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Coverage Opinions
Effective Date: December 18, 2013
Vol. 2, Iss. 23
 
   
 
 

Introduction: Ten Most Significant Insurance Coverage Decisions Of 2013
It was a bonanza for policyholders in 2013. They cleaned-up in wins in significant insurance coverage decisions. The score resembled the outcome of a Harlem Globetrotters – Washington Generals game. But insurers need not worry that this represents some sort of general judicial shift in favor of policyholders.

Washington Supreme Court: Policy Arbitration Clauses Are Unenforceable
Insurers See Red – Insureds See Delicious
Washington Department of Transportation v. James River Ins. Co. (Wash.)

Insurance policies sometimes contain clauses requiring that any dispute under the policy be resolved by arbitration. But some states have statutes that purport to prevent insurers from requiring that a dispute under a policy be resolved by arbitration. Did a state statute make an arbitration provision in an insurance policy unenforceable?

Alaska Supreme Court: Demand To Settle For Limits -- But Not For All Insureds
Insurer Between A Rock And A Hard Case
Williams v. Geico Casualty Co. (Alaska)

It is the proverbial “damned if you do and damned if you don’t” situation for insurers. An insurer is presented with a policy limits demand to settle for one insured – and it should be accepted based on liability and damages considerations -- but the settlement offered will not secure a release for all insureds. What is an insurer to do?

Idaho Supreme Court: No Covered Damages – But Coverage Still Owed For Plaintiffs’ Attorney Fees
Employers Mutual Casualty Co. v. Donnelly (Idaho)

If the compensatory damages awarded against the insured are not covered, are the associated attorney’s fees, incurred by the plaintiff, to recover such damages, also not covered?

American Law Institute Begins Adoption Of Its Principles Of Liability Insurance
Academic Mumbo Jumbo That You Don’t Need To Know About? Not So Fast.

The American Law Institute adopted some of the initial sections of its Principles of Liability Insurance. The ALI’s Principles Project – essentially a rule book for liability coverage issues -- sounds like the stuff of law professors, academic mumbo jumbo, and nothing you needed to know about. That’s what I used to think.

Illinois Supreme Court: Statutory Liquidated Damages Are Not Penal And Not Uninsurable Under Public Policy
Standard Mutual Insurance Company v. Lay (Ill.)

Are liquidated damages, that are more than the amount of harm actually sustained by the aggrieved party, penal, and, therefore, uninsurable in a state where punitive damages are considered uninsurable?

Almost Heaven For Policyholders: West Virginia High Court Overrules Four Prior Decisions And Holds That Faulty Workmanship Is An “Occurrence” [And Two Others Do The Same]
Cherrington v. Erie Insurance (W.Va.)

The West Virginia high court held that defective workmanship constituted an “occurrence.” That’s a dog bites man story. The significance of the case is not the decision, but what it took for the court to get there -- overruling four prior decisions (including a recent one). Two other state supreme courts used their power to overrule to find coverage for policyholders in CD cases.

Missouri Supreme Court: Policy Limits “Do Not Matter”
Trend: Harsh Consequences For Breach Of The Duty To Defend
Columbia Casualty Company v. Hiar Holdings, LLC (Mo.)

An insurer breached the duty to defend, but not in bad faith, and was obligated to indemnify the insured by paying the settlement amount. Did the insurer’s obligation to indemnify the insured include the portion of the settlement amount that exceeds the policy’s limits of liability?

Texas Supreme Court: Insured’s Settlement Without Insurer’s Consent Covered
Insured’s Texas 1-Step: Settle And Skip Insurer’s Consent
Lennar Corp. v. Markel American Insurance Company (Tex.)

Is an insurer obligated to provide coverage for an insured’s settlement, without insurer consent, when the insured actively solicited claims which might otherwise never have been brought?.

Eleventh Circuit Limits Construction Site Bodily Injury Exposure (Without Using An Endorsement)
Amerisure Insurance Co. v. Orange and Blue Construction, Inc. (11th Cir.)

Insurers have been taking various steps to attempt to limit their exposure for bodily injury claims on construction sites. One way has been to amend the employer’s liability exclusion. Here is a method for insurers to do so that requires no changes to standard policy language.

California Appeals Court: No Bad Faith For Insurer’s Failure To Attempt To Settle When There Is No Demand
Reid v. Mercury Insurance Company (Cal. Ct. App.)

Is an insurer liable for an excess verdict, after it did not settle a case, but there was no demand that it do so?

 
 


 

Vol. 2, Iss. 23
December 18, 2013

 

 

Introduction: Ten Most Significant Insurance Coverage Decisions Of 2013

It was a bonanza for policyholders in 2013. They cleaned-up in wins in significant insurance coverage decisions. The score resembled the outcome of a Harlem Globetrotters – Washington Generals game. The electoral map from Reagan’s 1980 win over Carter. A tennis match between me and Rafa. Policyholders did very well in my selection of the year’s ten most significant coverage decisions. I have policyholders taking seven out of ten (counting the ALI Principles as offering more for policyholders than insurers, discussed herein). What’s more, most of the cases that came close to being selected for the Top 10 list also favored policyholders.

And I’m not alone in my observation. A recent Law360 article, from Mary Calkins, Helen Michael and Carl Salisbury, of Kilpatrick, Townsend & Stockton, was titled “A Big Year For Coverage Rights.” But here’s the most telling part -- four out of five of the cases discussed in their article are ones that I did not include in my Top 10.

But insurers need not worry that this represents some sort of general judicial shift in favor of policyholders. The many significant decisions that policyholders won this year involved a host of unrelated issues from a wide range of courts. That being the case, the fact that so many big decisions went policyholders’ way is mere coincidence. The reality is that, when examining all issues, on a nationwide basis, insurers win more liability coverage cases than policyholders. I have no statistical proof that insurers do better than policyholders on an across the board basis. My conclusion is simply based on looking at a lot of cases. But I am going to try to prove this in 2014. [At least I have it on my to-do list, along with cleaning out the attic.]

I am thrilled to present my 13th annual look back at the year’s ten most significant insurance coverage decisions. As I always do at the outset, here is my description of the selection process (repeated from past years’ editions). The process is highly subjective, not in the least bit scientific, and is in no way democratic. But just because the selection process has no accountability or checks and balances whatsoever does not mean that it wants for deliberativeness. To the contrary, the process is very deliberate and involves a lot of analysis, balancing and hand-wringing. It’s just that only one person is doing any of this.

The selection process operates throughout the year to identify coverage decisions (usually, but not always, from state high courts) that (i) involve a frequently occurring claim scenario that has not been the subject of many, or clear-cut, decisions; (ii) alter a previously held view on an issue; (iii) are part of a new trend; (iv) involve a burgeoning or novel issue; or (v) provide a novel policy interpretation. Some of these criteria overlap. Admittedly, there is also an element of “I know one when I see one” in the process.

In general, the most important consideration for selecting a case as one of the year’s ten most significant is its potential ability to influence other courts nationally. That being said, the most common reasons why many unquestionably important decisions are not selected are because other states do not need guidance on the particular issue, or the decision is tied to something unique about the particular state. Therefore, a decision that may be hugely important for its own state – indeed, it may even be the most important decision of the year for that state – nonetheless will be passed over as one of the year’s ten most significant if it has little chance of being called upon by other states confronting the issue at a later time.

But the cases selected here differ. Many courts in coverage cases have no qualms about seeking guidance from case law outside their borders. It is routine--especially so when in-state guidance is lacking. The selection criteria operates to identify the ten cases most likely to be looked at by courts on a national scale and influence their decisions.

The year’s ten most significant insurance coverage decisions are listed in the order that they were decided.

 
 
 


Vol. 2, Iss. 23
December 18, 2013


Washington Supreme Court: Policy Arbitration Clauses Are Unenforceable
Insurers See Red – Insureds See Delicious
Washington Department of Transportation v. James River Ins. Co., No. 87644-4 (Wash. Jan. 17, 2013)


W.C. Fields once famously quipped: “All things considered, I’d rather be in arbitration.”

Insurance policies sometimes contain clauses requiring that any dispute under the policy be resolved by arbitration. Given the complexity and uniqueness of every case in litigation, it certainly cannot be said that insurers will fare better, in every case, if arbitration is the method of resolution. But, all things considered, insurers generally prefer arbitration over the traditional judicial system.

But some states have statutes that purport to prevent insurers from requiring that a dispute under a policy be resolved by arbitration. Washington is one such state. How many states have statutes to this effect is unclear, but apparently at least one-third. The Washington DOT’s brief in Washington Department of Transportation v. James River Ins. Co. (kindly sent to me by the Washington Attorney General involved), discussed herein, cited a 2005 Connecticut Insurance Law Journal article, stating that nearly one-third of states have provisions prohibiting binding arbitration of insurance disputes. However, a Law360 article reporting on Washington DOT cited an attorney who stated that around 26 states place a restriction of some type on the enforcement of arbitration clauses. It is possible that these two sources are using different definitions of what is a restriction on the enforcement of an arbitration clause. Thus, they may both be correct. But the point is that Washington is not an outlier by having the arbitration prohibition statute that it does.

In Washington Department of Transportation v. James River Ins. Co., the Washington Supreme Court held that a state statute made an arbitration provision in an insurance policy unenforceable. The case involved a dispute whether James River owed coverage to the Washington DOT, as an additional insured, under policies issued to a company performing work on a highway project. James River attempted to initiate an arbitration proceeding against the DOT pursuant to a binding arbitration provision in the policies. The DOT filed an action seeking a declaration that the arbitration clauses were void.

The issue that ultimately made its way to the Washington Supreme Court was whether a Washington statute rendered the arbitration requirement in the policies void. The statute provided, in relevant part, as follows: “No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state, shall contain any condition, stipulation, or agreement (b) depriving the courts of this state of the jurisdiction of action against the insurer[.]”

In general, the parties’ competing arguments, centered around the meaning of the term “jurisdiction” contained in a nearly 100 year old statute. The DOT argued that “the legislature intended to prohibit mandatory binding arbitration clauses in insurance contracts because such agreements deprive Washington policyholders of the right to bring an original action against the insurer in the courts of this state.” Alternatively, James River argued that the statute “is a forum selection provision” and “the legislature intended to prohibit forum selection clauses in insurance contracts that designate a forum outside the state as the sole forum for actions against the insurer because such agreements deprive Washington policyholders of the right to bring an action against the insurer in the courts of this state.” Putting aside how it got there, the Washington high court held that the statute is “properly interpreted as a prohibition on binding arbitration agreements.”

Having concluded that the statute prohibits binding arbitration agreements in insurance policies, the court was required to examine a second issue: whether the McCarran–Ferguson Act shielded the statute from preemption by the Federal Arbitration Act. The court described the issue as follows: “Generally, when a state enacts a statute of general applicability prohibiting arbitration agreements, the statute may be inconsistent with the FAA, and if so, the FAA arguably preempts that state law. However, there is an exception to this general rule when the state statute was enacted ‘for the purpose of regulating the business of insurance’ within the meaning of the McCarran–Ferguson Act.” The court held that, because the Washington statute regulated the “business of insurance,” the McCarran–Ferguson Act shielded it from preemption by the FAA.

Incidentally, the 2005 Connecticut Insurance Law Journal article, that is cited in the DOT’s brief in James River, stated that the provisions prohibiting binding arbitration of insurance disputes come in two types: arbitration acts that provide that arbitration agreements are valid, enforceable and irrevocable, but specifically exempt insurance contracts from their scope; and insurance codes that provide that insurance policies issued or delivered in the state may not contain any provision that deprives the state’s courts of jurisdiction against the insurer (the type in James River).

I was on the fence about including James River as one of the year’s ten most significant coverage cases. Such statutes are not unique to Washington, lots of courts have addressed the same issues as James River and most reach the same conclusion. But James River was from a state supreme court and very few of the existing cases are. James River arose in the context of a commercial general liability policy and most of the existing cases do not. Lastly, I took an informal, and far from scientific, survey of folks that have significance experience in the general and professional liability arenas. Many were unaware of the issues addressed in James River, especially the impact of the McCarran–Ferguson aspect. Lastly, albeit this is anecdotal, I have started to see an increase in the inclusion of arbitration requirements for dispute resolution in liability policies. For all of these reasons, James River was selected as one of the year’s ten most significant coverage cases as it put a spotlight on what may be an unfamiliar issue that arose in the context of a common liability claim scenario. If the arbitration enforceability issue arises in a liability claim scenario, James River is more likely than the others to be the go-to case for guidance.

 
 


Vol. 2, Iss. 23
December 18, 2013


Alaska Supreme Court: Demand To Settle For Limits -- But Not For All Insureds
Insurer Between A Rock And A Hard Case
Williams v. Geico Casualty Co., No. S-14089 (Alaska Jan. 25, 2013)


It is the proverbial “damned if you do and damned if you don’t” situation for insurers. An insurer is presented with a policy limits demand to settle for one insured – and it should be accepted based on liability and damages considerations -- but the settlement offered will not secure a release for all insureds.

If the insurer accepts the settlement offer, and secures a release for one insured, then the insured that is not released can be expected to allege that the insurer acted in bad faith, by exhausting the policy without consideration of its interests. If the insurer does not accept the settlement offer, because what’s proposed does not secure a release for all insureds, then the insured who did not obtain the settlement that had been offered to it, can be expected to allege that the insurer acted in bad faith. This insured will invariably argue that the insurer is liable for any resulting excess verdict because the liability and damages justified the insurer accepting the settlement offer.

This conundrum for insurers -- one court addressing the issue called it a Hobson’s choice -- was addressed by the Alaska Supreme Court in Williams v. Geico Casualty Co. In Williams, the Alaska Supreme Court addressed coverage for an intoxicated driver and passenger of a truck that ran over, and killed, a drunk individual that was lying in the middle of a road. The estate of the decedent filed suit against the driver and passenger.

The driver of the truck was insured under a Geico policy that had a liability limit of $50,000 per person. Geico undertook the defense of the driver and the passenger. There were ultimately numerous settlement offers made but no settlement was achieved. The driver and passenger eventually each confessed judgment for nearly $4.7 million.

The settlement negotiations, and some other companion issues in the case, are complex – too much for the discussion here. But the gist of it, for purposes of making the point, is as follows. The estate of the decedent argued that Geico had a duty to offer a $50,000 settlement for the release of the driver only or to offer two $50,000 settlements for the release of the driver and passenger, and failure to do so was a breach of the insurance contract and was in bad faith. [Geico disputed that it owed a second $50,000 limit under the policy.]

The Alaska Supreme Court, referring to the situation as an unsettled area of the law, responded as follows: “We have not directly addressed how an insurer should handle multiple insureds. Other jurisdictions have utilized two different approaches. The first is that the insurer should seek to release all insureds, but if it cannot, then it ought to seek to settle on behalf of one. In these cases, the insurer’s obligations to other insureds are extinguished by reaching policy limits, even if the other insureds are exposed to personal liability. The second approach requires an insurer to seek release of all insureds; where a settlement cannot be reached the insurer must file a declaratory action to determine what coverage is owed.”

The Alaska Supreme Court adopted the later approach: “An insurer has a duty to defend its insureds; seeking a settlement to the benefit of one insured while leaving others open to liability could cause unfairness. Further, the latter approach avoids a potential bad faith claim by an insured who was unprotected and efficiently adjudicates the rights and duties of the insurer and the insured.” Therefore, the court held that “Geico did not have a duty to settle for [the driver’s] release while leaving [the passenger] open to liability and therefore it was not in breach of contract nor did it commit the tort of bad faith. We affirm the superior court’s holding that Geico did not breach its duties when it offered to settle for only one policy limit for the release of both [the driver and passenger].

Williams is a state high court decision, addressing an important and challenging issue, that it characterized as unsettled [it is; the decisions go both ways], and does not come with a lot of guidance, even nationally. For these reasons the decision warranted selection as one of the year’s ten most significant.

This issue also arose in 2013 in Harp v. Converium Insurance (North America), Inc. The California District Court stated that, under California law – as in just about every state – there is an implied duty for liability insurers to accept a reasonable settlement offer within policy limits. If an “insurer fails to accept a reasonable settlement offer within policy limits, it may be held liable for the entire judgment, even if the judgment exceeds policy limits.” However, the Harp court also noted that, under California law, “the implied covenant of good faith and fair dealing prohibits an insurer from accepting a settlement demand that would exhaust its policy limit without obtaining releases for all its insureds.” Hence, the law protects the insureds that do not have a settlement opportunity. But see: Contreras v. U.S. Security Insurance Company, 927 So. 2d 16 (Fla. Ct. App. 2006) (concluding that an insurer was in bad faith for refusing to accept a limits settlement demand that would have secured a release for one insured, even though it would have left no coverage for another insured that was not included in the release).

 


Vol. 2, Iss. 23
December 18, 2013


Idaho Supreme Court: No Covered Damages – But Coverage Still Owed For Plaintiffs’ Attorney Fees
Employers Mutual Casualty Co. v. Donnelly, No. 38623 (Idaho April 19, 2013)


Employers Mutual Casualty Co. v. Donnelly is a paradigm top 10 coverage case. It involves an issue that comes up with some regularity, there is a dearth of case law nationally addressing it and the decision shedding light on it is from a state supreme court.

Donnelly is on the lengthy side and involves several issues, but the one subject of discussion here is this. In almost all litigation here, Alaska aside, the losing party is not obligated to pay the prevailing party’s attorney’s fees. This is often referred to as the “American Rule.” But there are some common exceptions, most notably when a contract or statute allows the prevailing party to recover its attorney’s fees.

Consider this situation. An insured is found obligated to pay compensatory damages to a plaintiff and it is also determined that the insured violated a consumer protection statute that allows for the prevailing party to recover its costs and attorney’s fees. Or there is some other mechanism that allows for the prevailing party to recover its attorney’s fees. Now assume that the damages awarded are themselves not covered. This is not a far-fetched situation. After all, for there to have been a determination that a consumer protection statute was violated, the insured’s actions may have been of a nature that are uninsurable. Likewise, prevailing party attorney’s fees may be recoverable in a breach of contract action, but damages of such nature may not be covered.

Query: If the compensatory damages awarded against the insured are not covered, are the associated attorney’s fees, incurred by the plaintiff, to recover such damages, also not covered? This was the question before the Idaho Supreme Court in Donnelly. The Idaho high court concluded that, even if the damages were not covered, the corresponding prevailing party attorney’s fees were.

[The case does not involve a different issue concerning prevailing party attorney’s fees – whether they are covered in the first place, and, if so, whether such coverage is found in the supplementary payments section (and excess of limits) or insuring agreement (and within limits). This is a whole other issue involving prevailing party attorney’s fees.]

At issue was coverage for a construction defect suit (what else). A jury concluded that a construction company breached its implied warranty of workmanship to a homeowner and awarded $126,000. The jury also concluded that the construction company violated two provisions of the Idaho Consumer Protection Act and awarded $2,000. The homeowners were also entitled to recover their costs and attorney’s fees of $297,000.

For various reasons, no coverage was owed for the damages awarded to the homeowners for breach of warranty. Nonetheless, the Idaho Supreme Court held that coverage was owed for the costs and attorney’s fees award of nearly $300,000.

The commercial general liability policy at issue contained a “Supplementary Payments” provision that provided, in pertinent part, as follows: “We will pay, with respect to any claim we investigate or settle, or any ‘suit’ against an insured we defend: a. All expenses we incur. e. All costs taxed against the insured in the ‘suit’.” The policy defined “suit” as “a civil proceeding in which damages because of ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.”

The trial court held that the insurer was obligated to provide coverage for the attorney’s fees, despite the absence of coverage for the construction defect damages: “[T]he insurance policy plainly states that with respect to any suit pursued against an insured which it defends, EMC will pay all costs taxed against that insured. The language appears to be unambiguous, and thus, it must be given its plain meaning. EMC has never set forth any specific language in its policy that ties its promise to pay costs on a finding that there is coverage. Because EMC defended its insured, RCI, in the underlying litigation, EMC is responsible to the Donnellys for the $296,933.89 in fees and costs taxed against RCI in that lawsuit, as well as any interest on that judgment which has accrued.”

The Idaho Supreme Court affirmed, focusing on the fact that the policy defined “suit” as needing to only allege “property damage.” The court stated: “Under the plain language of the contract, RCI’s policy states that damages only need to be ‘alleged’ to trigger coverage, they do not need to be proven. Since the Donnellys clearly alleged damages that implicate the applicable provisions of the policy, EMC is obligated to pay ‘[a]ll costs taxed against the insured in the ‘suit.’” Of note, ISO’s CG 00 01 form (including the 2013 version) likewise defines “suit” as a civil proceeding in which damages to which the insurance applies are “alleged.”

A dissenting opinion was filed. While more complex than just this, the dissenting justice focused on a different aspect of the definition of “suit.” While “suit” is a civil proceeding in which damages are alleged, such damages must also be ones “to which the insurance applies.”

The dissenting justice’s conclusion was that “[i]t has clearly been determined that Donnellys recovered no damages covered by any provision of the EMC policy. Since it is clear under the policy that there is no ‘coverage’ for any damages awarded against the insured, there can clearly be no ‘supplementary payments’ for costs and fees when it is established there is no coverage for damages awarded in the lawsuit.”

 


Vol. 2, Iss. 23
December 18, 2013


American Law Institute Begins Adoption Of Its Principles Of Liability Insurance
Academic Mumbo Jumbo That You Don’t Need To Know About? Not So Fast.


On May 20, 2013, the American Law Institute adopted some of the initial sections of its Principles of Liability Insurance. I’ll be honest. When I first heard about the ALI’s Principles Project – essentially a rule book for liability coverage issues -- I did not pay much attention. It sounded like the stuff of law professors, academic mumbo jumbo, and nothing I needed to know about. When I need to know what the law is, I’ll look to the courts, not people that smoke pipes and wear tweed sport jackets with patches on the sleeves -- thank you very much. Well I was wrong.

The ALI’s Principles Project brings together a host of stakeholders in liability insurance – law professors, lawyers on both sides of the aisle, brokers, insurance company representatives and judges -- to produce a text that sets forth the law on several liability insurance coverage issues. The finished work is the result of a lengthy and painstaking process of drafts and debates by those involved. Of course, with so many different interests represented, the final product may not reflect everyone’s beliefs. Compromise is certainly a part of the process.

The American Law Institute is best known for drafting Restatements of the Law, such as the Restatement of Torts, Restatement of Contracts and Restatement of Conflict of Laws, the last which has played a huge part in the resolution of choice of law for purposes of coverage disputes. So what is a “Principles Project?” And how does it differ from a Restatement? These are the obvious first questions.

First, it helps to start with the question what is an ALI Restatement? In simple terms, a Restatement sets forth what the law is concerning a certain issue. A Principles Project sets forth what is the best law or what the law should be. To the extent that a Principle sets forth what is already the existing law, there is no practical difference between a Restatement and Principles Project. However, a Principles Project also purports to set forth more direct statements of what courts actually do and make adjustments to the law that are superior.

Here’s why the ALI’s Principles Project should matter to you, even if your involvement with liability insurance is not on the academic side. Mike Marick, of Meckler, Bulger, Tilson, Marick & Pearson, Chair of the DRI Insurance Law Committee, speaking in his From the Chair column in the January 29, 2013 issue of DRI’s Covered Events, explained that in instances where there is no law on an issue in a state, the litigants and courts could look to ALI’s work as persuasive authority. Mike’s point is particularly apt when you consider that so many coverage issues have two schools of thought. A host of courts nationally have resolved an issue one way and another group have resolved the issue in an alternative manner. Courts that are called upon to resolve an issue for the first time in their state will often examine the case law that makes up these two schools of though and decide which camp to join. When weighing this decision it would not be surprising for the court to look at the Principles, the diverse parties involved in their development and consider the authoritative nature of the ALI. Having done so, the court may choose the rule set out in the Principles as the “tie-breaker.” In addition, a court may look to the Principles as support for altering an existing rule or addressing a certain aspect of a general rule that has never come before it.

The Principles are prepared and adopted in a slow and bureaucratic process. As far as I can tell, being an outsider, it works like this. There is a Reporter and Associate Reporter – Professor Tom Baker of the University of Pennsylvania Law School and Professor Kyle Logue of the University of Michigan Law School, respectively. These law professors are essentially the quarterbacks. A project with this many involved needs people in charge to keep it on track and do the heavy lifting. The Reporters prepare the first draft of the Principles (so, of course, they have a big influence on the process). Then there are “Advisors.” These are about 40 law professors, lawyers (both sides), judges and insurance company executives. They discuss and debate the draft under consideration and are critical participants influencing the final outcome. Then there is a “Members Consultative Group,” which is comprised of over 100 ALI members (also law professors, lawyers, judges and insurance company executives) that weigh in on the discussion. Like any group that large, I suspect that some ALI members are much more active than others. Next is the ALI Council, which is a 55 person group of law professors, lawyers and judges that are essentially the ALI leaders. The Council must approve the final draft. Lastly there is the entire ALI membership which also must approve the finished draft at a meeting. When that happens, white smoke billows from the chimney where the ALI membership meeting is being held.

When the text is approved it includes the Principles themselves, as well as comments, which basically explain the rules and provide examples, and reporter’s notes, which is the technical legal support underlying the Principles.

With all of this background, necessary I believe to fully appreciate the project, just what are some of these so-called Principles of Liability Insurance? First, Chapter 1 of the Principles covers basic liability insurance contract issues, such as definitions, policy interpretation, ambiguity, misrepresentation, waiver, estoppel, etc. The entirety of Chapter 1 was approved by the ALI membership at the May meeting.

These provisions are very significant as they are the foundation of liability insurance coverage. However, they are not the subject of disputes that coverage professionals confront on a daily basis. For this reason I’ll pass over any discussion of Chapter 1 [but, take my word, it is very important] and get to Chapter 2, which addresses issues that are the subject of disputes that frequently confront coverage professionals. These are the coverage issues that get fought on the front lines on a frequent basis. Chapter 2 is where the meat and potatoes of the Principles kick in. Forthcoming Chapters 3 and 4 will address substantive coverage issues, such as trigger, allocation and bad faith.

Chapter 2 of the Principles addresses management of potentially covered claims -- essentially rules governing the duty to defend. Sections 12 to 15 of Chapter 2 were approved by the ALI membership in May. Sections 16 to 23 have been approved by the ALI Council but not yet submitted to the full membership.

Chapter 2, Section 15, addresses the conditions under which an insurer must defend. Essentially the answer is that the duty to defend shall be based on the allegations in the complaint and extrinsic evidence (“Any additional allegation or legal theory, identified in the course of the investigation or defense of the claim or inferable from the complaint or comparable document, that a reasonable insurer would regard as an actual or potential basis for all or part of the claim.”) In general, a duty to defend standard that is tied to the allegations in the complaint and the allowance of extrinsic evidence benefits policyholders.

Section 15 also includes a duty to defend provision that will benefit insurers. It permits an insurer to use extrinsic evidence, to disclaim a duty to defend [which is usually a major no-no], when the issue is a fundamental one -- whether a person or entity is even an insured under a policy. It also allows the use of extrinsic evidence, to disclaim a duty to defend, when the question is whether the events required for the claim to trigger the policy took place during the policy period. This will benefit insurers that must now defend, based on a complaint that does not contain dates of damage (so the potential for the policy to be triggered cannot be ruled out), yet there is evidence available of the timing of such damage that demonstrates that the insurer’s policy is not triggered.

Section 18 [not yet approved] states that when a defense is provided under a reservation of rights and “there are common facts at issue in the claim and the coverage defense such that the claim could be defended in a manner that would advantage the insurer at the expense of the insured, the insurer must provide an independent defense of the claim.” This is essentially the adoption of California’s “Cumis rule.” In general, many states apply a rule that looks something like Cumis (just not in statute form). Further, under Section 19 [not yet approved], “[t]he insurer is obligated to pay the reasonable fees of the defense counsel and related service providers on an ongoing basis in a timely manner.”

This too is generally the rule in many states. However, the comment to the rule states that an insurer’s panel rate is not the reasonable fee to be paid to the insured’s independent counsel. It is relevant but not dispositive. The comment also states that “[i]n the event of a dispute during the course of the defense about the reasonableness of fees, the insurer must pay the disputed fees and may bring an action against the independent defense counsel seeking return of the disputed fees after the duty to defend has ended and any coverage defenses have been adjudicated or settled, so as not to invade the attorney—client privilege or work-product immunity. If the fees are later found to be unreasonable, the insurer’s sole recourse is from defense counsel, not the insured.”

While this provides a much-needed rule, on the much-disputed rate issue, it goes very far and proposes a standard (and one that I’ve never seen) that is not workable. It is easy to see the problems that will arise when an insurer would have paid panel counsel a rate in the $200 per hour range and the insured hires counsel at $600 (or more) and claims it is reasonable. This a recipe for litigation between insurers and independent counsel over the reasonableness of the fees.

Section 21 [not yet approved] states that an insurer that breaches the duty to defend loses the right to defend or associate in the defense of the claim, the right to assert any control over the settlement of the claim AND the right to contest coverage for the claim. Waiver of coverage defenses is a very strong consequence for a breach of the duty to defend. It is the rule adopted by the New York Court of Appeals this year in K2 (rehearing granted).

Damages for breach of the duty to defend include the amount of any judgment entered into against the insured or the reasonable portion of a settlement entered into by or on behalf of the insured after breach, subject to the policy limits, and the reasonable defense costs incurred by or on behalf of the insured. Here, by limiting the insurer’s liability for any judgment or settlement to policy limits, the Principles are answering a question that needs guidance and doing so in a manner that favors insurers (compare to Columbia Casualty Company v. Hiar Holdings, LLC, discussed further on).

This description of the ALI’s Principles of Liability Insurance is just the tip of the iceberg. The ALI Principles are here to stay. Dismiss them as academic mumbo jumbo at your peril. I believe that there is little doubt that the Principles will be raised by litigants and cited by courts in coverage decisions. Anyone doing liability coverage work would be well-served to follow the progress of the Principles and become familiar with what’s been proposed and adopted.


Vol. 2, Iss. 23
December 18, 2013


Illinois Supreme Court:
Statutory Liquidated Damages Are Not Penal And Not Uninsurable Under Public Policy
Standard Mutual Insurance Company v. Lay, No. 114617 (Ill. May 23, 2013)


Standard Mutual v. Lay is a Telephone Consumer Protection Act coverage case. TCPA is a do-do bird issue, or getting close to it, on account of the frequent lack of insurance dollars, to fund any damage award or settlement, because of the commercial general liability policy exclusion for Distribution of Material in Violation of Statute. If Lay had no applicability outside of the TCPA context it would not have been included as one of the year’s ten most significant coverage decisions. Not even close. But Lay’s legacy will not involve TCPA. It will go beyond it.

Specifically at issue in the case was whether damages available under the TCPA, for sending out unsolicited fax advertisements - $500 per occurrence – were meant to compensate for any harm. The lower court had ruled that the damages awarded were a penalty to the sender, in the nature of punitive damages, and, hence, uninsurable as a matter of Illinois law and public policy.

The Boyz from Illinois saw it differently. For several reasons the Illinois high court concluded that the TCPA is a remedial, and not penal, statute and that the TCPA damages of $500 per violation are compensatory and not penal or punitive damages. The court explained its decision as follows: “The harms identified by Congress, e.g., loss of paper and ink, annoyance and inconvenience, while small in reference to individual violations of the TCPA are nevertheless compensable and are represented by a liquidated sum of $500 per violation.” “Congress intended the $500 liquidated damages available under the TCPA to be, at least in part, an incentive for private parties to enforce the statute. This added incentive is necessary because the actual losses associated with individual violations of the TCPA are small.” “[T]he fact that Congress provided for treble damages separate from the $500 liquidated damages indicates that the liquidated damages serve additional goals than deterrence and punishment and were not designed to be punitive damages.”

Again, the impact of Lay is likely to be felt well outside the TCPA context. It is not unusual for a statute to allow for liquidated damages that are more than the amount of harm actually sustained by the aggrieved party. And the reasons for providing such remedy are likely to be similar to those outlined by the Lay court concerning the TCPA, such as liquidated damages being a necessary incentive for private parties to enforce the statute because the actual losses associated with individual violations are small.

I would expect to see Lay cited by policyholders in coverage cases involving such statutes, in support of their argument that the liquidated damages are not penal, and, therefore, not excluded from coverage in a state where punitive damages are considered uninsurable. And I’m not the only one that sees Lay’s impact this way. A Law360 article discussing Lay quoted both insurer and policyholder counsel seeing the decision as impactful in other types of coverage disputes surrounding statutory damages.


Vol. 2, Iss. 23
December 18, 2013


Almost Heaven For Policyholders: West Virginia High Court Overrules Four Prior Decisions And Holds That Faulty Workmanship Is An “Occurrence”
[And Two Others Do The Same]
Cherrington v. Erie Insurance, No. 12-36 (W.Va. June 18, 2013)


Ordinarily I would not include in the annual insurance hit-parade a case addressing the beat-to-death issue whether faulty workmanship qualifies as an “occurrence” under a commercial general liability policy. There are simply too many cases addressing the issue so any single new one, even if from a state high court, is very unlikely to have any influence on the national landscape. At most it may influence its particular state’s law on the subject.

But along came the West Virginia high court’s in Cherrington v. Erie Insurance. It is a fairly mundane case, involving commercial general liability coverage for a builder, for claims made against it for defective construction of a residence. The builder used a subcontractor. There’s more to it than that, but when it comes to analyzing a construction defect coverage case, that’s basically all the facts needed.

The West Virginia circuit court held that no coverage was owed because the underlying homeowner had not established that an “occurrence” (accident) had caused the damages sustained because faulty workmanship, in and of itself, or absent a separate event, is not sufficient to give rise to an “occurrence.” The circuit court’s decision was hardly surprising as there were several decisions from West Virginia’s highest court, the Supreme Court of Appeals, to support it. That was Cherrington’s next destination.

The Supreme Court of Appeals was quite mindful of the landscape before it concerning coverage for faulty workmanship. The court reviewed its prior decisions and set out their conclusions that poor workmanship is not an “occurrence” and such claims are outside the risks assumed by a traditional CGL policy.

But, unlike my wife, the Supreme Court of Appeals was willing to admit that they got it wrong. The court explained that it was time for it to go in another direction. “Despite this Court’s express holdings that a CGL policy does not provide coverage for defective workmanship, we are acutely aware that, after we rendered these rulings, many other courts also considered this issue and rendered their own rulings. Some of those jurisdictions have reached conclusions similar to those expressed in our prior opinions. However, a majority of other states have reached the opposite conclusion, announcing their contrary view either in judicial decisions or through legislative amendments to their states’ insurance statutes. While we appreciate this Court’s duty to follow our prior precedents, we also are cognizant that stare decisis does not require this Court’s continued allegiance to cases whose decisions were based upon reasoning which has become outdated or fallen into disfavor. Although we fully understand that the doctrine of stare decisis is a guide for maintaining stability in the law, we will part ways with precedent that is not legally sound. Thus, when it clearly is apparent that an error has been made or that the application of an outmoded rule, due to changing conditions, results in injustice, deviation from that policy is warranted.” “We recognize that a definite trend in the law has emerged since we rendered our determinative decision in Corder sufficient to warrant this Court’s reconsideration of the issues decided therein and that, if warranted, a departure from this Court’s prior opinions would be consistent with this Court’s steadfast resolve to follow the law to achieve just, fair, and equitable results.”

Further, the court observed: “With the passage of time comes the opportunity to reflect upon the continued validity of this Court’s reasoning in the face of juridical trends that call into question a former opinion’s current soundness.”

So the stage was set for the Supreme Court of Appeals to reconsider whether faulty workmanship was an “occurrence.” The court cited a boat-load of decisions from around the country that have addressed the “occurrence” issue regarding coverage for construction defects. The court noted that, since its 2001 decision in Corder, a minority of jurisdictions have adopted the position that defective workmanship is not an “occurrence.” Moreover, three of them were superseded by statutory enactments that specifically require CGL policies issued in those states to include coverage for defective workmanship and/or injuries and damages resulting therefrom.

For several reasons, the Supreme Court of Appeals, overruling four prior decisions on the issue (including one as recent as 2005), held that defective workmanship constituted an “occurrence.” [As a result, the insured was now able to reach the “your work” exclusion, and, more importantly, the subcontractor exception.] There were several reasons for the court’s about-face.

First, the court explained that “[i]t goes without saying that the damages incurred by Ms. Cherrington during the construction and completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it hired the subcontractors alleged to have performed most of the defective work. Common sense dictates that had Pinnacle expected or foreseen the allegedly shoddy workmanship its subcontractors were destined to perform, Pinnacle would not have hired them in the first place. Nor can it be said that Pinnacle deliberately intended or even desired the deleterious consequences that were occasioned by its subcontractors’ substandard craftsmanship. To find otherwise would suggest that Pinnacle deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation in the process.”

Next, the court observed that, if the defective workmanship at issue was not covered by the CGL policy’s insuring clause, it would be incongruous with the policy’s express language providing coverage for the acts of subcontractors.

The court concluded that its “prior proscriptions limiting the scope of the coverage afforded by CGL policies to exclude defective workmanship to be so broad in their blanket pronouncement that a policy of CGL insurance may never provide coverage for defective workmanship as to be unworkable in their practical application.”

That the West Virginia high court, in Cherrington v. Erie Insurance, held that defective workmanship constituted an “occurrence,” is as dog bites man of a coverage case as you’ll see. The significance of the case is not the decision, but what it took for the court to get there -- overruling four prior decisions (including one as recent as 2005 – Webster County Solid Waste v. Brackenrich).

But there are still two more important pieces to this tale. A couple of months before Cherrington was decided, the North Dakota Supreme Court issued K&L Homes, Inc. v. American Family Mut. Ins. Co., which held that “faulty workmanship may constitute an ‘occurrence’ if the faulty work was ‘unexpected’ and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.” Not a significant decision unless you live in Fargo. However, in reaching its decision, the K&L Homes court noted that it was consistent with the definition of “accident” for purposes of a CGL policy, and, to that extent, its 2006 decision in ACUITY v. Burd & Smith Construction was overruled.

And still another state high court in 2013 used its power to overrule when concluding that an insured’s faulty workmanship can amount to an occurrence when the only damage alleged is to the work of the insured. See Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., 746 S.E.2d 587 (Ga. 2013), overruling Forster v. State Farm Fire & Cas. Co., 704 S.E.2d 204 (Ga. Ct. App. 2010).

The potential national impact of Cherrington, and these others in 2013, is the possibility that these courts’ unusual steps will cause other state high courts to reconsider some of their earlier decisions that defective workmanship does not constitute an “occurrence.” Supreme courts do not overrule decisions lightly. The court in Cherrington made that very clear. What’s more, no justice in Cherrington dissented. You would have expected at least one to do so.

Nonetheless, the Cherrington court seemed to be comfortable with its decision. Cherrington noted: “It has been said that wisdom too often never comes, and so one ought not to reject it merely because it comes late.” Policyholders will no doubt use Cherrington and these others to attempt to persuade courts that any prior precedent, that defective workmanship does not constitute an “occurrence,” is ripe for review. Arguing against supreme court precedent is not easy or desirable. After Cherrington and these other decisions, policyholders may be more willing to take on clear precedent and courts may be more willing to listen.

 


Vol. 2, Iss. 23
December 18, 2013


Missouri Supreme Court: Policy Limits “Do Not Matter”
Trend: Harsh Consequences For Breach Of The Duty To Defend
Columbia Casualty Company v. Hiar Holdings, LLC, No. SC93026 (Mo. Aug. 13, 2013)


I’ve always found it interesting that some very important coverage issues elude judicial review, while inconsequential ones get answered. Riddle me this: Why has the question whether bat guano is excluded by the pollution exclusion been addressed by three courts?

Once such significant coverage issue that wants for more judicial guidance is this: An insurer disclaims coverage for a defense. The insured now goes ahead and settles the underlying action. And it does so for an amount in excess of its policy’s limits of liability. It is ultimately determined that the insurer breached the duty to defend, but not in bad faith, and the insurer is obligated to indemnify the insured by paying the settlement amount. So far this is neither an unusual nor complex scenario. But here’s the rub: Does the insurer’s obligation to indemnify the insured include the portion of the settlement amount that exceeds the policy’s limits of liability? There is surprisingly little law addressing this not uncommon scenario. This question was one before the Missouri Supreme Court in Columbia Casualty Company v. Hiar Holdings, LLC.

Note that I am not speaking of a situation where an insurer refuses to settle an action, when there is a demand to do so that is within the limits of liability, an excess verdict comes in, and it is ultimately determined that the insurer should have settled, based on the liability and damages at issue. Here the insurer stands to be liable for the full amount of the verdict, even the portion in excess of the limits of liability. The situation in Hiar is one where the insurer’s refusal to settle was based on its determination that no coverage was owed.

Hiar Holdings LLC, a hotel, used a marketing services company to send approximately 12,500 unsolicited “junk faxes.” About 10,000 of them were received, including one by Karen S. Little LLC, which brought a class action against Hiar, under the TCPA, seeking injunctive relief and statutory damages of $500 per fax sent.

At the time it sent the junk faxes, Hiar was insured by Columbia Casualty Company under a commercial general liability policy with limits of $1 million per “occurrence” and $2 million aggregate. Hiar tendered defense of the suit to Columbia Casualty. The insurer refused to defend, asserting that the claims were outside the policy provisions. The class made a settlement offer to Hiar for an amount within its policy limits. Hiar presented the demand to Columbia Casualty, which again refused to defend or cover the claims and the insurer refused to participate in subsequent settlement negotiations. Hiar defended the suit at its own expense for five years before agreeing to a class-wide settlement for $5 million.

A final settlement approval hearing was held and the trial court approved the settlement, including determining that the settlement was fair, reasonable and not a product of collusion. The court entered a judgment for the class and approved Hiar’s assignment to the class of its claims against Columbia Casualty and any other insurers. The settlement amount plus interest totaled $8.4 million. The class brought a garnishment action against Columbia Casualty seeking the settlement amount plus post-judgment interest. Columbia Casualty filed a declaratory judgment action concerning its duties to defend and indemnify the class’s claims under the policy. The garnishment action was stayed pending resolution of the declaratory action.

To make a long story short, the Missouri Supreme Court, in the coverage action, examined a multitude of TCPA coverage issues and concluded that the trial court did not err when it determined that “property damage” and “advertising injury” coverage was owed under the Columbia Casualty policy and the insurer’s duty to defend was triggered.

Columbia Casualty argued that the settlement amount was not reasonable. The Missouri Supreme Court was not persuaded. “Columbia cannot refuse to defend and then relitigate the already-determined reasonableness issue where it has been the subject of a court judgment after a hearing and determination of reasonableness by the court. . . . The reasonableness hearing conducted by the trial court was sufficient to form and support its findings that the settlement was made in good faith and reflected ‘what a reasonably prudent person in the position of the [d]efendants would have settled for on the merits of [the class’s] claims.’ Columbia is not entitled to a reassessment of the reasonableness of the settlement.”

Now, to the most important issue. Columbia Casualty owed coverage, but for how much, since the settlement amount was well above the $1 million per “occurrence” and $2 million aggregate limit?

Columbia Casualty argued exactly what you would expect. “[I]t need not indemnify the class’s settlement because the trial court erred by finding that Hiar’s policy limits ‘do not matter.’ Columbia contends that the trial court wrongly awarded extra-contractual damages, even though the class made no request for extra-contractual damages, Hiar released its counterclaims for extra-contractual damages, and Columbia’s maximum indemnity obligation was $2 million in the absence of a successful extra-contractual damages claim. Columbia asserts that only a ‘bad faith’ claim could result in the award of extra-contractual damages, and it maintains that no ‘bad faith’ allegation was presented in this case.”

The Missouri Supreme Court did not accept Columbia Casualty’s show-me effort. The court held that Columbia Casualty’s wrongful refusal to defend Hiar put it in a position to indemnify Hiar for all damages flowing from its breach of the duty to defend. “Because Columbia wrongly denied coverage and even a defense under a reservation of rights, and also refused to engage in settlement negotiations, Columbia should not avoid liability for the settlement judgment entered in this case. Columbia cannot benefit from its wrongful refusal to assume control of the proceedings. As such, the trial court did not err in determining Columbia’s liability for the class’s settlement.”

The Missouri Supreme Court is correct that Columbia Casualty must face consequences for what was ultimately determined to be a wrongful refusal to defend. But to hold Columbia Casualty liable, under this scenario, for a settlement that exceeds (by a lot) its limits of liability, goes too far. Insurers are entitled to assert coverage defenses. And they need to take care when applying such defenses. But to saddle an insurer with these kind of consequences (limits “do not matter”), for a breach of the duty to defend, is a de facto taking away of this right. The duty to defend is broad – but not boundless. This situation called for a remedy, but not an extra-contractual one. [Even the ALI Principles, discussed herein, would not have held the insurer liable for the amount of the settlement in excess of the limit of liability.]

Of course, Hiar was not the only decision in 2013 to place harsh consequences on an insurer that breached a duty to defend. The most talked-about one was from the New York Court of Appeals in K2 Investment Group, LLC v. American Guar. & Liab. Ins. Co., where the Empire State’s top court held that an insurer, that wrongfully fails to defend its insured, loses the right to rely upon policy exclusions for purposes of determining its indemnity obligations. In September the Court of Appeals granted re-argument in K2.

Another decision in 2013 to change the equation concerning an insurer’s duty to defend – and here the insurer was agreeing to defend --was the Pennsylvania Superior Court’s in The Babcock & Wilcox Company v. American Nuclear Insurers. The court held that an “insured may decline the insurer’s tender of a qualified defense [read as, defense under an ROR] and furnish its own defense, either pro se or through independent counsel retained at the insured’s expense. In this event, the insured retains full control of its defense, including the option of settling the underlying claim under terms it believes best. Should the insured select this path, and should coverage be found, the insured may recover from the insurer the insured’s defense costs and the costs of settlement, to the extent that these costs are deemed fair, reasonable, and non-collusive.”

 


Vol. 2, Iss. 23
December 18, 2013


Texas Supreme Court: Insured’s Settlement Without Insurer’s Consent Covered
Insured’s Texas 1-Step: Settle And Skip Insurer’s Consent
Lennar Corp. v. Markel American Insurance Company, No. 11-0394 (Tex. Aug. 23, 2013)


As a general rule, when an insured is tardy in providing notice of claim to an occurrence-based liability insurer, the insurer is not relieved of coverage, on such ground, unless it can demonstrate that it was prejudiced by such late notice. This is often-times a high hurdle for the insurer to meet. When an insured settles a claim, without the insurer’s consent, i.e., breaches the policy’s no voluntary payments clause, the insurer will likely argue that it need not prove prejudice to be relieved of any obligations under the policy. In other words, the insurer will likely argue that, here, prejudice is presumed because the insurer was denied any opportunity to defend the claim. The horse has left the barn. The toothpaste cannot be put back into the tube. Choose your cliché.

The Texas Supreme Court addressed a large dollar voluntary payments situation in Lennar Corp. v. Markel American Insurance Company. At issue was about $6 million between damages, attorney’s fees and pre-judgment interest. The court, in an opinion written by Justice Hecht -- who has said some very pro-insurer things over the years -- held that the insurer must prove prejudice and a jury found that it did not. While there is no shortage of case law addressing coverage for voluntary payments, Lennar involved a unique situation -- there was no doubt that some of the settlements were with people that did not bring a claim against Lennar (and never would have). In other words, Lennar’s actions prejudiced Markel because, if Markel had been in charge, it would have handled the remediation program in a manner in which settlements would not have been made with people who would have never brought a claim.

Sometimes there is no easier way to describe the facts of a case than setting out the court’s brief summary verbatim. This is one of those times. Here is how the Lennar court described the facts.

“Long used in commercial construction, EIFS was marketed in the early 1990s as an attractive alternative to conventional stucco in home construction. But installed on wood-frame walls typical of single-family homes, EIFS traps water inside, causing rot and structural damage, mildew and mold, and termite infestations. Damage is often undetectable from a visual inspection of the exterior of the home. Lennar Corporation and another homebuilder it bought built some 800 homes using EIFS, but stopped using it in 1998. After the problems with EIFS were exposed on the NBC television show Dateline in 1999, homeowner complaints poured in. Lennar investigated and learned that the problems associated with EIFS were frequent and substantial. Property damage typically began six to twelve months after EIFS was installed, progressed more or less, depending on the proximity of water due to rain and yard irrigation, and continued until the EIFS was removed. Lennar decided not merely to address complaints as it received them but to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. Lennar began its remediation program in 1999 and finished in 2003. Almost all the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled.

Early in the process, Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar’s proactive, comprehensive efforts, preferring instead to wait and respond to homeowners’ claims one by one. All the insurers denied coverage, and in 2000, Lennar sued. The trial court granted summary judgments for the insurers, and the court of appeals affirmed for all but two: American Dynasty Surplus Lines Insurance Company, which had provided Lennar a $1 million primary commercial general liability policy with an annual $1 million self-insured retention, and Markel American Insurance Company, which had provided a $25 million commercial umbrella policy, in effect from June 1, 1999 through October 19, 2000. On remand, Lennar settled with American Dynasty, leaving only its claims against Markel for trial.”

Permit me to continue with the convenient verbatim fact summary. “At trial against Markel, Lennar offered evidence that the extent of water damage to a home could not be determined without removing all the EIFS, though when that was done, some homes turned out to have only limited damage, and some had none at all. Lennar offered evidence of its remediation costs for only 465 homes that had some water damage, but it included costs for removing and replacing all the EIFS on the homes, even if only part of a home was damaged.”

Putting aside several issues and procedure, the discussion here will focus on the voluntary payments aspect of the case that was addressed by the Texas Supreme Court. The Markel policy contained a provision precluding Lennar, except at its own cost, from voluntarily making any payment, assuming any obligation, or incurring any expense without Markel’s consent. Markel did not consent to Lennar’s settlements with the homeowners, but it conceded that, for the voluntary payments provision to apply, it must prove that it was prejudiced by the settlements.

Markel also argued that the policy contained another voluntary payments provision [Loss Establishment Provision] and this one, because it was contained in the policy’s insuring agreement, did not require that it prove prejudice. The provision obligated Markel to pay Lennar’s “ultimate net loss”—defined as the total amount of property damages for which Lennar is legally liable and stated that such loss may be established by adjudication, arbitration, or a compromise settlement to which Markel had previously agreed in writing.

The court rejected Markel’s argument that prejudice was not required for this second provision to apply: “Assuming Markel is right, that an insurer need not show prejudice from an insured’s failure to comply with a policy requirement that is ‘considered essential to coverage’, the Loss Establishment Provision does not qualify, certainly not for the reasons Markel argues. Its language is no clearer than Condition Es [the other voluntary payments provision cited above], and the purpose of the two provisions, precluding liability for the insured’s voluntary payments without the insurer’s consent, is exactly the same. The Loss Establishment Provision is no more central to the policy than Condition E, and the requirement that Markel show prejudice from Lennar’s non-compliance with either operates identically.”

So proof of prejudice was on the table. Markel argued at trial that “Lennar’s settlements were prejudicial, largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.” Indeed, Markel argued that the case involved prejudice and then some: “[P]rejudice is even more stark in this case, in which the insured actively solicited claims which might otherwise never have been brought and made payments which were not covered under the Policy.” In other words, the court saw Markel’s argument like this -- had Lennar stonewalled the homeowners, fewer repairs would have been made.

However, the court stated that this was a fact question, and not one of law, and the jury saw it differently, concluding that Lennar’s remediation program was a reasonable approach to a serious problem and that, had Lennar not proceeded as it did, the damages would have worsened and the remediation costs increased. Held – “The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy.”

You could look at Lennar and conclude that the Texas Supreme Court’s decision, that proof of prejudice is required for an insurer to disclaim coverage for a voluntary payment, is not particularly noteworthy. That’s the law in other states too. You could also say that the decision is not noteworthy because it was based simply on one jury’s view of the case. Different jury. Different decision on the existence of prejudice. And you could say that the decision is not noteworthy because it involved unique facts – one where the situation would get worse if not addressed.

These are all valid points. However, Lennar is still a significant decision, as voluntary payments cases go, because, as Markel argued, the prejudice was more stark than in the usual case. Here the insured actively solicited claims which might otherwise never have been brought. Such a situation could be argued to support a finding of prejudice as a matter of law. But it was still considered to be a fact question for the jury – now enabling Lennar to make an argument, to a jury of lay people, that it should not be penalized for standing behind its product and nipping a problem in the bud. A company that will argue to a jury that it “did the right thing” is about a 10 point favorite against an insurance company pointing to a clause in an insurance policy.

Further, even if the decision involved unique facts – one where the situation would get worse if not addressed -- these are not necessarily unique facts in the context of construction defect. There, moving quickly to resolve the problem can have a significant impact on the ultimate extent of damage. This is where Lennar is likely to have influence – for contractors that step-in to resolve problems quickly, despite, for whatever reason, no consent having been provided by the insurer, such as, because it is still investigating the claim.

But despite the Texas Supreme Court’s decision in Lennar, policyholders would be well-served to continue to involve their insurers in the claims and settlement process. Settling a case, and then letting your insurer know by listing it as a cc party, on the settlement check transmittal letter, is not the safest way for policyholders to go. Settling, and then hoping that your insurer cannot prove prejudice, is risky business. But notwithstanding the risks, some contractors may do so, to protect a business relationship. Lennar may prove useful for contractors in that situation.

 


Vol. 2, Iss. 23
December 18, 2013


Eleventh Circuit Limits Construction Site Bodily Injury Exposure (Without Using An Endorsement)
Amerisure Insurance Co. v. Orange and Blue Construction, Inc., No. 13-10313 (11th Cir. Nov. 4, 2013)


Insurers have been taking various steps to attempt to limit their exposure for bodily injury claims on construction sites (not to mention for property damage). One way has been to amend the employer’s liability exclusion to preclude coverage for employees of “any insured” as opposed to “the insured.” In this way, coverage may not be owed to general contractors, that are additional insureds under policies issued to subcontractors, for injuries to employees of the subcontractor. This is a very common claim when there is a construction site injury. Since the amended exclusion precludes coverage for employees of “any insured,” and the general contractor is an “insured” (by way of an additional insured), no coverage is owed, even though the injured party is not an employee of the general contractor.

Another tack insurers have taken has been to add exclusions that preclude coverage for an employee of any contractor at the site, even if not an employee of a contractor hired by the insured.

This year the Eleventh Circuit demonstrated another method for insurers to limit their exposure for bodily injury claims on construction sites. However, its significance is that it requires no changes to standard policy language. In Amerisure Insurance Co. v. Orange and Blue Construction, Inc., the Eleventh Circuit held that the employer’s liability exclusion applied to preclude coverage for Epoch Properties, a general contractor, under a policy issued to a subcontractor, for an injury sustained by an employee of another subcontractor. The employee killed on the construction site was employed by a contractor that was three tiers removed from the general contractor.

Not surprisingly, Epoch, the general contractor, argued that the employer’s liability exclusion did not apply because it excluded coverage for bodily injury to an employee of “the insured” and the decedent, three tiers removed, was hardly an employee of the GC-insured. In other words, at issue was a typical (non-amended) employer’s liability exclusion that was tied to an employee of “the insured,” i.e. an employee of “the insured seeking coverage.”

But the court was not persuaded that the employer’s liability exclusion was so limited. The Eleventh Circuit held that “[a]lthough Mr. Tejeda may not have been one of Epoch’s employees in the traditional sense, Mr. Tejeda was a ‘statutory employee’ of Epoch for purposes of workers’ compensation law. . . . Because Mr. Tejeda was one of Epoch’s statutory employees and was injured during the course of his employment, Amerisure had no duty to defend or indemnify Epoch against his Estate.”

In other words, a typical (non-amended) employer’s liability exclusion, that was tied to an employee of “the insured,” was treated as if it were an amended exclusion that applied to an employee of “any insured.”

The Appeals Court explained its decision as follows: “Our interpretation of the CGL policy is consistent with the purpose of commercial general liability policies like this one. Unlike worker’s compensation insurance or employer’s liability insurance, which exist to provide employers with coverage for injuries that occur to employees during the scope of employment, the sole purpose of commercial general liability insurance is to provide coverage for injuries that occur to the public-at-large. . . . Because the terms of the CGL policy did not cover injuries to Epoch’s employees or the employees of Epoch’s subcontractors like Mr. Tejeda, Amerisure has no duty to indemnify or defend Epoch in this case.”

In general, a “statutory employee” is an employee of a subcontractor, who is deemed to be an employee of the general contractor, when he sustains bodily injury while acting within the scope of his employment. Even though a “statutory employee” is considered an employee of the general contractor for purposes of workers compensation, a few courts have held that the employee is also considered an employee of the general contractor for purposes of the employer’s liability exclusion. There are at least cases in Texas, Tennessee and Idaho (relying on the trial court decision in Orange and Blue) that have so held. But Orange and Blue Construction, coming from a Circuit Court of Appeals, adds weight to this body of law.

While lots of insurers have been using endorsements, to attempt to limit their bodily injury exposure on construction sites, Orange and Blue demonstrates a possible way to do so using the standard policy that is probably already in the insurers’ hands. Therein lies its significance.

 

 


Vol. 2, Iss. 23
December 18, 2013


California Appeals Court: No Bad Faith For Insurer’s Failure To Attempt To Settle When There Is No Demand
Reid v. Mercury Insurance Company, No. B241154 (Cal. Ct. App. November 6, 2013)


Talk of bad faith among coverage folks often centers around whether an insurer’s interpretation of a policy could constitute bad faith. However, given how high the burden is for an insured to prove bad faith, it is usually very difficult to do so. Even if the insurer were wrong, even really wrong, there was likely enough of a basis to support the insurer’s position that it will not satisfy the bad faith standard (absent some wrongful motive behind the decision).

In truth, most bad faith cases involve an insurer’s failure to settle and are not tied to coverage issues. Specifically, there is a demand that the insurer settle within limits, and it fails to do so, despite liability being clear and a substantial likelihood of a recovery in excess of policy limits. So the case now goes to trial and there is a verdict in excess of the policy’s limits. In this situation, the insurer is likely facing exposure for the portion of the judgment that exceeds the policy limits. This rule, or some variation of it, exists in just about all states.

A close cousin to this situation – and one without an abundance of case law addressing it – is whether an insurer is liable for an excess verdict, after it did not settle the case, but there was no demand that it do so. To put it another way, must the insurer, in the absence of any demand from the third party claimant, initiate settlement negotiations or offer its policy limits, and, if so, how quickly must it do so, to avoid a claim of bad faith failure to settle. This was the issue before the California Court of Appeal in Reid v. Mercury Insurance Company.

The facts in Reid are detailed but most can be overlooked to make the points about the case. Mercury Insurance Company insured Zhi Yu Huang under an automobile policy with bodily injury policy limits of $100,000 per person and $300,000 per accident. Ms. Huang was involved in a multivehicle collision. The injury to another party was quite serious and liability was clear as the police report showed that Huang failed to stop at a red light and collided with a car driven by Shirley Reid.

There was a lot of discussion between the insurer and Reid’s lawyer concerning the investigation of the claim. Ultimately, Reid sued Huang and a bench trial was held. Judgment was entered against Ms. Huang for more than $5.9 million. Ms. Huang declared bankruptcy and the bankruptcy trustee later assigned to Reid any potential rights Ms. Huang had against Mercury.

There was a significant fact issue whether Reid ever made a demand to settle. It was determined that she did not. For purposes of this analysis, assume that other cases will not have this disputed issue and it will be reasonably clear that no demand was made to settle. That’s a reasonable assumption.

The court concluded that there was no settlement offer from Reid and no evidence from which any reasonable juror could infer that Mercury knew or should have known Reid was interested in settlement. Under this circumstance, the court held that the insurer was not liable for bad faith failure to settle. “For bad faith liability to attach to an insurer’s failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated. In the absence of such evidence, or evidence the insurer by its conduct has actively foreclosed the possibility of settlement, there is no ‘opportunity to settle’ that an insurer may be taxed with ignoring.” Further, an “opportunity to settle” does not arise simply because there is a significant risk of an excess judgment.

It is important to note that a policy limits offer was ultimately made by the insurer to the plaintiff -- ten months after the accident. It was rejected. In that situation the court described the bad faith claim as one in which the case would have been settled within policy limits had the insurer initiated earlier settlement negotiations. As a practical matter, this is likely to be the situation where Reid has the most applicability. It is not unusual for an insurer, at the conclusion of its investigation, to make a policy limits offer. But because of the time that it takes to complete that investigation, the claimant rejects the offer, even if it may not have if made earlier. Reid does not punish an insurer for the settlement impact of the time it takes to complete a coverage investigation.