in contractual dispute over a duty to pay.

Comment: These cases were an eye-opener. After years of dormancy, consequential damages are now a prominent feature of insurance jurisprudence in New York. As the dissenters point out, however, there is some irony in this given the general reluctance of New York courts to award punitive damages in most cases. Now, policyholders have an alternative means of recovery even in the absence of bad faith.

Continental Cas. Co. v. Employers Ins. of Wausau, 2008 N.Y. slip op. 10227 (N.Y. App. December 30, 2008)

The Appellate Division has ruled that a trial court erred in holding that Continental Casualty had a potentially unlimited indemnity exposure for claims against a now insolvent company that installed products containing asbestos at Consolidated Edison facilities prior to 1972. The First Department held that the insured not only had been guilty of laches in its failure to pursue claims for coverage against CNA on a non-products theory but that its failure had equal effect against third party claimants who stood in the shoes of Keasbey. Furthermore, the Appellate Division ruled that the trial court had erred in finding that CNA had failed to establish that all of the underlying claims against Keasbey fell within the “products/completed operations hazard” and were therefore subject to aggregate limits in the policies. The court took note of the fact that all of these suits were originally pleaded as products claims based upon an alleged failure to warn of the hazards of asbestos. The court distinguished the Court of Appeals’ opinion in Frontier Insulation as involving the duty to defend whereas these claims solely pertained to Continental Casualty’s claimed indemnity duties. The Appellate Division also emphasized the fact that mere exposure to asbestos fibers was not itself an injury and that given the length of time that it took for asbestos-related diseases to develop, said injuries plainly occurred after any installation operations conducted by Keasbey occurred. The court emphasized that an “injury in fact” trigger is not the same as an “exposure” trigger and there was no evidence that any of the underlying claimants suffered an injury in fact at the time of any ongoing operations conducted by Keasbey.

Corn Plus Cooperative v. Continental Cas. Co., 516 F.3d 674 (8th Cir. 2008)

The Eighth Circuit has ruled in this Minnesota case that a consent judgment that did not allocate between covered and non-covered damages was invalid. Having found that a portion of the underlying loss (which concerned lost ethanol production caused by defective welding that contaminated the plaintiff’s corn mash) was subject to various “business risk” exclusions, the court ruled that the failure of the Miller-Shugart agreement to allocate between covered and non-covered damages made it impractical for the court to determine whether it was reasonable or not and therefore rendered the agreement unenforceable as a matter of law. The court also rejected the plaintiff’s argument that it should be allowed to revive its claims against the insured, holding that the plaintiff had waived this right as the agreement stipulated that the release of the plaintiff’s claims was unaffected by the lack of enforceability of other parts of the agreement.

Comment: Minnesota, Arizona and Missouri have long been the epicenter of consent judgment disputes. With this opinion, the Eighth Circuit pioneered a new tool by which insurers might challenge the efficacy of such agreements in jurisdictions that recognize an insurer’s right to allocate losses between covered and non-covered claims.

Don’s Building Supply v. OneBeacon Ins. Co., 267 S.W.2d 20 (Tex. 2008)

In this case, the Texas Supreme Court adopted an “injury in fact” trigger for construction defect cases, declaring that allegations of ongoing property damage as the result of the insured’s negligent installation of EIFS in the plaintiffs’ homes triggered coverage throughout the period that water intrusion allegedly occurred. A mere six months after oral argument (possibly a record for a court that lately has taken over two years to resolve coverage appeals), a unanimous court declared that despite the fact that numerous lower Texas courts had adopted a manifestation approach to such claims over the years, such a theory was not reflected in the actual wording of the policy. The court observed that “the policy in straightforward wording provides coverage if the property damage “occurs during the policy period,” and further provides that property damage means “[p]hysical injury to tangible property.” Whatever practical advantages a manifestation rule would offer to the insured or the insurer, the controlling policy language does not provide that the insurer’s duty is triggered only when the injury manifests itself during the policy term, or that coverage is limited to claims where the damage was discovered or discoverable during the policy period.”

Comment: Prior to Don’s Building, Texas “trigger” case law was a complete mess, with state and federal courts disputing whether “manifestation” or “exposure” triggers should apply and other courts distinguishing between BI and PD claims. Since it’s issuance, Don’s Building has been given broad scope by the Court of Appeals. See Union Ins. Co. v. Don’s Building Supply, No. 05-06-00884-CV (Tex. App. September 23, 2008)(insurer held to owe duty to defend even though the homeowners in question had not purchased the property until 2003, five years after the policies in question had expired) and Thos. S. Byrne, Ltd. v. Trinity Universal Ins. Co., 2008 WL 5095161 (Tex.App. December 4, 2008)(water intrusion could have begun from the date of the insured’s contractors work first work at the property).

Mutual of Enumclaw Ins. Co. v. T&G Construction, Inc., 2008 WL 4670256 (Wash. October 23, 2008)

In this en banc opinion, the Washington Supreme Court ruled that a liability insurer that defended its policyholder under a reservation of rights but declined at the conclusion of a mediation session to pay for the settlement of construction defect claims could not now contest the reasonableness of the settlement. Although the court’s prior ruling in Besel had declared that an insured’s good faith settlement establishes the insured’s presumptive damages if an insurer declines in bad faith to participate in the liability suit, the Supreme Court has now ruled that the same rule applies even in the absence of bad faith. In so ruling, the Supreme Court reversed a holding of the Court of Appeals that the insurer should have been free to contest its policyholder’s liability since issues of liability had not been finally resolved. Instead, the Supreme Court ruled that although the insurer was correct that the insured’s affirmative defense of the statute of limitations had not been litigated to “absolute finality,” it had been “substantially resolved” to the point that the settlement was binding on the insurer absent a showing of collusion or fraud. The court declared that although “an insurer is entitled to a final determination on coverage questions…if a coverage question turns on the very same facts that are in dispute in the underlying litigation between its insured and the claimants, the insurer will be bound by the factual findings of a good faith settlement, which is judicially approved as reasonable.”

Comment: Issues relating to consent judgment plagued insurers throughout this decade. With this opinion, the Washington Supreme Court thrust itself to the forefront of jurisdictions that impose an all but impossible burden of proof on insurers that wish to contest the reasonableness of settlements that insureds enter into over their objections even where, as in this case, the insurer is defending under a reservation of rights and has not acted in bad faith in disputing is claimed indemnity obligations.

Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr.3d 770, 161 Cal. App.4^th 184 (4^th Dist. 2008), review denied (Cal. 2008).

The California Court of Appeal ruled that a policyholder could not force its excess D&O carrier to pay the “excess” amount of a class action settlement where the insured had compromised its claim against the primary insurer for less than the full $20 million primary limits. Despite the insured’s agreement to itself make up the difference between the primary limit and the amount that it had received in settlement, the Fourth District held that the language in question unambiguously stated that the excess carrier’s obligation should only arise after the primary insurer had paid the limits of his coverage or after the insured had been held liable to pay the full amount of the underlying limits of liability. The court ruled that the phrase “had paid the full amount of limits of liability” could only reasonably be interpreted as meaning the actual payment of no less than $20 million, particularly when considered in the overall context of the policy in which it was included. Further, the court ruled that language required that the insured “had been liable to pay the full amount of the underlying limit of liability” was not susceptible of contrary meanings and could only reasonably be understood as requiring coverage where a court order or judgment had entered declaring the insured’s liability to pay more than the underlying limits.

Comment: We have included relatively few intermediate appellate opinions in this survey. Qualcomm warrants inclusion, however, because it was the rare instance in which an appellate court at any level given strict effect to the underlying exhaustion provisions in an umbrella policy. Although the ruling may be unique to the particularly London wordings that were at issue here, the case had a profound impact on the manner in which policyholders thereafter settled multi-layered claims in California, particularly in the D&O arena.

Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008)

The Georgia Supreme Court ruled in this case that an absolute pollution exclusion precludes coverage for carbon monoxide poisoning claims against a landlord. The court declared that carbon monoxide is clearly a toxic fume within the exclusion’s definition of a “pollutant.” The court held that dissenting judges in the Court of Appeals who had attempted to limit the scope of the exclusion based upon its perceived purpose had improperly looked outside the actual wording of the exclusion to find ambiguity. Two justices argued in dissent that words in an insurance policy should not be given a literal meaning that would lead to absurd results.

Comment: Earlier in the decade, several major states (California, Illinois, Massachusetts, New York, etc.) had used indoor fumes cases to adopt an extremely constricted view of absolute pollution exclusions that presumed that the origin of such exclusions impliedly required that their scope be limited to “environmental” claims. By the end of the decade, however, decisions such as Reed and the 2007 opinion of the Iowa Supreme Court in Bituminous Cas. v. Sand Livestock Systems had restored some balance to the rules that courts were applying. In the interim, however, ISO had promulgated very different endorsement and exclusionary wordings that restored coverage for BI claims due to malfunctioning heating systems.

Sony Computer Entertainment America, Inc. v. American
Home Assurance Co., 532 F.3d 1007 (9^th Cir. 2008),

The Ninth Circuit ruled in this California case that class actions brought against Sony for claimed defects in its Play Station II did not trigger CGL or Media E&O policies. The court rejected Sony’s contention that the AISLIC Media E&O policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations. The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc. The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement and that a more limited definition of the term consistent with the case law and the policy context would be to only afford coverage for the publication of material that leads the reader to commit a harmful act. As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Play Station II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.” The court took note of the fact that although the plaintiffs alleged that these disks had not properly played on the Play Station II, there was no suggestion that they did not function properly on other devices. In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury. The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Play Stations. Rather, the court found that these allegations suggested that the devices deteriorated over time. Writing in dissent, Judge By bee argued that the majority had given an unduly narrow construction to Aisle’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

Comment: Sony reflects the confluence of several interesting factors: the modern ferment on intellectual property disputes, California’s principles of policy interpretation and the emergence of media E&O policies as an alternative target for policyholder IP claims.

Unauthorized Practice of Law Committee v. American Home Assur. Co., 261 S.W.3d 24 (Tex. 2008)

Nearly three years after agreeing to hear this case, the Texas Supreme Court ruled that liability insurance companies may rely upon staff counsel to undertake the defense of their policyholders so long as the interests of the parties are congruent and so long as staff counsel fully discloses his employment relationship to the insured. In a lengthy opinion that reviewed the evolution of legislative control over the practice of law in Texas and the evolving role of insurer use of staff counsel in Texas and elsewhere, the court rejected the Committee’s argument that American Home and Travelers were acting as corporations engaged in the practice of law when they employed staff attorneys to provide legal services to third-party policyholders. Just as a corporation could use in-house attorneys to represent its own interests, the Supreme Court held that a liability insurer was not prohibited from using such attorneys to represent its policyholders so long as they shared a mutual interest in the outcome of the case. While giving credence to the Committee’s argument that even absent an actual conflict of interest, the profit motivation of insurers to reduce legal expense created a situation where the relationship was “fraught with the potential for a conflict,” the majority observed that the Committee had not presented any empirical evidence of injury to a private or public interest caused by a staff attorney’s representation of an insured. Given that insurers have used staff counsel for decades, the Supreme Court found this lack of evidence telling. In an interesting aside, the court noted that even though actual conflicts of interest might result from coverage disputes, a reservation of rights letter ordinarily does not, by itself, create a conflict between the insured and the insurer as it merely recognizes the possibility that such a conflict may arise in the future. The court therefore declined to hold that staff attorneys should never represent insureds in cases where the insurer is defending under a routine reservation of rights although it suggested that this might be the safer course. The court also noted that private and staff counsel were subject to the same ethical obligations and problems as regards the acquisition of confidential information or obligations to provide objective settlement evaluations that might thereby subject the insurer to Stowers liability for failing to settle within policy limits. The Supreme Court observed that it saw no reason why staff counsel would be less respectful of these obligations than private counsel. The court also declined to accept the Committee’s declaration that insureds’ defense counsel represents only the insured and that, as a result, staff attorneys, who necessarily represent the insurer, cannot defend insureds without violating this rule. The Supreme Court observed that, “We have never held that an insured’s defense lawyer cannot represent both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer.” In conclusion, the majority found that although the use of staff attorney comes with risks owing to the possibility of conflicts, there are a great many cases where the interests of the parties are congruent and where an insurer may use staff attorneys without conflict and to the mutual benefit of it and its policyholder. As a result, it concluded that the use of staff attorneys in such cases does not constitute the unauthorized practice of law. Writing in dissent, Justices Johnson and Green argued that liability insurers were acting in the unauthorized practice of law by managing court proceedings on behalf of third parties when the used staff counsel. As a result, the dissenters argued that because acts of staff attorneys are acts of the insurers, when staff attorneys defend insureds in lawsuits, the insurer violates the State Bar Act.

Comment: Like the Battle of New Orleans, the insurers’ win in the Texas Supreme Court was the decisive victory in a war that had largely run its course even before the news of the battle was announced. By 2008, insurers and insurance defense lawyers had reached an uneasy truce in the tripartite wars that had begun a decade earlier. During this period, the role and scope of staff counsel’s role changed dramatically. By the end of the decade, only North Carolina and Tennessee continued to prohibit insurers from using staff counsel to defend their insureds.

The Decade That Was: 2007

Mike Aylward — Sat, 09 Jan 2010 07:07:52 -0500

2007: The Year of The Pig

New Nasty Claim Threat: Contingent Commissions

Athletic Achievement: Tiger Woods

Furthest Fall from Grace: Dickie Scruggs

Coolest New Gadget: Streaming Video

Hottest Coverage Issue: “Occurrence”

The 7 Most Important Coverage Rulings of 2007

Cinergy Corp. v. St. Paul Surplus Lines Ins. Co., 865 N.E.2d 571 (Ind. 2007).

In this case, the Indiana Supreme Court held that a liability insurer has no obligation to pay for the cost of implementing new technology to prevent future environmental harm. In holding that AEGIS did not owe coverage for a lawsuit in which the federal government sought to compel Duke Energy and other utilities to comply with the federal Clean Air Act and implement new clean air technologies to prevent widespread harm to public health and the environment, the Supreme Court agreed with other jurisdictions that a distinction should be drawn between remedial and prophylactic remedies and that coverage was not required here where the federal lawsuit was directed at preventing future harm to the public not obtaining control, mitigation or compensation for past or existing environmentally hazardous emissions. The court ruled that the policy’s requirement that injury be “caused by an accident” precluded coverage for cases such as this where the complaint sought to prevent an occurrence from happening.

Comment: Notwithstanding broad language in its 2001 opinion in Hartford v. Dana that damages covered under a general liability policy might include costs “to prevent further releases of hazardous substances,” the Indiana Supreme Court ruled in Cinergy that coverage only extends to existing harm and does not insure against costs that a policyholder must undertake to prevent future injuries. The opinion has since been widely cited by insurers as proof against claims that they should be liable for the cost of limiting greenhouse gas emissions that are claimed to contribute to global warming.

Donegal Mut. Ins. v. Baumhammers, 938 A.2d 286 (Pa. 2007).

After the Pennsylvania Superior Court ruled 5-3 that a shooting spree in which the insured’s son fatally shot five people and wounding another involved six separate “occurrences, a nearly equally divided Supreme Court tilted the opposite way, ruling that the claims involved a single ‘occurrence.” ), the Supreme Court held that the appropriate focus of a “cause” analysis was on the act of the insured that gave rise to his or her liability rather than the “immediate injury-producing act.” The court held that, “Determining the number of occurrences by looking to the underlying negligence of the insured recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured. Since the policy was intended to insure [policyholders] for their liabilities, the occurrence should be an event over which [policyholders] had some control.” Justice Baldwin’s opinion was joined by Justices Castille, Saylor and Eakin. Justices Cappy and Baer filed separate concurrences joining the majority’s analysis with respect to whether the underlying claims alleged an “accident” but dissenting with respect to the analysis of the “occurrences” issue. Chief Justice Cappy argued that the majority had been inconsistent in finding that the definition of “occurrence” focused on the violent acts of Richard Baumhammers in shooting his victims whereas its analysis of “occurrences” had focused on the negligent acts of the parents and that the majority should have adopted the “cause” approach proposed by the Florida Supreme Court in Koikos v. Travelers Ins. Co., 849 So.2d 263 (Fla. 2003) wherein “cause” was the immediate act causing bodily injury. Justice Baer took a somewhat different approach arguing that the number of occurrences should be determined not based on the negligent acts of the insured or the events directly causing each individual’s injury or death.

Comment: A depressing number of appellate rulings in this decade addressed serial crimes. With this ruling, the Pennsylvania Supreme Court, despite its deep divisions, took a relatively pragmatic approach, finding coverage for the innocent defendants whose conduct may have contributed to the perpetrator’s violence while reining in the nearly unlimited amounts of coverage that other courts had allowed in such cases.

In Re: Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)

Rejecting a District Court’s distinction between floods that result from natural and manmade causes, the Fifth Circuit has held that property policies do not cover Katrina claims. Mere weeks after hearing oral argument, the panel ruled that the policies’ flood exclusions were not ambiguous, nor should ambiguity be inferred merely because they could have been worded more explicitly to make their intent clearer as was the case with similar water damage exclusions. Further, the court held that numerous dictionary definitions failed to apply the distinction that the District Court had relied on and, indeed, in certain cases had included the inundation of land from burst levies as an example of a “flood.” Nor was the court persuaded that other terms in these exclusions implied an intent on the part of underwriters to limit the scope of the exclusion to natural events. The court declined to reach the issue of whether anti-concurrent causation language applied here, declaring that the efficient proximate cause doctrine would only arise in cases where there were two distinct perils, one covered and one excluded, that resulted in a loss whereas here the plaintiffs’ loss was solely attributable to a flood. The court declared that negligent design, construction or maintenance of the levies may have contributed to the plaintiffs’ losses but was only one factor in bringing about the flood; “the peril of negligence did not act, apart from flood, to bring about damage to the insureds’ property.” For similar reasons, the court precluded any argument on the part of the policyholders that sought to recharacterize their flood damage as actually resulting from negligent design, holding that the flood exclusions were meant to apply regardless of what other factors contributed to the development of the flood.

Comment: Hurricane Katrina brought on a flood of coverage litigation against property insurers along the Gulf Coast in Louisiana and Mississippi, along with a political firestorm orchestrated by Dickie Scruggs and his political allies in Mississippi. Central to many of these disputes was the debate over whether the plaintiffs’ homes were damaged by wind (covered) or water (not) and the efficacy of anti-concurrent causation language that insurers contended barred coverage where covered causes of loss contributed to damage resulting from excluded causes. This crucial Fifth Circuit opinion proved to be a tipping point in this struggle. Despite vast amounts of unfavorable publicity and the formidable political forces arrayed against State Farm and other insurers, state and federal appellate courts did a remarkably rational job throughout in giving effect to plain policy wordings.

Lamar Homes Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)

A year and a half after hearing oral argument, a bitterly divided Texas Supreme Court has ruled that construction defect claims can be an “occurrence.” In keeping with recent opinions from states such as Wisconsin, the majority declared that whether faulty workmanship claims are covered should be a function of policy exclusions, not insuring agreement elements such as “occurrence” or “property damage.” The court further refused to find that the “economic loss” doctrine precluded coverage. The Texas Supreme Court took note of the fact that certain policy exclusions, notably Exclusion J(6) were clearly directed to the consequences of faulty workmanship causing property damage and preclude coverage for such claims except in circumstances where they result from the work of a subcontractor. The Texas Supreme Court ruled that, “The proper inquiry is whether an occurrence has caused property damage, not whether the ultimate remedy of that claim was in contract or tort.” Three dissenting judges took issue with this conclusion, arguing that “selling damaged property is not the same as damaging property,” and arguing instead that the economic loss doctrine should preclude any coverage for such claims. Three dissenting justices argued that claims for breach of contract due to faulty workmanship are a mere “economic loss” and thus not covered.

Comment: Lamar Homes concluded the coverage cycle that began with cases such as Vandenberg in California and American Girl in Wisconsin. It also came during a period when an extraordinary number of major appeals and certified questions were pending before the Texas Supreme Court. When the logjam finally broke in 2007-2008, insurers learned to rue the day that they had complained about how long it was taking the Supreme Court to answer these questions.

Philip Morris, USA v. Williams, 549 U.S. 346 (2007)

Returning to the issue of the constitutionality of punitive damage awards only four years after its landmark opinion in State Farm v. Campbell, a narrowly divided court ruled 5-4 that awards based on a jury's desire to punish a defendant for harming those who are not parties to the lawsuit amounted to a taking of property from the defendant in violation of the defendant’s constitutional due process rights. The court therefore set aside a $97 million punitive damages award that had been upheld by the Oregon Supreme Court. Justices Stevens, Ginsberg, Scalia and Thomas issued three separate dissents arguing that the court should not impose limits on the right of the courts to impose damages in such cases.

Comment: In Williams, the U.S. Supreme Court made explicit what it had previously suggested in State Farm v. Campbell, namely that juries may not punish civil defendants for injury to parties who are not parties to the litigation. Although widely-hailed at the time, the court’s opinion proved to be of little benefit to Philip Morris. On remand, the Oregon Supreme Court reinstated the $97 million award on the basis of a state law jury instruction. Although the U.S. Supreme Court took the unusual step of accepting the case again in 2008, it dismissed the petitioner’s cert claim following oral argument, apparently due to frustration at the confusing factual record. Williams does, however, signal a shift in punitive damages jurisprudence from disputes over ratios to a renewed focus on jury instructions.

Wilson v. 21st Century Ins. Co., 42 Cal.4^th 713, 723-24 (2007)

Despite an auto insurer’s contention that it was insulated against any claim that it could not have acted in bad faith when it denied the insured’s UIM claim, as there was a genuine dispute with respect to whether the plaintiff’s spinal injuries had been caused by the accident or were the result of a pre-existing condition, the California Supreme Court ruled 5-2 that the trial court had not erred in refusing summary judgment to the insurer, as the insured had established triable issues of fact with respect to whether the insurer had undertaken an adequate investigation, particularly as it appears that the denial was not supported by the medical evidence. The court ruled that the “genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim” and that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. By contrast, the court declared that a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances. Writing in dissent, Justices Chin and Baxter argued that the insurer’s denial was reasonable in light of x-rays that were taken immediately after the accident showing no fracture or degenerative change as well as the fact that the plaintiff thereafter went on an extended backpacking trip in Europe.

Comment: With this opinion, the California Supreme Court made clear just how thin a defense to bad faith claims the “genuine dispute” doctrine could be. Wilson is the culmination of a trend that started at the beginning of the decade, when the Ninth Circuit ruled 2-1 in Guebara v. Allstate Ins. Co., 237 F.3d 987 (9^th Cir. 2001), that expert testimony did not automatically insulate an insurer from bad faith claims based on biased investigations, but could, as in this case, create a genuine issue of coverage sufficient to preclude a finding of bad faith. Following Guebara, several California courts have refused to grant summary judgment to insurers in bad faith cases based on the insurer’s inadequate investigation of the insured’s claim. See Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1072 (2007) and Chateau Chamberay Homeowner’s Assn. v. Associated International Ins. Co., 90 Cal. App.4th 335 (2001).

Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007)

In what may well be a low point (and one of the most gruesome fact patterns) in Washington insurance jurisprudence, the state Supreme Court has ruled that a lower court erred in refusing to find GL and E&O coverage for emotional distress claims by a dentist’s employee after a bizarre practical joke in which the insured posed the plaintiff with boar’s tusks in her mouth while under anesthesia and took photos of her. Whereas the Court of Appeals had declared that no reasonable patient would construe such misconduct as involving the rendering of professional dentistry services, the Supreme Court held that E&O coverage applies as the act occurred in the course of preparing the patient for surgery and was “integrated into and inseparable from the overall procedure” and that the insertion of the boar tusk “flipper,” however oddly shaped, conceivably fell within the policy’s broad definition of the practice of dentistry. The Supreme Court observed that an obligation to defend existed if the law was in doubt, observing that Fireman’s Fund’s decision not to defend was based upon an outside opinion from counsel that was somewhat equivocal. The Supreme Court also held that the dentist could obtain coverage through his general liability policy, despite the fact that the plaintiff only alleged emotional distress, in light of allegations of depression, panic attacks, nightmares and suicidal impulses. Further, the court found that the practical joke, despite its intentional nature, was a covered “fortuitous circumstance, event or happening” since the policy required not only that the act be intended but the resulting injuries also be expected or intended by the insured. In this case, the court found that although the dentist’s conduct was intentional, it was conceivable that he had not intended his conduct to result in the plaintiff’s injuries. Four justices dissented, arguing that the claims clearly involved intentional conduct none of which involved professional services and that no reasonable person would have understood that such claims would be covered. The Supreme Court did rule, however, that Fireman’s Fund had no obligation to provide EPL coverage.

Comment: The Washington Supreme Court is something of a puzzle palace. Its opinions are often deeply divided, regularly generating more dissents and concurring opinions than any other appellate court in the country. Even so, a majority of the court seemed determined to stake out the broadest territory that it could in compelling coverage for an incredibly dubious claim.

Oregon's key ruling of the decade: Policies mean what they say.

Diane Polscer — Wed, 06 Jan 2010 20:41:25 -0500

In our opinion, the most significant insurance ruling in Oregon over the past ten years is the Oregon Supreme Court’s decision in Holloway v. Republic Indemnity Co. of America, 341 Or. 642 (2006). The “central issue” in that case was “whether an anti-assignment clause providing that ‘[y]our rights or duties under this policy may not be transferred without our written consent[]’ is ambiguous and thus should be construed against its drafter.” 341 Or. at 644. The Court’s ruling – that the clause was unambiguous and, therefore, an attempted assignment was void – is significant because it sets Oregon apart from the majority of other states which hold that anti-assignment clauses “prohibit the assignment of only pre-loss rights or duties.” Id. at 652.

The scenario presented in the Holloway case is a common one: an insured settles a claim by stipulating to a large judgment and assigning its rights under the insurance policy to the tort victim in exchange for a covenant by the tort victim to not execute directly against the insured. Assuming the insurance policy contains an anti-assignment clause, the question then becomes whether or not the assignment is valid such that the tort victim can pursue a direct action against the insurer.

Oregon’s Court of Appeals surveyed the law of insurance policy anti-assignment clauses and noted that the majority of states hold that anti-assignment clauses only prohibit the assignment of “pre-loss rights or duties.” In other words, the anti-assignment clause prohibits an insured from substituting another insured in its place prior to any loss, but the clause does not prohibit the insured from assigning any rights that may accrue to it following a loss. This makes sense, the Court of Appeals noted, because it is perfectly reasonable that an insurer would want to “protect itself from the unknown risks to which an assignee insured might expose it.” Id. at 648. However, after a loss the parties’ rights are already fixed, so an assignment does not expose the insurer to any greater liability. Because the subject anti-assignment clause did not specify whether it applied to pre-loss rights, post-loss rights or both, the Court of Appeals found an ambiguity which it construed in favor of the insured.

The Oregon Supreme Court found that the Court of Appeals’ ruling stretched logic too far because “[t]he anti-assignment clause … is worded broadly; it contains no exceptions or qualifications.” Id. at 651. It was “unreasonable” to read “an exclusion into a broadly worded anti-assignment clause based upon the clause’s silence regarding its application to a particular situation.” Id. at 652. Because the clause was unambiguous, the attempted assignment was void. Accordingly, the tort victim could not proceed directly against the insurer.

The lesson from Holloway, in our opinion, is that even the most clearly worded policy provisions will be found ambiguous by a sufficiently motivated court. However, in Oregon, the trend is to reject manufactured ambiguities and to interpret insurance policies as they are actually written. Because the Holloway decision granted a degree of certainty to a traditionally uncertain area of the law, we recognize that case as the most significant insurance ruling in Oregon over the past decade. In our opinion, other states’ courts would be wise to follow its course.

2003, 2004, 2005 - In Review

Sara Thorpe — Wed, 06 Jan 2010 00:34:48 -0500

2003, 2004, 2005 – (Happy new year!) It is difficult to keep up with that Mike Aylward – especially when he is in a reminiscing-kind of mood. But I have to add my two cents, in addition to Mike’s list, of important California decisions from these three years because of their long-lasting impact, mainly in the area of policy interpretation. Of these, 2005 was the watershed year when a number of decisions from California’s Supreme Court were based on strict and literal policy interpretation.

2003

First party property policy with coverage for actual collapse did not cover imminent collapse – the court could not rewrite the parties’ contract. Rosen v. State Farm Gen. Ins. Co. (2003) 30 Cal.4th 1070.
Intentional misconduct may be excluded from coverage, but still may require duty to defend (depending on policy language and whether exclusion based on Ins. Code § 533). Marie Y. v. General Star Indem. Co. (2003) 110 Cal.App.4th 928.

2004

One that does not fit with the others summarized here is a decision that the underlying indemnity agreement must be considered along with the insurance policy provisions when determining indemnity and contribution rights. Hartford Cas. v. Mt. Hawley Ins. Co. (2004) 123 Cal.App.4th 278.

2005

Whether there is an obligation to pay defense costs under umbrella policies when there is no duty under the underlying primary policies because there is no “suit” depends on the policy’s language - in particular the insuring agreement and definition of ultimate net loss. Powerine v. Superior Court (2005) 37 Cal.4th 377; County of San Diego v. ACE Property & Cas. Co. (2005) 37 Cal.4th 406.
The pollution exclusion still does exclude coverage, here silica dust, in the wake of MacKinnon. Garamendi v. Golden Eagle Ins. Co. (2005) 127 Cal.App.4th 480.
Even with California’s efficient proximate cause law which decidely favors policy-holders, a weather conditions exclusion in a property policy precluded coverage. Julian v. Hartford Underwriters (2005) 35 Cal.4th 747.

The Decade That Was: 2006

Mike Aylward — Tue, 05 Jan 2010 16:11:21 -0500

2006: The Year of The Dog

The Decade That Was: 2005

Mike Aylward — Tue, 05 Jan 2010 16:07:13 -0500

2005: The Year of The Rooster

Top New Claim Threat: Hurricane Katrina

Athletic Achievement: Roger Federer

Furthest Fall from Grace: Scott Gilbert

Coolest New Gadget: HD Television

Hottest Coverage Issue Absolute Pollution Exclusion

The 5 Most Important Insurance Opinions of 2005

Avery v. State Farm Mutual Auto Ins. Co., 835 N.E.2d 801 (Ill. 2005)

Reversing a $1.1 billion award against State Farm, the Illinois Supreme Court has ruled that two lower courts erred in certifying a national class action of policyholder consumers who alleged injury as the result of the insurer’s practice of using repair parts that were not the original equipment of the car manufacturer. The Supreme Court declared that the Circuit Court had abused its discretion in certifying the class and finding “commonality” among the plaintiffs’ claims in view of the fact that the claims actually involved different policy wordings used by State Farm in several states. Further, the Supreme Court held that State Farm’s use of after-market parts was not in violation of its policy obligations, nor did it constitute a violation of the Illinois Consumer Fraud Act.

Comment: The after-market parts class action crusade against auto insurers reached its high water mark in Illinois with a billion dollar award against State Farm. In this crucial opinion, newly elected members of the Illinois Supreme Court turned the tide and helped to substantially limit class actions as a plaintiffs’ remedy in similar litigation, a trend that was accelerated around the same by the newly-enacted federal Class Action Fairness Act (CAFA).

Elacqua v. Physicians’ Reciprocal Insurers, 800 N.Y.S.2d 649 (3d Dept. 2005)

The Appellate Division of the New York Supreme Court ruled in this case that an insurer had not only ignored a conflict of interest in failing to assign independent counsel to individual physicians and a professional association that were both claiming under its policy but that the insurer had an affirmative obligation to notify its policyholder of that right since “to hold otherwise would seriously erode the protection afforded.”

Comment: Elacqua poses difficult and troubling questions for insurers. As the opinion of a single Department of the Appellate Division, is it controlling law in the rest of the state. And if it is, what types of affirmative duties do insurers have where the carrier is uncertain as to whether a conflict exists or believes that the insured is already protected through the advice of its own counsel. As a footnote to the 2005 opinion, the same court ruled in Elacqua v. Physician’s Reciprocal Insurers, 860 N.,Y.S.2d 229 (3d Dept. 2008) that a liability insurer’s failure to notify its policyholder of its right to independent counsel due to a conflict of interest was a deceptive practice for which the insured was entitled to recover its attorney’s fees pursuant to General Business Law Section 349.

Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 451 (2005)

In a brief but momentous opinion, the Court of Appeals ruled that a landlord’s insurer was only obligated to pay a single “occurrence” limit for a lead poisoning claim, despite the fact the tenant’s child had suffered bodily injury during all three years of Allstate’s coverage. While opining that whether limits could be stacked would ordinarily be a “difficult question,” the court held that in this case the issue was controlled by a “non-cumulation” clause that stated that “regardless of the number of insured persons, injured persons, claims, claimants, policies involved, our total liability under the Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for Coverage X shown on the declarations page. All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss.”

Comment: Together with the Third Circuit’s opinion in Liberty Mutual Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3d Cir. 2005), this ruling of the New York Court of Appeals revived interest in non-cumulation clauses as a means of avoiding successive limits from being stacked in long-tail cases.

Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 829 (2005)

The New Jersey Supreme Court ruled that an absolute pollution exclusion did not preclude coverage for personal injury claims against a painting subcontractor arising out of claims for nausea, vomiting and headaches suffered by a tenant who was exposed to fumes in the course of the insured’s work. In keeping with similar rulings from state supreme courts in California, Illinois, Massachusetts, Ohio, New York and Washington, the New Jersey Supreme Court declared that the history of such exclusions makes clear that their intent is to only preclude coverage for traditional environmentally-related damages, such as CERCLA claims. In keeping with the analysis of the original pollution exclusion that it adopted in Morton, the court looked to industry statements made to state regulators in the mid-1980’s when absolute pollution exclusions were first proposed for approval and concluded that there was no compelling evidence that the exclusion was intended to have the broad effect proposed by Selective in this case adding that, “The insurance industry may not seek approval of a cause restricting coverage for the asserted reason of avoiding catastrophic environmental pollution claims and then use that same clause to exclude coverage for claims that a reasonable policyholder would believe were covered by the insurance policy.”

Comment: Twelve years after the New Jersey Supreme Court shocked the insurance industry by gutting the “qualified” pollution exclusion under the guise of “regulatory estoppel,” the Supreme Court returned to the scene of the crime in Nav-Its. Apart from Pennsylvania (?), no court in the country has followed the notion that statements made by third parties to state regulators can bind coverage for policyholders who were never aware of or relied on such claimed representations concerning the scope of coverage.

Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 115 P.3d 460 (2005)

The California Supreme Court here ruled that in cases where a court determines that an insurer had no duty to defend and the insurer had been defending under a reservation of rights that included a claimed right to recoup defense costs in the event that it was found not to owe coverage, the California Supreme Court has ruled that the insurer is entitled to reimbursement for the costs of defense. The Supreme Court rejected the Court of Appeal’s holding that the defense obligation was only terminated prospectively and found instead that insofar as the court had ruled that there was no potential for coverage, the insurer never had a duty to defend and is therefore entitled to recover its fees under a Buss analysis. So long as the insurer had given notice at the time that it agreed to defend that it was reserving rights on this basis. The Supreme Court held that this was so even if the determination that there was no potential for coverage was based on case law that evolved afterwards, as was the case here where the insurer agreed to defend the case prior to the California Supreme Court’s Hameid ruling clarified the limitations of “advertising injury” coverage as regards such claims.

Comment: Scottsdale was the third in a trilogy of cases that began with Buss in 1997 (insurer allowed to sue later to recoup that portion of defense costs solely allocable to non-covered claims) and persisted through 2001’s Blue Ridge v. Jacobsen (insurer allowed to recoup settlement payment is case later held not to be covered).

The Decade That Was: 2005

Mike Aylward — Sat, 02 Jan 2010 12:57:37 -0500

2005: The Year of The Rooster

Top New Claim Threat: Hurricane Katrina

Athletic Achievement: Roger Federer

Furthest Fall from Grace: Scott Gilbert

Coolest New Gadget: HD Television

Hottest Coverage Issue Absolute Pollution Exclusion

The Five Most Important Insurance Coverage Rulings of 2005

Avery v. State Farm Mutual Auto Ins. Co., 835 N.E.2d 801 (Ill. 2005)

Elacqua v. Physicians’ Reciprocal Insurers, 800 N.Y.S.2d 649 (3d Dept. 2005)

Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 451 (2005)

Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 829 (2005)

Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 115 P.3d 460 (2005)

The Decade in Review: 2004

Mike Aylward — Sat, 02 Jan 2010 12:45:57 -0500

2004: The Year of The Monkey

Top New Claim Threat: Eliot Spitzer
Athletic Achievement: Boston Red Sox
Furthest Fall from Grace: Britney Spears
Coolest New Gadget: Apple I Pods
Hottest Coverage Issue Wardrobe Malfunctions

The year of Spitzer. Aon and Marsh were battered by controversy over contingent commission schemes. Hopes for a federal solution to asbestos reached their high water mark when the U.S. Senate failed to approve the FAIR Act by a single vote. Phase I of the Silverstein WTC cases went to trial. Love Canal was declared cleaned up.

The Five Most Important Insurance Coverage Rulings of 2004

American Family Mutual Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004)

In this case, the Wisconsin Supreme Court ruled that the Court of Appeals erred in refusing to find coverage for breach of contract claims arising out of the insured’s faulty construction of the plaintiff’s warehouse. Whereas the Court of Appeals had declared that the insured’s liability was excluded as being based upon “contractual liability,” the Supreme Court held that the underlying claims not only involved “property damage” that was outside the scope of the economic loss doctrine but that the “contractually assumed liability” exclusion is limited to situations in which the insured contractually assumes the liability of others, as through indemnification or hold harmless agreements, and does not automatically preclude coverage for all suits for breach of contract. In a wide-ranging opinion, the court further declared that a “continuous trigger” was appropriate in cases where injury or damage occurs over more than one policy. Finally, the Supreme Court declared that policies in effect after 1997 need not respond since the claims were a “known loss” by then. The majority’s conclusion was disputed by two dissenting justices who variously argued that (1) the economic loss doctrine should preclude any possibility of coverage that there was no “occurrence” since the insured was aware of existing unstable subsoil conditions that would inevitably result in the building sinking if the work went forward as planned.

Comment: This landmark opinion was the first time that the Wisconsin Supreme Court addressed several key issues, including “known loss” and “trigger of coverage.” More importantly, American Girl gave significant momentum to policyholder arguments that the absence of coverage for contractual claims is not an inherent aspect of CGL policies and is specific to certain “business risk” exclusions rather than the definition of “occurrence.” American Girl pioneered the path to coverage that would be followed by the Texas Supreme Court and others.

Berges v. Infinity Ins. Co. 896 So.2d 665 (Fla. 2004).

The Florida Supreme Court ruled that an auto insurer with limits of $10,000 per person/$20,000 per accident acted in bad faith when it failed to accept the plaintiff’s offer of settlement within the short time permitted. The court refused to find that the insurer’s insistence on having the settlement, which involved a claim by a minor, first be approved by the court in condition for payment of its policy limits was reasonable or justified. Although the District Court of Appeals found that Infinity could not have acted in bad faith, since the offer that was presented was not one that could have been accepted absent court approval, the Florida Supreme Court adopted the view of Florida appellate districts that court approval was not necessary to create bad faith in claims involving minor claims.

Comment: During the past decade, Florida has become an increasingly troublesome source of bad faith claims. With this opinion, the state Supreme Court gave its stamp of approval to a tactic pioneered by plaintiff’s lawyers who set up insurers by demanding the limits of coverage within a short period of time, with little interest or expectation that the demand will be accepted, thus creating an unlimited pool of funds for their clients. Efforts to impose reasonable limits on this tactic through the Florida legislature have met with little success since then.

Central Illinois Light Co. v. The Home Ins. Co., 821 N.E.2d 206 (Ill. 2004)

The Illinois Supreme Court concluded that a gas utility was entitled to coverage under various London Market umbrella policies for costs that the insured had voluntarily incurred to clean up former MGP sites to avoid being sued by the Illinois EPA. The court distinguished the California Supreme Court’s contrary holding in Powerine on the grounds that it involved CGL policies that included a duty to defend, whereas these London excess policies merely required that the insured be “liable” to pay these sums. In this instance, the court found that the requirement of liability was satisfied by the fact that the Illinois environmental statutes imposed strict liability. While concurring that insureds should not be entitled to voluntarily undertake liabilities to trigger coverage, the court declared that the “liability” aspect of the insuring agreement would be satisfied so long as the insured was acting in response to a claim (which need not even be a formal demand letter) and which was satisfied here by evidence that the insured agreed to do the clean up after receiving an oral threat from the IEPA that they could deal with this liability “the easy way or the hard way.”

Comment: Much of the hope engendered by Powerine, evaporated with this opinion.

Royal Ins. Co. of America v. Hartford Underwriters Ins. Co., 391 F.3d 639 (5th Cir. 2004)

Where two insurers issued both CGL and professional liability policies to a nursing home, the Fifth Circuit has ruled that allegations that a nursing home failed to provide proper and timely medical and nursing care, causing skin infections and ulcers to develop, triggered the E&O coverage. The court opined that a CGL policy would cover a slip and fall in a waiting room whereas an E&O policy would protect the nursing home against lawsuits by residents who claimed to have been harmed as a result of the medical treatment they received at the facility. On the other hand, while agreeing that the allegations of on-going mistreatment potentially triggered successive professional liability policies, the Fifth Circuit ruled that the District Court had erred in trying to the Hartford “escape” other insurance clause with Royal’s “pro rata” clause, holding instead that both carriers owed coverage since the clauses were in conflict. The court ruled, however, that Hartford was only obligated to pay that share of defense costs that were incurred after the date that the claim was tendered to it.

Comment: This case illustrated a particular aspect of the rising tide of nursing home claims, in which insurers faced not only the difficulty of class actions claims and coverage issues but the pressing question of how “other insurance” disputes could be reconciled as between general liability and professional liability policies.

United National Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153 (Nev. 2004)

In this opinion, the Nevada Supreme Court declared that allegations of negligent construction activity are insufficient to trigger coverage under a CGL policy. Concluding that the CGL policy unambiguously restricts coverage to physical injury to tangible property that occurs during the policy period, the Nevada Supreme Court has declared that the insurers of a metal framing subcontractor whose policies were in effect when the Las Vegas Hilton marquee sign collapsed on July 18, 1994 have no right of recovery against earlier insurers whose policies were in effect during the period of time that the sign was being constructed as there was no evidence that the sign suffered property damage prior to its collapse. Furthermore, despite allegations in the underlying complaint that the insured’s subcontractor had been negligent in the erection of the sign, including improper welding and modifications of the bolts connecting the various steel components of the sign, the Supreme Court refused to find that the earlier insurers had a duty to participate in the defense of the case as these allegations of negligent acts only constituted “intangible, economic injuries and not the type of physical, tangible injury or destruction of property that a reasonable person would contemplate as covered under the policy.”

Comment: By 2004, the wave of construction defect litigation that had swamped California had spread far into Nevada. With this decision, the Nevada Supreme Court showed that it would be less liberal than its California counterpart in applying liability insurance to such disputes.

SJC To Consider Bad Faith Claims Against Guaranty Fund

Mike Aylward — Sat, 02 Jan 2010 12:33:49 -0500

The Supreme Judicial Court is due to hear oral argument on January 4, 2010 in the matter of Wheatley v. Mass. Insurers Insolvency Fund, SJC-10510. At issue is whether the state guarantee fund can be held liable under M.G.L. c. 176D for the sort of unfair claims settlement practices that would ordinarily subject a domestic insurer to liability under M.G.L. c. 93A. Wheatley has appealed from a ruling in the Superior Court that the fund was not "in the business of insurance" and was therefore outside the purview of Chapter 176D. The claim in question arises out of serious personal injuries that a special needs student suffered on October 26, 2001 while attending a public elementary school in the Town of Duxbury. At the time, the Town was insured by Legion Insurance, which was put into insolvency the Pennsylvania Insurance Commissioner in July 2003. As a result, when Wheatley made a claim against the Town in August 2003, responsibility for the investigation and disposition of her liability claim was undertaken by the Massachusetts Insurers Insolvency Fund. Wheatley alleges that the Fund never responded to her various demands, including a demand presented pursuant to M.G.L. c. 93A, § 9 and that it had a legal responsibility to do so as Wheatley contends that the liability of the Town of Duxbury was reasonably clear. Her bad faith claims against the MIIF were dismissed in 2008 in light of earlier rulings such as Barrett v. MIIF, 412 Mass. 774 (1992) and Poznik v. Mass. Medical Professional Ins. Assn., 417 Mass. 48 (1994) in which Massachusetts courts had declared that only conventional insurers were meant to fall within the jurisdiction of Chapter 176D. On appeal to the Supreme Judicial Court, Wheatley has argued that 1996 amendments to Chapter 176D, which amended the definition of "person" to include the MIIF and certain joint underwriting associations, evidence an intent on the part of the legislature to treat the Guaranty Fund and JUAs as being in the "business of insurance" for purposes of Chapter 176D. Wheatley further argued that the timing of these legislative amendments clearly indicated an intent on the part of the legislature to reverse the Supreme Judicial Court's holdings in Barrett and Poznik. In light of subsequent cases in which courts have ruled that JUAs may be held liable for unfair claims practice prohibited by Chapter 176D, Wheatley argues that the same should be true as regards the MIIF. In response, the MIIF has argued that the legislature plainly never intended to subject it to the same range of liabilities as actual insurance companies and that the Supreme Judicial Court has itself made clear that it views the MIIF as the "insurer of last resort." The MIIF emphasized in its brief that it has limited financial resources and is dependent on assessments from admitted carriers that are, in turn, passed along to policyholders. As a result, it argues that such a radical expansion of its potential liabilities should not be implied and should only result from a direct action of the legislature. A ruling should be received from the SJC by May or June of 2010. Note that the issue in Wheatley is whether the MIIF can be held liable for its own claimed misconduct in handling claims of a policyholder. It is far less likely that the SJC would impose liability if the issue was whether 176D liability could be imposed based on the claimed misconduct of an insurer prior to being declared insolvency.

The Decade That Was: 2003

Mike Aylward — Mon, 28 Dec 2009 08:18:54 -0500

2003: The Year of The Sheep

Top New Claim Threat: SARS

Athletic Achievement: Lance Armstrong

Furthest Fall from Grace: Martha Stewart

Coolest New Gadget: DVD Camcorders

Hottest Coverage Issue Sue and Labor Clauses

The Five Most Important Insurance Coverage Rulings of 2003

Hameid v. National Fire Insurance of Hartford, 1 Cal.3d 401 (2003).

In this case, the California Supreme Court reversed a ruling of the Court of Appeal that had declared that allegations that the insured solicited customers by advertising in the Pennysaver, sending mailers and telephoning former clients constituted “advertising” for purposes of Coverage B. Rather, the Supreme Court declared that “advertising” required widespread solicitations by the insured to the public at large and therefore did not provide coverage for one on one solicitations to prospective customers.

Comment: Although HameidI’s interpretation of “advertising” is now embodied in the definition of “advertising” in Coverage B of the CGL, this opinion set the tone in a manner that California courts have since followed in restricting the scope of Coverage B in numerous cases.

Henkel Corporation v. Hartford Acc. & Ind. Co., 62 P.3d 69 (Cal. 2003).

The California Supreme Court ruled that a successor entity cannot claim coverage under policies issued to a predecessor insured absent evidence that the successor entity to a carrier’s original insured was being sued as the result of a merger, a continuation of the seller or as the result of an fraudulent asset transfer or unless the insurer gives its express assent to an assignment of rights. The court ruled that because Henkel had not acquire the liabilities of the named insured by operation of law but assumed those liabilities by contact, any purported assignment was invalid as it had not been assented to by the insurer. The court focused on the fact that as of the date of these transactions, the underlying claims had not been reduced to a sum of money due, nor had the insurer’s breached any contractual obligations such that such rights of action could be assigned. Whereas Henkel argued that an assignment under these circumstances had not increased the risk of losses to be imposed on the insurers, the Supreme Court disagreed, noting that such assignments did impose an additional burden since they created a “ubiquitous potential for disputes over the existence and scope of the assignment.” Likewise, the California Supreme Court has since ruled that an assignment of rights under an insurance policy will only be upheld if (1) at the time of the assignment the benefit has been reduced to a claim for money due or to become due, or (2) at the time of the assignment, the insurer has already breached a duty to the insured and the assignment is of a cause of action to recover damages for that breach.

Comment: Before this opinion, most courts had ruled that just as successor entities were sued for the torts of predecessor companies, they were entitled to obtain the benefits of their predecessor’s insurance policies “by operation of law.” Henkel has largely eviscerated the “operation of law” argument and has gained significant traction in jurisdictions as widespread as Hawaii, Indiana and Ohio.

In Re Silicone Implant Insurance Coverage Litigation, 667 N.W.2d 405 (Minn. 2003).

Although silicone breast implants were a significant source of liability claims at the start of the decade, insureds faced the puzzling existential puzzle of arguing for an “injury in fact” trigger for a product that they claimed did not cause injuries. In this case, the Minnesota Supreme Court held that it was sufficient that the insureds had paid millions to settle these claims, whether there was proof of actual injury or not. Further, the court held that even though the bodily injuries allegedly attributable to silicone breast implants persist for months or years after the date of initial implantation, the losses attributable to implant claims need not be allocated over the total period of injury. In overturning the broad “time on the risk” approach that the Court of Appeals had applied, the Supreme Court declared that, unlike its rulings in past pollution cases such as Domtar and Northern States Power, allocation was not required here because the injuries while progressive in nature, were attributable to a specific identifiable event.

Comment: As with Johnson Controls, 3M illustrates the peril of litigating with a huge local corporation on its home turf. More importantly, 3M called into question the extent to which the Supreme Court was committed to allocation and whether it might adopt a different trigger of coverage for losses attribute to distinct events. In so holding, the court avoided addressing the more difficult allocation issues that had been struggled with by the trial court and the Court of Appeals, namely whether injuries occurring after 1985, when 3M was insured under “claims made” policies should be subject to allocation in he same manner as if conventional “occurrence”-based GL policies had been in effect.

Johnson Controls, Inc. v. Employers Insurance of Wausau, 665 N.W.2d 257 (Wis. 2003)

Apparently embarrassed about being one of only two state Supreme Courts (Maine, being the other) still holding to the view that CGL policies were not meant to cover Superfund claims, the Wisconsin Supreme Court did an about face in July 2003 and ruled that it had made a mistake in adopting a “narrow and technical” interpretation of the words “suit” and “damages” in its 1994 opinion in City of Edgerton. Instead, the court declared that “an insured’s costs of restoring and remediating damaged property, where the costs are based on restoration efforts by a third party (including the government) or incurred directly by the insured, are covered damages under CGL policies, provided that other policy exclusions do not apply.”

Comment: With Johnson Controls, the Wisconsin Supreme Court thrust itself firmly into the policyholder camp on environmental issues. Wisconsin is now unique among the major states in ruling for policyholders on all of the key issues impacting pollution claims, including “damages,” suit”, “sudden and accidental,” and “allocation.” Did we mention that Johnson Control is the largest private employer in Wisconsin?

State Farm Mutual Automobile Insurance Company v. Campbell, 123 S. Ct. 1513 (U.S. 2003).

Expanding on its earlier opinion in BMW v. Gore, the U.S. Supreme Court overturned a bad faith case from Utah in which the state Supreme Court reinstated a $145 million bad faith award, declaring that (1) out of state evidence should not have been taken into account in calculating punitive damages; (2) that a punitive damage award that was seventy times greater than the plaintiff’s actual damages violated the Due Process Clause to the Fourteenth Amendment of the U.S. Constitution and (3) that courts considering challenges to these awards must employ a de novo standard of review.

Comment: The impact of Campbell cannot be overstated.. Overnight, it eliminated double and triple-digit punitive damage awards. Although the opinion’s premise that most awards should not exceed a 1:1 ratio remains largely unfulfilled, the opinion gave insurers numerous new tools to limit the evidence that juries could consider, particularly with respect to injuries occurring in other states or impacting parties not a party to the dispute.

2000, 2001, 2002 - Additional California Highlights

Sara Thorpe — Thu, 24 Dec 2009 11:05:47 -0500

2000, 2001, 2002 – Of the final decisions issued by the California courts during those years which had a significant impact on insurers over the course of this decade, in addition to what Mike Aylward notes, I would add the following:

2000

No comparative bad faith. Kransco Int. v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390. There are still affirmative defenses, affirmative relief, and defenses insurers can pursue, and the insured’s conduct is relevant.
Construction defects that do not cause damage to property fall within the economic loss rule. Aas v. Superior Court (2000) 24 Cal.4th 627. Not an insurance case, but the ruling is in line with insurance coverage requirements that there be physical injury to tangible property.
An insurer’s reconsideration of whether there is coverage for a claim vitiates claims of bad faith. Shade Foods, Inc. v. Innovative Product Sales & Marketing (2000) 78 Cal.App.4th 847.
Other insurance may satisfy self-insured or deductible requirements. Vons Cos., Inc. v. United States Fire Ins. Co. (2000) 78 Cal.App.4th 52. This depends, of course, on the policy language. But where the insurance policy does not require the insured to pay the SIR, other insurance applicable to the claim may be used by the insured to satisfy that requirement.
Self-insurance is not insurance. Montgomery Ward & Co. v. Imperial Cas. & Indem. Co. (2000) 81 Cal.App.4th 356. It looks like insurance and acts like insurance and has insurance in its name, but it is not insurance.

2001

Where there is a genuine issue in dispute – factual or legal – there cannot be bad faith liability imposed on an insurer for advancing its side of the dispute. Chateau Chamberay v. Associated Int. Ins. Co. (2001) 90 Cal.App.4th 335.
Cumis counsel is not required where insurer agreed to defend all claims even though it denied coverage for some, distinct claims and refused to prosecute insured’s cross-claim. James 3 Corp. v. Truck Ins. Exchg. (2001) 91 Cal.App.4th 1093.
Additional insured is entitled to same considerations as named insured, insured can select insurer to pursue, and award of attorney fees against the insured are covered by the policy’s “supplementary payments provision” even if the claim upon which they are based is not covered by the policy. Pressley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal.App.4th 571. On the third point, there has been further clarification that attorneys fees awarded on claims that cannot be covered by insurance (i.e., the insured’s willful conduct) are not covered. Combs v. State Farm Fire & Cas. Co. (2006) 143 Cal.App.4th 1338. Further in State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274, the court held that there was no coverage for attorney fees awarded against the insured if based on a claim not potentially covered by the policy (there, a wage and hour claim).
The insured must prove the amount of damage attributable to the covered portion of the loss in order to prove breach of contract. Golden Eagle Refinery Co. v. Assoc. Int. Ins. Co. (2001) 85 Cal.App.4th 1300. This decision was recently overruled in State of Calif. v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, in which the court held the burden is on the insurer.

2002

Insurance policy can be proven by secondary evidence, including oral testimony and standard forms, and other evidence. Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059.
Insured cannot settle around its insurer where the insurer is defending the insured. Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718.
An affirmative defense that seeks damages in the form of a set-off is a claim for damages. Constructive Protective Services, Inc. v. TIG Specialty Ins. (2002) 29 Cal.4th 189.
No duty to provide independent counsel even where counsel retained by insurer was staff counsel of insurer. Gafcon, Inc. v. Posnor & Assocs. (2002) 98 Cal.App.4th 1388.

The Decade That Was: 2002

Mike Aylward — Wed, 23 Dec 2009 07:03:24 -0500

2002: The Year of the Horse

Top New Claim Threat: Terrorism

Athletic Achievement: New England Patriots

Furthest Fall from Grace: Salt Lake City Winter Olympics

Coolest New Gadget: GPS

Hottest Coverage Issue: Vanishing Premiums

The Five Biggest Rulings of 2002

Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 149 (9^th Cir. 2002),

The Ninth Circuit ruled that liability insurers had a duty to defend allegations that the insured's defective circuit boards had caused the plaintiffs' computer scanners to crash. In the court held that claims for breach of contract are an "occurrence" under California law and that the plaintiffs' claims alleged a "loss of use" of the scanners. Further, the Ninth Circuit ruled that the underlying suits left open the possibility that the defective circuit boards had caused "sudden and accidental physical injury to the insured's product or the insured's work after it had been put to its intended use" so as to fall within the exception to the "impaired property" exclusion. The court also took note of a consultant's investigative report which had concluded that "thermal stressing" had caused foil layers to separate, commenting that this suggested that the damage may have occurred "suddenly."

Comment: Despite earlier pro-insurer rulings such as Wisconsin Label, this Ninth Circuit opinion re-opened the door to forcing CGL insurers to pay for contract disputes involving defective electronic components at the same time as computers are assuming a ubiquitous position in our lives.

Consolidated Edison Co. of NY v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687 (2002)

In a landmark victory for insurers, the New York Court of Appeals declared that a trial court did not err in adopting a "time on the risk" approach to long-tail pollution cleanup claims. The Court of Appeals ruled that an "all sums" or joint and several approach that would have permitted the policyholder to allocate its entire loss to any single year of coverage was inconsistent with the provisions of such policies limiting coverage to property damage during each year, particularly in cases where the amount of damage in any given year is uncertain. The court declined to adopt a specific theory of pro-ration, however, noting that its ruling was not the "last word" with respect to questions such as whether allocation should be based on the total period of injury, the limits of available insurance coverage or the amount of injury in each year much less as to how allocation should apply to diverse factual circumstances, such as those involving self-insured period, periods when the insured failed to purchase insurance, or periods for which insurance was unavailable for such losses. In another significant ruling, the court concluded that policyholders have the burden of proving an "accident" or "occurrence" in order to trigger coverage, rejecting the insured's contention that such terms are "exclusionary" in effect.

Comment: In recent years, New York has rarely led the way. At the same time, however, opinions of the New York Court of Appeals have a way of consolidating trends that have emerged elsewhere. This opinion largely stemmed the tide of “all sums” rulings in other states and paved the way for the evolution of “time on the risk” case law in the region as state supreme courts in Connecticut, Massachusetts, New Hampshire and Vermont followed suit.

Friedline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002)

While affirming the Court of Appeals' ruling that personal injuries suffered by a building occupant who inhaled carpet glue fumes was outside the scope of an absolute pollution exclusion, the Indiana Supreme Court overturned the lower court's ruling that the assertion of the exclusion is per se bad faith in Indiana. The court ruled in that the Freidlines had failed to establish by clear and convincing evidence that Shelby Insurance lacked a reasonable basis for its coverage position, particularly as it had been adopted by several out-of-state courts.

Comment: Starting around 1996, when the Indiana Supreme Court eviscerated pollution exclusions in Kiger and Seymour, insurance jurisprudence in Indiana went into free fall. Things were so bad that, by 2002, an intermediate appellate court had ruled that an insurer had acted in bad faith by even contending that an absolute pollution exclusion might preclude coverage for indoor chemical exposures. In this 2002 opinion, the state Supreme Court began to right the ship. While continuing to hold to a limited view of the exclusion, the court acknowledged the right of insurers to contest coverage where legitimate grounds existed for their positions. It was the first (but not the last) major defeat for George Plews, who until them seemed to own the keys to the courthouse.

King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002

The Texas Supreme Court ruled in this case that allegations that an employer was negligent in its hiring, training or supervision of an employee who attacked the plaintiff have been held to set forth a separate claim for an "occurrence" under Texas law. The court declared that the question of whether an "occurrence" exists must be determined independently from the viewpoint of the insured seeking coverage. Although the Fifth Circuit had previously ruled on several occasions that employers are not entitled to coverage in such circumstances inasmuch as their liability is "related to and interdependent" on the intentional acts of the employee who causes the plaintiff's damage, the Texas Supreme Court concluded that this was an erroneous reading of Texas law since, "whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally."

Comment: In King, the Texas Supreme Court rejected an earlier line of cases in which the Fifth Circuit had held that employers are not entitled to coverage in such circumstances inasmuch as their liability is “related to and interdependent” on the intentional acts of the employee who causes the plaintiff’s damage. The Texas Supreme Court declared in King that this was an erroneous reading of Texas law since, “whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally.”

Port of Seattle v. Lexington Ins. Co., 48 P.3d 884 (Wash. App. 2002)

In one of the first Y2K first party coverage rulings, the Washington Court of Appeals held that millions of dollars that the Port of Seattle had spent to prevent system failures that might otherwise have resulted from the inability of its computer software to distinguish the year 1900 from 2000 fell outside the scope of its 1997 and 1998 first party property policies. The Court of Appeals declared that the Y2K problem was an "inherent vice" and therefore excluded. Further, the court refused to find that the insurers had an independent obligation to pay based on "sue and labor" provisions in their policies inasmuch as the loss that the insured sought to prevent could not have occurred before 2000 and therefore would not have been insurable in any event under these 1997 and 1998 policies.

Comment: Despite the smaller than expected incidence of Y2K-related failures after 2000, first party insurers still received millions of dollars in claims for costs that insureds claimed to have spent to mitigate against the risk of such losses occurring. As one of the first Y2K opinions, Port of Seattle set a tone that ultimately sealed the fate of such claims.

NEXT UP: 2003

The Decade That Was: 2001

Mike Aylward — Fri, 18 Dec 2009 08:03:10 -0500

2001. For those of us of a certain age it was, like 1984, a year in which remembered symmetries clashed with current realities. For many, it was the year in which the new century finally began. By the fall, it was clear to all that we had entered a new era.

2001: The Year of the Snake
Top New Claim Threat: Y2K
Furthest Fall from Grace: Enron
Athletic Achievement: Barry Bonds
Coolest New Gadget: Noise cancelling headphones
Hottest Coverage Issue: Attorney-Client Privilege

The Five Most Important Insurance Coverage Rulings of 2001

Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313 (2001)

In the most important allocation/recoupment case to be decided since Buss, the California Supreme Court ruled that where an insurer has defended a lawsuit under a reservation of rights and settles the claim over the objections of its insured, it is entitled to full reimbursement for all reasonable settlement payments in the event that it is later determined that the claims were not covered under its policy. The insurer had only settled after first warning the policyholder that it would seek recoupment and after giving the insured the right to take over its own defense if it so chose. The court distinguished the Texas Supreme Court’s 2000 opinion in Matagorda, noting that insurers are not free in California to immediately pursue a DJ to resolve coverage issues where, as here, the coverage issue conflicts with the underlying tort suit. The court also emphasized the fact that the insured had been offered the right to take over its own defense.

Comment: At the time, Jacobsen seemed like an entirely equitable and reasonable outcome to the dilemma that insurers face when insureds demand that they pay to settle cases that insurers do not believe are covered. Ironically, the case has since had the unforeseen outcome of placing insurers in the default position of having to fund settlements for insureds, even in cases where coverage likely does not exist.

Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001)

The Ohio Supreme Court ruled 4-3 that correspondence between an insurance company and its outside coverage counsel evaluating a policyholder’s claim for coverage is discoverable in a bad faith case, concluding that “claims file materials that show an insurer’s lack of good faith in denying coverage are unworthy of protection” much like the claim fraud exception to the attorney/client privilege. Three dissenting justices criticized the “unworthy of protection rationale” as being even broader than the claimed fraud exception, which only waives the attorney/client privilege in the event of proof whereas the majority’s analysis permits all such documents to be discovered in any case where bad faith is merely alleged.”

Comment: Vanliner sent a shiver through the insurance industry. Apart from the Arizona Supreme Court’s Lee opinion, no other court had ruled that a mere allegation of bad faith was enough to vitiate the privilege. In the event, these concerns proved somewhat exaggerated. Since 2001, however, no other state court has taken this view. Even in Ohio, the state legislature approved a measure in 2007 ameliorates Vanliner by now requiring in camera review by a court before privileged communications needed be disclosed.

Certain Underwriters at Lloyd’s v. Superior Court, 24 Cal.4th 945, 16 P.3d 94 (2001)

The California Supreme Court on February 1, 2001 that general liability policies that insure sums that the insured is “legally obligated as damages” only extend coverage to sums that the insured is ordered to pay by a court judgment and, consistently with its ruling in Foster-Gardner, specifically do not encompass “expenses required by an administrative agency pursuant to an environmental statute.” The Supreme Court refused to find that the insuring agreement extended to damages that existed apart from any order by a court. Further, the court refused to read “damages” outside of the insuring agreement or to find that it was redundant with the language requiring the insurer to pay sums for which the policyholder was “legally obligated.”

Comment: Powerine was followed by similar Supreme Court rulings in 2005 that extended its holding to excess policies. Together, these decisions have largely blunted the effect of the court’s earlier holding in Foster-Gardner that environmental claims are a “suit” and have since significantly reduced the number of environmental claims being litigated in California.

Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593 (Ariz. 2001)

In this case, the Arizona Supreme Court broke new ground, holding that a cause of action for malpractice existed, even if the insurer was not a client per se. 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. Further, the court declared 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.”

Comment: Much of the “dual client” case law, a pivotal premise underlying the tripartite relationship, has been decided in the unlikely context of efforts by insurers to sue defense counsel for malpractice. In this case, the Arizona Supreme Court found a way to avoid finding an express client relationship but still acknowledging the right of insurers to sue for malpractice.

Sunbeam Corp. v. Liberty Mutual Ins. Co., 781 A.2d 1189 (Pa. 2001)

After nearly two decades of pro-insurer rulings from state and federal courts, the future of the pollution exclusion was cast into doubt by the Pennsylvania Supreme Court when it ruled in this case that the exclusion was ambiguous or that coverage was mandated on a Morton-style theory of regulatory estoppel. While stopping short of formally adopting regulatory estoppel, the Supreme Court remanded the question back to the trial court for further finding and further suggested that such evidence might be relevant to establish a “custom and usage” within the insurance industry that mandates an interpretation of “sudden and accidental” that is contrary to the understanding of the general public. Justices Saylor and Castille argued that the lower court’s ruling should have been affirmed as the plain and ordinary meaning of “sudden and accidental” precludes coverage in a case where contamination occurred gradually over an extended period of time.

Comment: Despite initial concerns that Sunbeam might transform Pennsylvania into “West Jersey,” Pennsylvania’s courts have been slow to embrace the “regulatory estoppel” ‘theory. On the other hand, Sunbeam has made it far more difficult for insurers to obtain summary judgment in old pollution cases in the Keystone state and have opened the door for policyholder to pick and choose 1970-86 years under J.H. France.

Next up 2002