It’s official!  There will be a 6th edition of Insurance Key Issues.  With a little luck, it will be released in the Fall of next year.  That would make it a little over 3 years since the 5th edition was published.  In my experience, that’s about the right gap between editions.  That time period produces enough new developments in coverage law, and new decisions providing guidance for claims handling, to keep Insurance Key Issues as valuable as possible as a tool.

Once again, Margo Meta, whose name Jeff and I are proud to have on the cover of the 5th edition, will join the team as a co-author.  Margo serves as Claims Legal Counsel for Grange Insurance Company, where she focuses her work on property and casualty coverage issues arising under commercial and personal lines policies.  In 2022, she was recognized as one of CLM’s “Phenoms Under 40,” which honored outstandingly talented up-and-comers in the insurance industry.

With work on the 6th edition soon to be underway, the 5th edition will now be permanently priced at 45% off.  The price you see on Amazon is the reduced price.   www.InsuranceKeyIssues.com
      
I’ll keep you updated on progress.  It can be a huge slog, believe me, to put together a new edition.  Hopefully we’ll stay on target for a Fall 2024 release. 

I am excited to report that this issue marks the 11th Anniversary of Coverage Opinions!

Here is the thank you that I’ve provided for prior anniversaries.  I know it’s redundant, but I can’t think of any other way to say it.  

There could be no eleven-year anniversary to mark if it were not for you – the dear Coverage Opinions reader. I can’t thank CO readers enough for taking the time to read the newsletter dispatches, despite having such busy schedules and being inundated with other insurance coverage newsletters, and email new case reports, from law firms competing for their time.

I appreciate all of the reader email that I receive – mostly positive, but sometimes taking me to task for something I said or didn’t say -- and that’s fine too. And people sometimes kindly send cases that they think I’ll enjoy or that might merit a write-up.

I am also lucky for the friendships that I have made with CO readers who reached out about something they saw.  And, of course, I sincerely appreciate the many client relationships that have grown out of CO.           

Putting together Coverage Opinions is an extremely time-consuming endeavor – staying on top of case law developments and the writing.  Hearing from people, that they read it and enjoy it, provides the mojo that I need to keep it going.

Again, thank you for your loyal readership.

-- Randy Maniloff

-- Randy Spencer

maniloff@coverageopinions.info

OK.  If you think I did that for shameless clicks -- guilty!  But wait a second.  It’s not as bad as you think.  First, it is certainly a little crazy that there’s a 100-year-old decision, from the Supreme Court of Kansas, captioned Taylor v. Swift & Co.  And wait, there’s more.  At issue was coverage for a worker’s compensation claim.  But hold on, there’s still even more.  At issue was whether the injury was caused by an accident.  Regular readers of Coverage Opinions know that I have long-discussed such question being the most litigated and unpredictable liability coverage issue of them all.  Indeed, courts have been struggling with it with since at least the mid-1800s. 

Now do think that headline was so shameless? Or at least a little less so.  

As for the case, in Taylor v. Swift & Co. (hereinafter “Taylor Swift”), the Kansas high court addressed whether injury caused by exposure to very low temperatures, while working in and out of a meat-cooling plant, qualified as an accident for purposes of worker’s compensation recovery.  The Taylor Swift court held that it did not:

“That statute awards compensation for accidents and consequent injuries arising in the course of the workman's employment and because of it. But there must be some accident, some mishap, some untoward, unexpected event arising out of and in the course of the employment from which the injury is occasioned. (citations omitted).  Here there was no accident. The exposure caused by working in and out of a cooler or refrigerated wareroom is undoubtedly hard on the human constitution, it may wear down and gradually weaken a workman’s powers of endurance and render him more liable to various diseases, including possibly transverse myelitis as contended for in this case by plaintiff, but such work and such exposure, although regrettable consequences flow therefrom, do not constitute an industrial accident within the meaning of the compensation act.”

By the way, in case you are wondering.  I checked.  There is no reported decision involving a case captioned Travis v. Kelce & Co.

I know that policyholder counsel can get angry with some decisions that conclude that no coverage is owed for a claim where they strongly believe otherwise. But there are some decisions where I imagine their anger going to a next level.  They are reading the decision, seeing where the court is going, coverage is found not to be owed, their face gets red and then – boom.  Their head explodes. 

I suspect that the Wisconsin federal court’s decision in Great Am. Ins. Co. v. R.J. Schinner Co. Inc., no. 21-1018 (D. Wis. Dec. 1, 2023) is a head-exploder for some on the policyholder side.  

It’s Sunday morning. I have a lot to do today.  And I want to be finished by 4:00 for the Eagles-Niners game. [Monday update: UGH!]  So I’ll the court’s words do the work.  It’ll get the point across.

Facts: “Schinner is a Wisconsin corporation that sells paper, plastic, and Styrofoam products as well as cleaning supplies on the redistribution market.  In addition to its Wisconsin headquarters, Schinner maintains 18 warehouses nationwide. The warehouse at the center of this litigation was located in Nashville, Tennessee, about 25 yards from Mill Creek, a tributary of the Cumberland River.

“Between March 27 and 28, 2021, Nashville experienced historic flash flooding that damaged over 500 homes and businesses and left six people dead. Schinner’s warehouse was among the infrastructural casualties. Mill Creek overflowed and toppled one of the warehouse’s cinder block walls.  This begat an ‘almost incomprehensible’ debris field.  Plastic coated every inch of the 20-foot trees lining the riverbank.  Pizza boxes, straws, and bags festooned miles of dense vegetation.”

Coverage dispute arises: Schinner and its insurers argued whether Schinner’s policies provided coverage for the arduous and expensive clean-up.  When the dust settled, one issue before the Wisconsin federal court was the potential applicability of the pollution exclusion in a Great America excess liability policy.

Pollution exclusion decision: As liability policies go, there was nothing unusual about the GAIC excess policy’s pollution exclusion nor the policy’s definition of pollutant. 

The court held that the pollution exclusion served to preclude coverage.  There were several reasons provided, but I’ll set out the following:

“Putting financial consequences of the answer on the parties aside, it is hard to fathom how any reasonable insured would consider this scene [Note: the court included pictures] to depict anything other than a river marred by pollutants. The massive amounts of paper and plastic products blown from the warehouse and coating the river’s banks and the surrounding vegetation are pollutants within both the normal meaning of the term and as defined in the endorsement.

“This commonsense conclusion is consistent with the generally understood meaning of pollution. The deposit of solid waste and plastics into and along our nation's waterways, like that shown in the photos, is a form of water pollution. See, e.g., Water Pollution, Wikipedia, https://en.wikipedia.org/wiki/Water_pollution (Oct. 5, 2023). That the contents of the debris field are visible to the naked eye, or ‘macroscopic,’ does not render them any less pollutants than the unseen ‘microscopic’ chemicals contaminating a river as a result of an accidental oil spill. In determining whether a contaminant is a pollutant, size does not matter.”

***

“As explained in Wilson Mutual, the context of the insurance claim is key. Thus, the debris from Schinner’s warehouse would not be a pollutant if it remained in the warehouse. But once it was washed away by the flood and scattered in and around Mill Creek it became a pollutant. In other words, while pizza boxes, straws, and bags are not pollutants when awaiting shipping in a warehouse, those same substances are pollutants when left on the banks of a waterway and when spilled into a river, caking its banks and nearby vegetation. Like manure or linalool, the products that make up the debris field have beneficial uses, but in the context of being strewn across land and water where they do not belong, they are pollutants.

“Indeed, Schinner likens the debris removal to ‘picking up litter on a roadside.’  This comparison is apt and supports application of the exclusion.  Littering causes pollution. Indeed, national public service campaigns have long been dedicated to stopping pollution, with a clear emphasis on littering. See Harald Fuller-Bennett & Iris Velez, Woodsy Owl at 40, Forest History Today, Spring 2012, at 22, 23 (‘The film, an antipollution public service announcement, featured scenes of litter and pollution and ended with . . .’Give a hoot, don’t pollute.’). Plastic pollution, in particular, is a widely recognized issue, with the United Nations Environment Assembly recently adopting a resolution to ‘develop an international legally binding instrument on plastic pollution . . . by the end of 2024.’ World Environment Day Brings Solutions to Plastic Pollution Into Focus, UN Environment Programme (June 5, 2023), https://www.unep.org/news-and-stories/press-release/world-environment-day-brings-solutions-plastic-pollution-focus.”

I seems that Schinner did itself no favor by likening the debris removal to “picking up litter on a roadside.”

I have a sense that policyholder counsel are not convinced that the pollution exclusion applied here, based on that 1970s anti-littering ad campaign -- which I completely remember as a kid, including the song - where Woodsy Owl said “Give a hoot, don’t pollute.”

Woodsy can be viewed here: https://www.youtube.com/watch?v=gZB7gSQRIuM

[If you get the song stuck in your head, sorry.]

The number of decisions nationally that have addressed coverage for construction defects is breathtakingly legion.  Yet, until late last week, there had never been one from the Supreme Court of Illinois.   There are lots of decisions from the Illinois Court of Appeals, which the Supreme Court in Acuity v. M/I Homes of Chicago, No. 129087 (Ill. Nov. 30, 2023) noted, but the issue had never made it to Springfield.

At issue was a condo association that sued M/I, a developer/builder for construction defects, and M/I sought coverage, as an additional insured, under a subcontractor’s policy.  The coverage issues were what you would expect, especially with the court addressing whether faulty workmanship qualifies as an “occurrence.”

Nothing that the lower appellate court decisions are “in flux” – addressing the issue “based on a myriad of rationales and factors -- the Supreme Court decided to cast them aside and start from scratch.  Its motivation for doing so was its observation that the cases were not tied to principles of contract interpretation, but, rather, “policy [not insurance policy] considerations” and the purpose of CGL policies.  “Considering the current legal landscape and the unsettled nature of the law in this area,” the court decided that “rather than merely begin with the parties’ premise, the best approach to bringing clarity to these issues is to return to first principles and apply a disciplined legal framework from which we can arrive at the correct legal analysis and the correct result.”

Taking this “return to first principles” approach, the Illinois Supreme Court concluded that faulty workmanship, to an insured’s own work, can qualify as an “occurrence.”  If insurers do not believe that coverage exists for any such property damage, then the place to turn is the potential applicability of policy exclusions:

“Based on these definitions, we find that the term ‘accident’ in the policies at issue reasonably encompasses the unintended and unexpected harm caused by negligent conduct. Our finding aligns with the commonly accepted definitions of ‘accident’ in CGL policies in other jurisdictions considering construction defects. (citations omitted).

“Applying this definition to the Association’s complaint, it does not claim that the subcontractors intentionally performed substandard work that led to the water damage. Rather, taken in the light most favorable to M/I Homes, the allegations indicate that inadvertent construction defects accidentally caused property damage to the completed townhomes. Neither the cause of the harm—the inadvertent defects—nor the harm—the resulting water damage to the walls of the interior of the units—was intended, anticipated, or expected.

“Acuity asserts that damage to any portion of the completed project caused by faulty workmanship categorically can never be caused by an accident because it is always the natural and probable risk of doing business. We disagree with that claim. We acknowledge Acuity’s argument that ultimately the intent of CGL coverage is not to insure the cost to repair or replace defective work or to recover damages within the named insured’s own scope of work. Nevertheless, as we discuss below, these notions of business risk articulated by Acuity are specifically expressed in the exclusion section of the policy as set forth below; they are not found in the language of the initial grant of coverage.

Hawaii and Alaska are located 3,000 miles from each other and have, well, different climates.  Yet, owing to their status as the last two additions to the star-spangled banner – and in the same year – it is not unusual for them to be discussed together.

The Hawaii-Alaska tandem recently hit the world of insurance coverage – and in a remarkedly coincidental way: courts in both states, know for pristine environments, 24 hours apart certifying a pollution exclusion issue to their respective top courts.   

On September 5, 2023, a Hawaii District Court certified the following questions to the Hawaii Supreme Court:

1) For an insurance policy defining a covered “occurrence” in part as an “accident,” can an “accident” include recklessness?
If that answer “yes,” the court certified this follow-up question:
2) For an “occurrence” insurance policy excluding coverage of “pollution” damages, are greenhouse gases “pollutants,” i.e., “gaseous” “irritant[s] or contaminant[s], including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste’”?

Then, on September 6 – the next day! -- the Ninth Circuit, in Estate of Wheeler v. Garrison Prop. & Cas. Ins. Co.,certified the following question to the Alaska Supreme Court: “Does a total pollution exclusion in a homeowners' insurance policy exclude coverage of claims arising from carbon monoxide exposure?”  The next day!

It’s just coconuts that that could happen!

Cases addressing the effectiveness of reservation of rights letters are, by far, the ones I most enjoy addressing in Coverage Opinions.  I try to read every reported reservation of rights case handed down nationally.  I don’t know if I succeed, but I probably come close.  As the backbone to the handling of liability claims, the importance of reservation of rights decisions cannot be overstated for providing guidance to insurers. 

In Integris Ins. Co. v. Tohan, No. HHD CV21-6141816 (Super. Ct. Conn. Nov. 8, 2023), the court addressed whether an insurer, following a judicial determination that it no longer had a duty to defend, had drafted a reservation of rights letter sufficient to now enable it to withdraw its defense. 

The Connecticut court’s decision especially caught my attention as it addressed a reservation of rights drafting point that I discuss in my “50 Item Reservation of Rights Checklist” webinar that I have been doing for ages.  [If you are an insurer, interested in having me put on the ROR Checklist webinar, drop me a note.]

At issue in Tohan was coverage for an insured-fertility doctor, under a medical professional liability policy, sued for using his own sperm to impregnate two of his patients.  The insurer undertook the insurer’s defense under a reservation of rights. Even if had nothing to do with reservation of rights letters, the case has enough interesting coverage issues that I would have discussed it in CO.

The issues addressed by the court were not surprising – whether the doctor’s conduct qualified as a professional service (Marx v. Hartford was addressed), an exclusion for intentional conduct and whether the actions of the doctor fit within the policy’s sexual misconduct exclusion. 

In the end, the court concluded that the sexual misconduct exclusion applied, no defense was owed and the insurer sought to cease defending its insured.  However, the physician objected, arguing that the insurer had promised to provide a defense and the reservation of rights letter did not carve out any exceptions to such agreement.

Faced with this argument, the court, as you would expect, placed the insurer’s reservation of rights letter under a microscope to study its effectiveness at allowing the insurer to withdraw its defense.  The court concluded, for various reasons, that the insurer had adequately reserved its rights to do so.  In reaching this decision, the judge made a point that the insurer’s letter did “not explicitly list the right to withdraw its defense as one of the rights reserved.”  Nonetheless, the court was satisfied that the right had been sufficiently reserved, as the letter stated “our rights include but are not limited to.”  This, the court concluded, implied that the rights reserved in the letter were not exhaustive.     

I have long included, in the “50 Item Reservation of Rights Checklist” webinar, a recommendation that letters specifically make mention of the insurer’s right to withdraw its defense if, at any time, it is determined that a defense is no longer owed.
     
While the insurer here did not do so, it was not fatal as the court decided that it was an implied right based on the terms of the letter.  But the Tohan court’s decision certainly supports a reservation of rights letter drafting tip: specifically include the right to withdraw a defense.

Interestingly, this same issue arose earlier this year in U.S. Underwriters Ins. Co. v. Kenfa Madison, LLC, No. 20-2761 (E.D.N.Y. Mar. 30, 2023), where an insurer sought to withdraw its defense.  The insured took issue, noting that, nowhere in the reservation of rights letter did the insurer state that it could withdraw its defense.   However, based on the totality of the language in the letter, the court concluded that the insurer had reserved such right.

As in Tohan, the omission in Kenfa, of express defense withdraw language in the reservation of rights letter, was not a mortal wound for the insurer.  Nonetheless, both decisions provide sound advice to insurers to include such language in their reservation of rights letters.  While it may prove acceptable to have relied on a general catch-all reservation of rights – following perhaps avoidable litigation -- it takes just seconds, when drafting the letter, to include a specific reservation of the right to withdraw a defense.

For a few reasons, New Jersey’s rules concerning duty to defend and reservation of rights are unique.  One of them is the requirement, created by the state’s high court in Merchants v. Eggleston (1962), that an insurer must obtain the insured’s consent to be defended under a reservation of rights.  And I don’t mean a reservation of rights of the type that creates a conflict warranting independent counsel.  I mean a reservation of rights – period. 

The best way for an insurer to comply with this obligation is to simply set out the terms of its reservation of rights and ask the insured for its consent to the insurer retaining counsel subject to such terms.  [I have an approach to do this that I have developed -- and I think it best that it appear at the beginning of the reservation of rights letter and not page 17.]

Of course, what happens when the insured does not respond to the insured’s request for consent?  This is not an infrequent situation.  If the insured does not respond, its consent can be inferred, i.e., acquiescence by silence, but only if the letter fairly informed the insured that the offer can be accepted or rejected.

This was the issue in United Specialty Ins. v. Century Waste Services, No. A-1428-22 (N.J. Super Ct. App. Div. Nov. 20, 2023): did the insurer’s reservation of rights letter adequately inform the insured that it had the right to reject the defense -- to qualify as acquiescence by silence?

The specific language in the ROR letter was as follows: “If we do not hear from you to the contrary, we will assume that you consent to the retention of [counsel] for this matter.”  The insured, Century Waste Services, did not respond.

The New Jersey Appellate Division referred to this language as a “variation of acquiescence by silence.”

While the court’s decision did not get into detail, it held that there was “no magic language” required and the language used here was acceptable for the insured’s non-response to qualify as consent by the insured to being defend under a reservation of rights.

Of course, despite the decision here, it makes sense for a reservation of rights to be more specific.  By specifically advising the insured that it has the right to reject the defense, the insurer can forestall a challenge (or at least it should) that the insured’s non-response to whether it is OK being defended under a reservation, with insurer-chosen counsel, qualified as acquiescence by silence.

Lastly, the court ever so slightly touched on the issue whether an insurer, that defends under a reservation of rights without consent, i.e., fails to comply with Merchants v. Eggleston, can avoid estoppel by proving that the insured was not prejudiced by the defense.  Without answering the question, the court offered the following: “[E]ven if were we to assume for the sake of argument that prejudice is a relevant consideration, here, Century has not shown that it suffered any prejudice. . . . It is not disputed that USI’s reservation of rights letter was sent twenty months after it had retained an attorney to defend Century in the underlying lawsuit. But, as counsel candidly acknowledged at oral argument before us, Century is not able to show how the case would have been handled differently had it chosen to retain a different attorney at its own expense.”

Cases addressing an insurer’s right to reimbursement of defense costs, following a determination that it had no duty to defend in the first place, are not infrequent.  But such decisions, from state high courts, are the ones that get the attention of scorekeepers on this issue.  [Curiously, the issue has been the most popular to be addressed by courts that have turned to the ALI’s Insurance Restatement as a source of guidance.  Whoda thunk it?]

In St. Paul Fire & Marine Ins. Co. v. Bodell Constr. Co., No. SCCQ-22-0000658 (Haw. Nov. 14, 2023), the Hawaii Supreme Court answered the following question from a Hawaii District Court:

“Under Hawaiʻi law, may an insurer seek equitable reimbursement from an insured for defense fees and costs when the applicable insurance policy contains no express provision for such reimbursement, but the insurer agrees to defend the insured subject to a reservation of rights, including reimbursement of defense fees and costs?”

Hawaii’s top court, concluding that the state’s “stout duty to defend clashes with repayment” answered “no.”  Having done so, the court did not reach the follow-up certified questions: “(A) for what specific fees and costs may the insurer obtain reimbursement, (B) which party carries the burden of proof, and (C) what is the burden of proof?”

The court in Bodell Construction, after noting that some states allow reimbursement and others do not, employed a three-part approach to deciding in which camp Hawaii would join.  These are generally the same issues that all courts coming before it have addressed 
 
The Insurance Policy Does Not Contain the Right
“Insurers may reserve contractual rights, not create new ones. Permitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.  A reservation of rights letter does not alter policy coverage or remake a contract.  It "does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense.”

Reimbursement is Inconsistent With a Broad Duty to Defend
“The duty to defend is broader than the duty to indemnify.  An insurer only indemnifies covered claims.  But an insurer must defend when there is possible coverage, even ‘groundless, false, or fraudulent’ claims.  And the insurer has to defend mixed actions: some claims covered, others not. The insurer is obligated to provide a defense against the allegations of covered as well as the noncovered claims.”  Based on this, as the court saw it, “[i]f insurers recover for defending uncovered claims, our law flips: the duty to defend may be determined after the insurer tenders a defense. Not only does this sequence narrow the broad duty to defend, it dilutes an insurer’s good faith duty to take on a defense…”

Policyholders Are Not Unjustly Enriched By the Insurer’s Defense Of Uncovered Claims
“Since the insurer faces indemnity exposure, it deserves what it bargained for — near total control over a case.  Normally, an insurer’s duty to defend is coupled with the right to control the defense of the litigation.  . . .  An insurance company that tenders a defense protects itself, at least as much as it protects its insured.  No scrubs, say the insurers. An insurer has the right to defend its own way to avoid the risks of an inept or lackadaisical defense of the underlying action.
 
“If we allowed reimbursement, the unjustly enriched party may very well be the insurer.  When the insured pays back defense costs to the insurer, it pays for the insurer to protect itself.  If a court later determines that there is no duty to defend, then reimbursement protects the insurer from bad faith or breach of contract actions - without any responsibility for defense costs.  An all reward, no risk proposition creates a win-win situation for the insurer: buffered from bad faith, it defends all claims, yet has no obligation to pay for the whole defense. Meanwhile, the insured receives no greater benefit than if its insurer had refused to defend outright.”

Turning to the insurer’s argument that “the sky will fall and a world without a right to reimbursement is ‘rife with temptation to deny . . . costly and questionable claims,’ the court concluded that “insurers are seasoned, skilled, and well positioned to evaluate whether they need to defend. And bad faith or breach actions motivate them to honor contractual obligations.”

Number of occurrences is such an interesting issue.  There are no shortage of cases addressing it, but I wouldn’t mind a few more to address in CO.  The issue is like King Midas.  Not enough coverage?  In the right scenario, policyholders (or underlying plaintiffs) look for a solution by making more.  Find more occurrences.  It is an attempt at insurance alchemy.   

Number of occurrences was at issue in Western National Mutual Ins. Co. v. Rainbow Ranch Holdings, No. 23-05 (D. Mont. Nov. 20, 2023).  The court addressed coverage for Rainbow Ranch, which operates a hotel in Gallatin County, Montana.  Catharine Hudgens and her husband stayed there and experienced carbon monoxide exposure in their room.  Hudgens suffered injuries and her husband died from the exposure.

Rainbow Ranch was insured by Western National under a commercial general liability policy with a $1 million per occurrence limit and an umbrella policy with a $5 million limit and $20,000 in medical payments coverage.

Western National tendered the undisputed policy limits of $6,020,000, representing the sum of the $1 million per occurrence limit under the primary policy, the $5 million limit under the umbrella policy and $20,000 in medical payments.

The insurer sought a determination that its $1 million payment, under the primary CGL policy, satisfied its good faith obligations under Montana’s Unfair Trade Practices Act. 

The decision does not say this, but presumably the CGL policy had an aggregate limit greater than the $1,000,000 “occurrence” limit.  Hence, there was a need to know if there was more than one “occurrence” to reach the aggregate limit.  The umbrella policy was not at issue, likely because its $5,000,000 limit was both per “occurrence” and aggregate.

Having noted that the Montana Supreme Court has adopted the “cause” test for purposes of determining number of occurrences -- look to the cause or causes of the damage or injury rather than the number of injuries or claims -- the Rainbow Ranch court’s single “occurrence” decision was not surprising:

“Western National’s policy defines occurrence the same way as the policies in Casino West, Inc. and Scottsdale Ins. Co., including ‘continuous or repeated exposure to substantially the same general harmful conditions.’  The Underlying Litigation alleges faulty installation of the spa boiler, faulty maintenance of the boiler, and faulty construction of the room in which Hudgens stayed.  The Underlying Litigation also alleges that Rainbow Ranch failed to check on Hudgens and her husband when asked by concerned family members. These negligent acts allegedly led to a buildup of carbon monoxide. Hudgens’s bodily injuries and her husband’s death stem from one cause, carbon monoxide poisoning.”

In the last issue of Coverage Opinions, I addressed a Florida federal court’s opinion in Southern Owners Ins. Co. v. Midnight Tires, Inc. where the court held that an insurer did not owe a defense, under an automobile policy, because the defendant was not an insured.  The issue was tied to who owned a certain automobile. 

On one hand, looking solely at the complaint on the ownership issue, the defendant could have been an insured.  At least it could not be ruled out.  So, based the “eight corners” rule, a defense would be owed.  However, in fact, and nobody disputed this, the answer to the ownership question precluded insured-status for the defendant.     

But the court cited to a “limited” exception, adopted by the Eleventh Circuit, “in which a court may consider extrinsic facts if those facts are undisputed, and, had they been pled in the complaint, they clearly would have placed the claims outside the scope of coverage. . . . The exception is limited to exceptional cases in which courts have crafted an equitable remedy when it is manifestly obvious to all involved that the actual facts placed the claims outside the scope of coverage.”

In adopting this exception, the court stated that “at some point in legal pleadings, common sense should prevail, which is in essence the basis for the limited exception to the four corners rule.”

Ironically, Southern Owners Ins. Co. v. Midnight Tires was addressed in the November 14th issue of CO.  Well, in the crazy coincidence category, on November 13th, an Alabama federal court issued a decision in which it had the same scenario before it.

In Mass. Bay Ins. Co. v. Robinson, No. 22-CV1236 (N.D. Ala. Nov. 13, 2023) the court addressed whether a defendant was an insured under an automobile policy.  Just as in Midnight Tires, the issue was tied to who owned a certain automobile.  The complaint was silent as to who owned the automobile.  So it could not be ruled out that the defendant owned it.

However, in fact, the defendant was driving her own automobile, and, thus, she was not an insured.  And nobody disputed this – not even the defendant herself.

But, alas, the court explained that it was bound by Tennessee Supreme Court (the governing law) decisions holding that the duty to defend is based solely by the allegations in the complaint.  Acknowledging that its decision was counterintuitive – so clearly not adopting the Midnight Tires rationale that “at some point in legal pleadings, common sense should prevail” -- the court reached the entirely predicable conclusion:

“In light of the Tennessee Supreme Court’s clear, repeated, and longstanding instruction that an insurer’s duty to defend arises ‘solely’ from ‘the allegations contained in the underlying complaint,’ this court finds that it cannot consider the evidence the Insurers have presented about Ms. Robinson’s ownership of the car involved in the accident. And because the allegations in the state court complaint are unclear about ownership of the car, the court is required to construe them in favor of coverage. The court must, therefore, DENY Massachusetts Bay’s motion for summary judgment as to its duty to defend under the commercial lines policy.” (citations omitted).

Some excess/umbrella policies specifically state that their limits do not apply over the sub-limits contained in a primary liability policy.  The umbrella policy at issue in Berardi v. FMI Ins. Co., No. A-2940-22 (N.J. Super Ct. App. Div. Nov. 28, 2023) did not.  The New Jersey appeals court concluded that the umbrella policy provided coverage over a primary policy sub-limit.

Berardi is a dog bite case.  Those are often rich cases for discussion in Coverage Opinions.  But here the specific dog bite issue was not particularly interesting.

After concluding that the primary liability policy’s Medical Expenses coverage part applied, and the limit of $10,000 was owed, the parties disputed whether the umbrella policy provided Medical Expense coverage.  The primary policy’s $10,000 limit for Medical Expenses was exhausted; however, the primary policy’s principal limit of liability was $1,000,0000.  [The court called it the overarching limit.]

The policy language at issue was as follows: “[i]f the occurrence is covered by a primary policy, the limit of liability under the MPL 80 applies to any damages which exceed the limits of the primary policies described in this coverage form together with any other collectible insurance available to the insured.”  (emphasis mine).

The court seized on the word “limits” in the umbrella policy and concluded that the policy provided coverage over the exhausted Medical Expenses limit of $10,000:

“The plain text of the umbrella endorsement does not refer explicitly to sublimits. We note from a grammatical perspective, moreover, that the plural ‘limits’ could refer either to the overarching maximum limits of two or more separate policies, or to various limits set forth within either or both the FMI and Scottsdale policies.  The plain text, in other words, is ambiguous and could support either party’s interpretation.

“Neither party cites published precedent specifically addressing whether a general reference to policy limits in an umbrella excess coverage endorsement includes or excludes sublimits. Accordingly, we resort to the well-established principle that ‘[w]here the language of a policy will support two meanings, one favorable to the insured and the other favorable to the insurer, the interpretation sustaining coverage must be applied.’ (citation omitted). We add that if FMI wanted the umbrella excess coverage to apply solely to damages above the maximum amount of liability provided by the primary policies, and not to any or all the sublimits specified in the policies, it could have drafted the umbrella excess coverage endorsement to make that clear.”   

Court Addresses Coverage For July 4th Highland Park Mass Shooting
The coverage issue in Acceptance Indem. Ins. Co. v. Red DOT Arms, Inc., No. 22C7145 (N.D. Ill. Nov. 14, 2023) is not particularly noteworthy. But I include it here, in the Tapas column, as it addresses coverage for a well-known event – the tragic 2022 mass shooting, in Highland Park, Illinois, at the city’s July 4th parade.

At issue was coverage, under a general liability policy, for Red Dot Arms, Inc. for claims that, in violation of federal law and local ordinances, it transferred the firearm to the gunman who used it in the shooting. The insured argued that coverage was precluded by the policy’s exclusion for “‘bodily injury’ or ‘property damage’ arising out of any acts committed with a ‘firearm’ or ammunition that is sold, distributed, or transferred by any insured where such sale, distribution or transfer is in violation of ATF, federal, state or local laws or regulations for the lawful transfer of a ‘firearm’ or ammunition.” 

The court agreed, despite Red Dot’s arguments that the underlying complaints alleged negligence apart from a violation of laws.  The court also held that, even if this exclusion did not apply, coverage was precluded by the policy’s assault and battery exclusion.    

Court Treats Abuse of Process As Malicious Prosecution For Personal And Advertising Injury Coverage
While lots of courts do not see it this way, and if you’ve had this issue you know that, a California trial court, in Abramson v. Spinnaker Ins. Co., No. 22STCV24687 (Sup. Ct. Calif. Sept. 15, 2023), concluded that Personal and Advertising Injury coverage, for malicious prosecution, includes a cause of action for abuse of process.

The court analysis is fairly detailed. Among other things, its conclusion was based on the Ninth Circuit’s decision in Lunsford v. American Guarantee (1994), which was impressed by the Wisconsin federal court’s reasoning in Koehring Co. v. American Mutual Liability Ins. Co. (1983). 

From Lunsford: “While California courts have not yet considered whether ‘malicious prosecution’ coverage includes actions for abuse of process, the analysis in Koehring is consistent with California law. The Koehring court applied Wisconsin law and interpreted language  in a ‘Personal Injury Liability Coverage Endorsement’ that included ‘malicious prosecution’ as a covered hazard. 564 F.Supp. at 308. The court concluded that the ‘theoretical legal distinction between ‘malicious prosecution’ and ‘abuse of process’ is not so clear that insurance coverage of one should exclude coverage of the other unless the exclusion is specifically stated in the policy.’”