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Coverage Opinions
Effective Date: March 18, 2015
Vol. 4, Iss. 3
 
   
 
 
   
 
 

General Liability Insurance Coverage – Key Issues in Every State
The 3rd Edition Is Here!
Initial sales have been fantastic.
See for yourself why so many find it useful to have, at their fingertips, a nearly 800-page book with just one single objective -- Proving the rule of law, clearly and in detail, in every state (and D.C.), on the liability coverage issues that matter most.

Declarations: The Coverage Opinions Interview With Robert F. Kennedy, Jr.
Lawyer For The Water; John Q. Public v. John Q. Public Company; Kennedy’s Secret Ingredient; The Lone Gunman
Robert F. Kennedy, Jr. has spent a lifetime enabling guys in kayaks to take on huge corporations that are polluting waterways. He explained to me how the impossible sounding is achieved.

Randy Spencer’s Open Mic
Texting + Walking = :-(

Driverless Cars: The Real Insurance Issue
There has been a lot of talk lately about driverless cars. And it’s all silly.

Encore: The Springsteen-Quoting Coverage Case Judge Strikes Again
The last issue of Coverage Opinions discussed a Florida federal court judge who quoted lyrics from a Springsteen song in a coverage case. The Springsteen-quoting coverage case judge is back.

Report From The Rutgers Law School -- ALI Restatement Conference:
The Role Of Minority Positions In The Process

I attended the recent Rutgers Law School -- ALI Restatement of Liability Insurance conference. There was a lot said. But one sentence was the loudest.

Of Tanning Salons, Peeping Toms And Cyber Coverage
A recent decision has nothing to do with cyber coverage. And everything to do with it.

In A New York State Of Bind: Achieving Allocation Between Covered
And Uncovered Claims

Could this be the first New York case to say that, if an insurer doesn’t take some pre-emptive measure to achieve allocation between covered and uncovered claims, bad things will happen?

An Insurance Blue Moon: Coverage Owed For Sexual Assault -- “A Particularly Odd Set of Facts”
Coverage is rarely owed for sexual assault claims. It was here.

Breach Of The Duty To Defend And Forfeiture Of Coverage Defenses:
Not What You Are Thinking

While forfeiture of otherwise applicable coverage defenses is a harsh penalty for a breach of the duty to defend, there is a state where not following its duty to defend rules could be seen as even more severe.

Tapas: Small Dishes Of Insurance Coverage News And Notes
· This Insurer Is Not Man’s Best Friend
· Oh Lordy Lordy: I Can’t Believe This
· Colorado Supreme Court: No Prejudice Required For “Claims Made” Policy Breach

 
 
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Vol. 4, Iss. 3
March 18, 2015

 

Texting + Walking = :-(





On one hand, it was easy to see this one coming. On the other hand, it was shocking.

Walk down any street and take note of how many of your fellow pedestrians are looking down at their phones typing or reading. Of course, you’ll have to take a break from your own texting to make this observation. Needless to say, walking and looking anywhere but straight ahead is not advisable. But those days are long gone. We have become a race of robots, oblivious to all around us except our mobile devices. So it came as no surprise when I saw that a suit was filed against a walking texter for consequences of his inattentive behavior. Also not surprising was that coverage litigation ensured. But how that coverage case turned out was, well:

In Estate of Harriett Goldhammer v. Richard Russet, Fourth Judicial District, Idaho, No. 2014-1457, Goldhammer filed suit against Russet and his employer for injuries sustained under the following tragic circumstances. Goldhammer was standing on a corner in downtown Boise, waiting for the light to change before crossing the street. Without warning, Russet walked into her. He had been texting and simply did not see Goldhammer. The 82 year old, 95 pound Goldhammer didn’t have a chance against the 6’2”, 220 pound Russet. Goldhammer was knocked over – hard – and landed in the street, where she was hit by a passing automobile and killed. At the time of the incident, Russet, a copier repair man for Paper Yam, Inc. (“Yam”), had been texting with his office to learn the location for his next job. Goldhammer’s estate filed suit against Russet and Yam.

Yam provided notice of the suit to its commercial general liability insurer, Spuds Property & Casualty. Spuds disclaimed coverage, citing the policy’s “Distribution of Information” exclusion. Without the benefit of insurer-provided counsel, seemingly without any viable defenses to liability anyway and no real assets, the expected resulted. Yam settled with Goldhammer’s estate for $1,000,000, its policy limit, and assigned its policy rights to the estate, in exchange for a covenant not to execute.

Goldhammer’s estate filed suit against Spuds P&C and sought the $1 million limit under Yam’s policy. Spuds filed a motion to dismiss, asserting that, on the face of the underlying complaint, no coverage was owed because Goldhammer’s claim was for “‘bodily injury’ arising out of the dissemination, disposal, collecting, recording, sending, transmitting, communicating or distributing of material or information.”

Goldhammer’s estate argued that it was inconceivable that this exclusion could preclude coverage as it was unquestionably intended to be limited to statutes that regulate the transmission of such things as junk faxes, e-mail spam or other unsolicited information sent to recipients on a wide-scale basis.

The court in the coverage case acknowledged that, even if that were the intent of the exclusion, and it probably was, it was constrained to hold that the exclusion nonetheless precluded coverage for the claim.

First, there was no question that Mrs. Goldhammer’s death arose out of the dissemination, sending, transmitting, communicating or distributing of information. If Russet had not been transmitting information to his office, via text, when he approached Mrs. Goldhammer, waiting to cross the street, he would not have knocked her into a passing automobile. So, whatever the intent of the exclusion may have been, it was irrelevant, as the policy language, on its face, clearly applied. The court pointed to Rizzo v. Potato Growers Mutual Ins. Co., 217 P.3d 511 (Idaho 2013) (“In interpreting an insurance policy where the policy language is clear and unambiguous, coverage must be determined, as a matter of law, according to the plain meaning of the words used.”).

Second, the court concluded that, even if it could have considered the likely purpose of the exclusion -- to preclude coverage for the transmission of such things as junk faxes and e-mail spam -- that would not have altered its decision. The exclusion in the Spuds policy said nothing about junk faxes and e-mail spam. However, a similar exclusion in ISO’s standard CGL policy did specifically mention that it applied to TCPA (junk faxes), CAN-SPAM (e-mail spam) and other statutes that prohibit the transmission of information. Thus, as the court saw it, the exclusion in the Spuds policy was clearly intended to apply more broadly than to just these type of statutory violations.

Don’t text and walk. It can wait.


That’s my time. I’m Randy Spencer. Randy.Spencer@coverageopinions.info

 


Vol. 4, Iss. 3
March 18, 2015

Driverless Cars: The Real Insurance Issue

 

There has been a lot of talk lately about driverless cars. It has included when various manufacturers plan to introduce models with some driverless features (soon) and, more generally, longer-term predictions of when we’ll all be skootin’ around in KITT. However, while automobile manufacturers long-ago conquered cruise control, I’m dubious that the day will come when I can play backgammon while driving. After all, in nearly two centuries, nobody has been able to figure out how to prevent train derailments. And they run on a track -- and usually without any other trains nearby.

Given my skepticism of driverless cars taking over the highways and byways of America I haven’t given much thought to the subject. But I recently did – on account of a Wall Street Journal article that discussed various insurance implications of them. Throw insurance into the mix and I’ll try bird watching.

A March 4th Journal article, from reporter Theo Francis, discussed the fact that some insurance companies now see the need to mention in securities filings that driverless cars are a threat, albeit not an imminent one, to the way that they do business. Admittedly, this is all nervous nellie stuff by lawyers, but the article makes clear that some insurers are warning investors that, because driverless cars may be so safe, there could be a decrease in demand for auto insurance. [As if somehow auto insurance will no longer be mandated by law.] I don’t know about you, but the idea of driverless cars just makes me want to buy more insurance – auto and life.

[Another Journal article, from March 6th, stated that, according to McKinsey & Co., self-driving cars could eliminate 90% of all auto accidents. McKinsey predicts that, based on interviews with dozens of industry officials, mass adoption of driverless cars will begin in about fifteen years.]

As I see it, and this point was made in the earlier article, driverless cars can have a significant effect on the insurance market – liability that is. Right now, when there is an auto accident, it is rare to see the automobile manufacturer named as a defendant. Auto accidents are generally matters between the involved drivers and at issue is whose driving, and not whose car, was the cause. But if the car involved in the accident was designed not to have accidents, it is easy to see an automobile manufacturer being named as a defendant in just about every automobile accident suit – of which there are only a gazillion filed per year. Not to mention the other gazillion auto accident claims per year that are resolved pre-suit. The manufacturers of component parts for the supposedly safe driverless cars can also expect to get to know their way around every courthouse in America. This is the plaintiff’s lawyers dream – a deep pocket for every automobile accident. No longer will it be a problem when the negligent driver only has a 15/30 policy.

Under this scenario – and I don’t think it’s far-fetched – there will be a huge demand for liability insurance by automobile manufacturers and manufacturers of automobile component parts. Of course, given the massive claims frequency and severity involved, it is hard to imagine that such insurance would be even remotely affordable. And that assumes there is even an insurer willing to write it. If the solution is to build this risk factor into the price of the car, that would presumably make it more challenging for manufacturers to sell them.

Even if McKinsey is correct, that self-driving cars could eliminate 90% of all auto accidents, manufacturers would still be named as a defendant, in enough cases, to surely cause them serious financial consequences.

Of course all of this is pie in the sky stuff. But I can’t help but think that automobile manufacturers, who are falling all over themselves in the race to get to market with driverless cars, should be careful what they wish for.

 


Vol. 4, Iss. 3
March 18, 2015

Encore: The Springsteen-Quoting Coverage Case Judge Strikes Again

 

In the last issue of Coverage Opinions I wrote about a recent opinion, from Judge Jonathan Goodman, of the Southern District of Florida, quoting lyrics from Bruce Springsteen’s song, “No Surrender,” to make the point that, while not giving up may be a virtue when pursuing one’s dreams, it is frequently a bad idea in litigation. [I noted that Judge Goodman’s reference to Bruce lyrics, in Miami Yacht Charters, LLC v. National Union Fire Ins. Co., No. 11-21136 (S.D. Fla. Feb. 9, 2015), was the second time that this had been done in a coverage case.]

In particular, Judge Goodman invoked No Surrender to describe the insurer’s counsel’s “dogged, steadfast determination” to again revisit an already-decided issue. By Plaintiff’s count, that was the fifth time that the insurer had “tried to convince a court of its position after the Eleventh Circuit Court of Appeals issued its mandate.” But, despite this, the insurer made a sixth effort, by filing a Motion for Reconsideration. They must have been countin’ on a miracle. Thirty-five more tries and they’ll be at 41 shots.

I was shocked. And not surprisingly, so was the judge. His Honor stated that he was “astonished (to use a milder-than-the-actual-reality-term) to see National Union file a motion for reconsideration.” Of course, as shocked as I was that the insurer filed a Motion for Reconsideration, that’s how not shocked I was that it was denied. It had the same chance of prevailing as me beating LeBron in one-on-one.

To his credit, Judge Goodman did not return to Springsteen to describe the situation. Doing so would have only portrayed himself as a one trick pony (or pony boy, for you big Bruce fans out there). Instead, he tapped Albert Einstein for help, quoting him in both the first and last paragraphs. Judge Goodman began with this: “Substituting only one word (i.e., swapping ‘illogicality’ for ‘insanity’) transforms Albert Einstein’s famous quote into one applicable to [National Union’s] Motion for Reconsideration … denying its motion to ‘correct’ the record: ‘Illogicality: doing the same thing over and over again and expecting different results.” And he concluded with this: “For purposes of metaphorical harmony, the Undersigned will end this Order with another Albert Einstein quote: ‘We cannot solve our problems with the same thinking we used when we created them.’”

And His Honor added the following for good measure: “If defense counsel asserts the argument again, then he will be personally responsible for attorney’s fees under 28 U.S.C. § 1927, for pursuing in bad faith a legal argument which unreasonably prolongs this already-delayed lawsuit.”

Judge Goodman has shown the lawyers who’s the Boss.

[But here’s the bad news for the Judge. His reference to Einstein, in a coverage case, also comes in second. See Behrendt v. Gulf Underwriters Ins. Co., 768 N.W. 2d 568 (Wis. 2009) (“But the problem with the concurrence, as I see it, is that it tries to make things simpler than they are and is therefore misleading. To quote Albert Einstein, ‘everything should be made as simple as possible but not simpler.’”). Judge Goodman just hasn’t been able to be the man at the top.]

 

 


Vol. 4, Iss. 3
March 18, 2015

Report From The Rutgers ALI Restatement Conference:
The Role Of Minority Positions In The Process

 

I attended The Rutgers Law School–Camden Center for Risk and Responsibility’s ALI Restatement conference on February 27th.

It had been my first time on the Rutgers-Camden Law School campus since I’d been deemed unworthy of being there 27 years ago. Frankly, after being underwhelmed by the school’s snack situation, as well as an issue with the soap dispenser in the men’s room, it was a blessing in disguise that I was turned down by Rutgers.

The conference brought together a huge number of the key players involved with the ALI Restatement – formally a Principles project. And it was exactly as I expected – a full day of nuanced presentations and debate between the insurer- and policyholder-side factions. The discussion got into a level of minutiae that I’d never seen at an insurance conference. But I wasn’t surprised by this. The speakers were steeped in the project and much of the audience was quite familiar with it. It was graduate level from jump.

Much kudos to Professors Jay Feinman, Adam Scales and Rick Swedloff, of the Law School’s Center for Risk and Responsibility, for putting together a superb program. Not to mention that it ran with Patak Philippe precision.

The Rutgers conference was punctuated by the fact that, the day before, the Reporters released the eagerly-awaited draft of chapters 1 and 2 of the Restatement. This was the first opportunity to see how the draft text had changed from a Principles project to a now Restatement. I plan to discuss this more in future issues of CO.

The conference included lots of discussion of the substantive issues in the Restatement – focusing much on duty to defend; duty to settle; and policy interpretation. But the real take-away for me did not involve any of the specific Restatement provisions. Instead, it came from Virginia Law Professor Ken Abraham’s discussion of a common source of tension among project participants and watchers – what is a Restatement and can it adopt rules of law that are minority positions? Professor Abraham, a member of the ALI Council, has been at the forefront of the liability insurance project since its earliest stages. And he has been involved in a lot of Restatement projects over the course of many years.

The source of the minority position discussion comes from this. In general terms, a Principles project has, as its objective, to set forth what the law on liability insurance should be, i.e., it is aspirational. The objective of a Restatement, however, is much different. It is (or generally stated to be) to lay out rules describing what the law is. More specifically, the ALI defines a Restatement as follows: “Restatements are primarily addressed to courts. They aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might plausibly be stated by a court.”

To be sure, the insurance industry did not had a love affair with the Principles project. In general, insurers and their counsel criticized it for adopting the minority position on several issues that were adverse to their interests. But, since it was a Principles project, the adoption of minority positions could seemingly be justified on the basis that it was only aspirational. This took away some bite from insurers’ objections.

But if a Restatement’s aim is to reflect the law as it presently stands or might plausibly be stated by a court, then the minority rules adopted by the Principles, that so troubled insurers, should now give way to the adoption of the favored majority rule. Right? That is certainly how I saw the change from a Principles project to a Restatement playing out. And I’m not alone in this thinking among those on the insurer side.

But it turns out that this is not automatically so. This is where Professor Abraham’s discussion of what is a Restatement, and can it adopt rules of law that are minority positions, comes in.

Professor Abraham was unambiguous: Restatements can adopt minority positions, and there is nothing inappropriate in doing so, as long as there is a basis for it that is more than just fervent hope that it is the law. He was also quick to state that, if a Restatement adopts a minority position, such status must be noted in the text. In fact, Professor Abraham pointed out that two of the most influential Restatement sections ever, Restatement of Torts § 402A (adopting strict liability for products) and Restatement of Contracts § 90 (promissory estoppel), were “very much minority positions when adopted.”

The issue of what is a Restatement was recently addressed in the ALI’s Revised Style Manual that was approved by the ALI Council in January 2015. It is beyond the scope here to describe it in detail. To keep the discussion focused, I cite the part where it takes direct aim at the role of minority positions in the process of drafting a Restatement. Just as Professor Abraham said, they have a place at the table. The Revised Style Manual states as follows:

“The Restatement process contains four principal elements. The first is to ascertain the nature of the majority rule. If most courts faced with an issue have resolved it in a particular way, that is obviously important to the inquiry. The second step is to ascertain trends in the law. If 30 jurisdictions have gone one way, but the 20 jurisdictions to look at the issue most recently went the other way, or refined their prior adherence to the majority rule, that is obviously important as well. Perhaps the majority rule is now widely regarded as outmoded or undesirable. If Restatements were not to pay attention to trends, the ALI would be a roadblock to change, rather than a ‘law reform’ organization. A third step is to determine what specific rule fits best with the broader body of law and therefore leads to more coherence in the law. And the fourth step is to ascertain the relative desirability of competing rules. Here social-science evidence and empirical analysis can be helpful. A Restatement consists of an appropriate mix of these four elements, with the relative weighing of these considerations being art and not science. The Institute, however, needs to be clear about what it is doing. For example, if a Restatement declines to follow the majority rule, it should say so explicitly and explain why.”

As the Restatement process proceeds, look for insurers to argue aggressively against the adoption of minority positions that are adverse to their interests. That a rule of law is in the minority is a valid basis for arguing against its adoption in a Restatement. But insurers are going to have to deal with minority positions not being a per se basis for exclusion. Case in point – the adoption by the Principles, of the rule that an insurer that breaches the duty to defend forfeits an otherwise applicable coverage defense, is the vast minority rule nationally. And nobody disputes that. Insurers railed against it. But now, as a Restatement, surely this rule was eliminated. It had to be. Uh, no. This same minority rule is included in the first draft of the Restatement.

Lastly, the conference also included talk of what I am coining the “Scalia coincidence.” On February 24th, just three days before the conference, Justice Scalia issued a concurring in part and dissenting in part opinion in Kansas v. Nebraska and Colorado, a case involving a water rights dispute between these states, where the Restatement (Third) of Restitution and Unjust Enrichment (2010) played a role in other justices’ opinions. Scalia was quite critical of Restatements, describing them as being “of questionable value, and must be used with caution. The object of the original Restatements was ‘to present an orderly statement of the general common law.’ (citation omitted). Over time, the Restatements’ authors have abandoned the mission of describing the law, and have chosen instead to set forth their aspirations for what the law ought to be. . . . Restatement sections such as that should be given no weight whatever as to the current state of the law, and no more weight regarding what the law ought to be than the recommendations of any respected lawyer or scholar.”

Those unhappy with the project, especially on account of a Restatement’s possible adoption of minority positions, were quick to mention Scalia’s words.

 

 

 


Vol. 4, Iss. 3
March 18, 2015

Of Tanning Salons, Peeping Toms And Cyber Coverage

 

Now that I have your attention -- given how popular cyber coverage issues are these days -- the recent Pennsylvania trial court decision in Penn-America Ins. Co. v. Toni Tomei t/a Sunkissed Tanning & Spa, No. 3917 of 2012 (Pa. Ct. Comm. Pl., Westmoreland Cty. Feb. 19, 2015) is worthy of discussion. On its face, the case has nothing to do with cyber coverage. But, in fact, it does.

At issue in Sunkissed Tanning was coverage for a tanning salon for claims brought against it by female patrons who were surreptitiously videotaped while unclothed during tanning sessions. The videos were subsequently posted on the internet for public viewing. Plaintiffs alleged humiliation, embarrassment, shame, mental anguish and mental trauma as a result of discovering images of themselves nude on the internet. The plaintiffs essentially alleged that the defendants were negligent in failing to prevent what happened.

Sunkissed Tanning was insured under commercial general liability policies issued to it by several insurers during the time period in question. At issue, at the outset, was trigger of coverage and whether the plaintiffs sustained bodily injury.

The court disposed of the trigger issue with ease – concluding that the triggered policy for each plaintiff was the one on the risk at the time that she discovered the publication of the offending videotape on the internet. That is when each plaintiff manifested an injury. Using this analysis, one of the insurers was not triggered for any plaintiff as its policy was off the risk before any plaintiff manifested an injury. Another insurer was on the risk when nine plaintiffs learned of the positing of the video and for a third insurer the trigger test was satisfied for 28 plaintiffs.

However, even for the two insurers whose policies were on the risk at the time of manifestation, the court held that no coverage was owed because none of the plaintiffs alleged that they sustained bodily injury, as none alleged “physical manifestations attendant to or symptomatic of the claims for emotional or mental distress.” The law in Pennsylvania, on the issue whether emotional injury qualifies as bodily injury, is on the confusing side. Given how Pennsylvania-based this issue is, and with the real objective here to address the case’s relevance to cyber coverage, I’ll skip it.

Now, speaking of cyber, the court, as you would expect, addressed the potential for coverage under Part B of the policies for invasion of privacy, more specifically: “injury, including consequential ‘bodily injury,’ arising out of one or more of the following offenses: e. oral or written publication, in any manner, of material that violates a person’s right of privacy.”

The court held that no coverage was owed because “[t]he publishing of videotapes and photographs are not publications that would be generally defined as either ‘oral’ or ‘written’ under the plain meaning of those terms.” [The court also held that, even if “oral or written publication” includes videotapes or photographs, an exclusion for violation of a statute, prohibiting the distribution of material or information, served to preclude coverage.]

So “oral or written publication” does not include videotapes or photographs. If this is so, it certainly closes the door to commercial general liability coverage for some potential consequences of a hacking incident [to the extent that door was open in the first place.] After all, hackers often seek maximum exposure for their handiwork -- and posting to the internet is of course how that is achieved. And not ever cyber attack is for purposes of gaining access to personally identifiable information, credit card numbers or medical records. [Just ask some Hollywood celebrities who’ve learned this recently.] So if an insured is hacked, and it results in the posting on the internet of videotapes or photographs, Coverage B would not be triggered for claims brought against it (to the extent it was otherwise triggered). This being so, a determination that “oral or written publication” does not include videotapes or photographs is not without potential consequences for the availability of coverage.

True, a trial court decision, from Westmoreland County, Pennsylvania, may not carry a lot of weight. But these days, with the lines for cyber coverage still being drawn, all decisions that could have an implication are worthy of note.

[In the interest of full disclosure, Penn-America Ins. Co. was represented by my White and Williams colleagues Gale White and David Edwards.]

 

 


Vol. 4, Iss. 3
March 18, 2015

In A New York State Of Bind:
Achieving Allocation Between Covered And Uncovered Claims [A First For New York?]

 

I have said this so, so many times. But given the huge importance of the issue, it is restated here. If you’ve read this before please forgive me.

You have just written the greatest reservation of rights letter ever. If Felix Unger handled claims, this is what his letter would look like. If there were a hall of fame for reservation of rights letters, you would soon get to see how yours looked in bronze. Your letter compares the specific allegations in the complaint, to the policy language, and explains, with laser-like precision, why, despite the insured being provided with a defense, no coverage may be owed for any settlement or judgment. You mail the letter, put a copy in the file, take a deep breath of satisfaction, waste a few minutes reading a couple of meaningless articles on Yahoo, and then off you go to your next claim. It’s a fine day.

But the challenge with reservation of rights letters is not writing them. It is enforcing them. Because a reservation of rights letter is written in a sterile environment – at someone’s desk – it can easily spell out, in black and white terms, those claims and damages at issue in the underlying suit for which coverage may not be owed. The underlying litigation, on the other hand, is likely proceeding in a manner that is anything but as neat and tidy.

It will frequently be the case that the underlying litigation is simply not capable of producing an outcome that makes it possible for the insurer and insured to compare its results, with the reservation of rights letter, and easily decide which claims and damages are covered and which are not. To the contrary, the underlying litigation may result in a verdict that does not specify the extent to which it represents this or that type of damage or the claims on which the relief is based. In this situation, often-times referred to as a “general verdict,” the policyholder is likely to argue that, because the basis for the jury’s verdict cannot be determined, it must be presumed that the entirety of the jury award represents covered claims and damages. Adding to the difficulty for insurers is that it cannot ask appointed defense counsel to seek special jury interrogatories, which would go a long way toward solving this problem. [And similar problems may come from a settlement.]

Some courts have accepted the policyholder argument that, if the insurer created the problem of an inability to allocate between covered and uncovered claims, it must therefore bear the consequences. In other words, if it cannot be determined which portion of a verdict is covered and which is not, then all of the damages will be considered covered. Or the insurer may be given a difficult burden to prove covered versus uncovered damages. In these situations, the fact that the insurer issued a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, is no protection against failing to prevent a general verdict and the consequences that it causes.

At the heart of these decisions is the placing of blame on the insurer for being aware that the underlying litigation may result in a verdict that does not enable a determination to be made between covered and uncovered claims and/or damages, yet it took no steps to prevent such outcome. Indeed, these decisions sometimes speak in very harsh tones -- essentially blaming the insurer for being its own worst enemy.

With all that said, allocation between covered and uncovered claims was at the center of the court’s opinion in Uvino v. Harleysville Worcester Insurance Company, No. 13-4004 (S.D.N.Y. Mar. 4, 2015). And the underlying claim at issue was of the type where allocation is frequently needed. All allocation of covered versus uncovered claims are noteworthy – as the issue is so important and the case law not abundant. At least not as abundant as you would think, given the frequency in which the issue arises. But Uvino v. Harleysville has an extra reason why it is noteworthy. It involves New York law, not to mention that, in discussing the issue, the court cited to all non-New York cases. So if Uvino isn’t the first New York case to address the issue, it appears that there certainly can’t be many.

Uvino v. Harleysville involves coverage for an underlying construction defect suit. Nothing you haven’t seen before. A contractor, JBI, was hired to serve as Construction Manager for the construction of a home in Long Island. As seems to happen so often, the relationship went south and the homeowners, the Uvinos, filed suit against JBI alleging construction defects and related claims.

Harleysville insured JBI under a commercial general liability policy and retained counsel to defend it pursuant to a reservation of rights. As is often the case in construction defect, there was an issue of uncovered damages (related to the repair and replacement of JBI’s faulty work) versus covered damages (related to damages to other property).

Recognizing this issue, Harleysville, shortly before trial was to begin, “sought leave to move to intervene for the purpose of requesting that the court ‘submit special interrogatories to the jury to allocate between those damages related to the repair and replacement of [JBI’s] faulty work versus damages to other property.’ . . . Harleysville argued that the burdensome prospect of undertaking subsequent litigation to allocate covered damages favored allowing Harleysville to intervene to submit interrogatories at trial. JBI opposed the motion, asserting that the motion was untimely and that while JBI would be harmed by jury confusion caused by the interrogatories, Harleysville faced no prejudice if intervention was denied as it could resolve the coverage issues in a later proceeding.”

At this point, the opinion gets a little confusing as there was a mistrial and a disqualification of counsel. Putting all of that aside, the court denied Harleysville’s motion to intervene. The case went to trial a jury found JBI liable for damage to the Uvinos’ home and awarded them $317,840 in general damages, $83,788 in consequential damages and $51,231.04 in damages for breach of fiduciary duty. This was a general verdict and the court made no determination whether the losses were covered under the Harleysville policy. Shortly thereafter, Harleysville disclaimed coverage. The Uvinos initiated the action seeking a judgment that Harleysville must indemnify JBI for the damages.

The court in the declaratory judgment action undertook a long analysis of whether coverage was owed, under New York law, for the damages awarded. The issue before the court was the one so often seen in construction defect coverage disputes: “Generally, damages to remedy a contractor’s defective work will not be covered under a general commercial liability policy like the one at issue here; rather, coverage exists only where the contractor’s defective work causes harm to others or others’ work.”

It is unnecessary to get into this several page analysis. All that matters here is that, when all was said and done, the court held that the claims submitted by the Univos to the jury may include claims covered under the Harleysville policy.

Here is where it gets interesting. Harleysville argued that, “even if some of the Uvinos’ claims are covered under their policy, Harleysville is entitled to summary judgment because the Uvinos cannot prove what portion of the $401,628 general verdict awarded by the jury is attributable to covered claims and what portion is attributable to noncovered claims.” The court agreed, but with one caveat.

The court stated that, “[j]ust as the insured has the initial burden of establishing its entitlement to coverage, the insured generally has the burden of identifying covered damages. However, the court also noted there is an exception: “[I]in certain circumstances, that burden may be shifted to the insurer, and/or the party seeking recovery may be permitted to withstand summary judgment and proceed to further litigation on allocation of covered versus noncovered claims. For instance, if the insurer did not adequately make known to the insured the availability and desirability of receiving a special verdict, or if it is not clear that the insured was apprised its interest in receiving a special verdict, the parties seeking coverage need not be required to prove what portion of a general verdict is covered at the summary judgment stage.”

In setting forth this exception, the court string-cited four cases. Critically, none were from a New York court – state or federal. They were from the Fifth Circuit, District of Rhode Island, District of Florida and the Idaho Court of Appeals. That’s quite a combination.

The court concluded that, by its actions, Harleysville did not cause the burden of allocation to shift. This was because Harleysville “moved to intervene for the purpose of requesting special interrogatories to forestall a coverage-allocation dispute and therefore made known both the availability of the interrogatories and the parties’ divergence of interests, did not fail in its fundamental responsibilities to its insured such that the burden of proving allocation should shift to Harleysville.”

Thus, the case would move to an allocation proceeding and, because Harleysville took preemptive took steps to achieve allocation, the burden of proving covered damages would remain on the Univos. [There is some more to it but it’s unique to the case and unnecessary for the discussion here.]

While Univo v. Harleysville may be a federal District Court opinion, it is worthy of note. The court stated that, if an insurer did not take some affirmative steps, to address allocation between covered and uncovered damages, the insured need not be required to prove what portion of a general verdict is covered. In stating this, the court cited four non-New York cases. While time constraints precluded me from researching New York law on this issue, I suspect that the judge’s law clerks were not so constrained. The fact that Univo cites only non-New York cases suggests that New York law is sparse on the issue, perhaps even to the point where the decision is the first. [If there are others, I’d appreciate someone telling me.]

This gets back to the beginning. That an insurer issues a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, may be no protection against failing to prevent a general verdict and the consequences that it can cause. Reservation of rights letters are not self-enforcing. Writing them is often just the first step to limiting exposure to covered claims alone. Getting there may require that the insurer take a second step.

 

 

 


Vol. 4, Iss. 3
March 18, 2015

An Insurance Blue Moon:
Coverage Owed For Sexual Assault -- “A Particularly Odd Set of Facts”

 

The number of decisions addressing the availability of coverage for a sexual assault are legion. They often, but not always, arise under the liability section of a homeowner’s policy. I have never undertaken a formal count, but, anecdotally, I can say that coverage is rarely owed for such claims.

The reasons given by courts, for denying coverage for sexual assault, are several. These include the following. Since sexual assault involves intentional conduct, it is not an accident/occurrence. And even if a sexual assault is pleaded as negligence, that is simply artful pleading, in hopes of triggering coverage, and the court won’t be fooled. If there is a requirement in the law that the injury, and not just the act, be intended, an intention to cause injury will be deemed, in light of the nature of a sexual assault. There may be an express exclusion in the policy for sexual assault. And a court may conclude that reasons of public policy preclude coverage. Or the basis for a court’s determination of no coverage for a sexual assault could be a combination of the above.

So if Allstate Property & Casualty v. Choi, No. 14-311 (E.D. Wash. Mar. 3, 2015), a case involving the availability of coverage for sexual assault, had been like most, we would not be having this discussion. That we are is because Choi bucked the trend and the court found that coverage was owed.

At issue was the availability of coverage for Jong Hwan Choi for the alleged sexual assault of Jessica Arroyo Obispo. Obispo alleged that Choi sexually assaulted her at his home in March 2013. She filed suit against him and alleged several causes of action. Choi was insured under a homeowner’s and personal umbrella policy issued by Allstate. Allstate undertook his defense and filed an action seeking a declaration that no coverage or duty to defend was owed for the claims made by Obispo. That action is still pending. Choi’s defense was that, in his opinion, Obispo consented to the sexual activity at the time it occurred. This was the same explanation that he gave when he pled guilty to a misdemeanor count of Assault in the Fourth Degree with Sexual Motivation.

The question at the outset for the court was whether there was an “occurrence,” similarly defined under both policies as an accident. Allstate’s argument was that sexual assault is an intentional act and cannot be considered an “accident.”

The court half agreed: “Allstate is correct in claiming that Choi’s defenses to a claim are immaterial to whether Allstate has a duty to defend. If Choi was being sued for assault and simply denied it, or claimed he thought he had consent, the duty to defend would not attach—because there could be no circumstance under which the insurer could be liable.”

But this wasn’t just a situation where Choi simply claimed that he thought he had consent. Rather, Obispo’s complaint opened the door to the mistaken consent argument as it incorporated “Choi’s claimed defense both by making alternative claims of negligence and negligent infliction of emotional distress, and by explicitly pleading facts that include Choi’s defense of mistaken consent.”

This made the situation different from one where Choi simply claimed that he thought he had consent. As the court explained: “Thus, the question whether Allstate has a duty to defend is not limited to the allegations of assault, battery, or intentional infliction of emotional distress. Two of Obispo’s claims rely on allegations that Choi in fact believed he had Obispo’s consent to engage in the sexual touching. Therefore, the pertinent question is whether mistaken consent can constitute an occurrence under either the homeowner or umbrella policies. The Court holds that it can.”

In reaching this conclusion, the court was guided by the Ninth Circuit’s 2008 decision in Fischer v. State Farm – a decision that the Choi court described as having “a particularly odd set of facts.” In Fischer, the court held that “intercourse, performed intentionally, can constitute an accident for insurance purposes in some circumstances.”

I read Fischer – “a particularly odd set of facts” is indeed an accurate description. Here the court held that “Fischer was negligent when he engaged in intercourse with Donna MacKenzie and that MacKenzie had consented to the intercourse. It reasoned that the jury could have believed she gave consent under the mistaken belief that her boyfriend, not Fischer, had climbed into her bed.”

The court expanded on the accident issue under this particularly odd set of facts: “What caused the harm in this case was not that Fischer engaged in intercourse, but that he engaged in nonconsensual intercourse, which he could not have reasonably foreseen. A reasonable person in his position would not be aware of or foresee the harmful consequences of intercourse with the consenting MacKenzie because he would not be aware of or foresee that her consent was ineffective and based on her mistaken belief that she was with her boyfriend. MacKenzie’s mistake as to Fischer’s identity constituted an ‘additional unexpected, independent and unforeseen happening.’ Accordingly, the harm was the result of an accident.”

The Fischer court did not address how MacKenzie could have possibly made this mistake. There is definitely more to this story.

 

 


Vol. 4, Iss. 3
March 18, 2015

Breach Of The Duty To Defend And Forfeiture Of Coverage Defenses:
Not What You Are Thinking

 

There has been so much talk over the past couple of years about whether an insurer that breaches the duty to defend forfeits otherwise applicable coverage defenses. The talk has grown out of the New York Court of Appeals’s decisions in K2 and the ALI’s adoption of the forfeiture rule in its Principles of the Law of Liability Insurance and now first draft of the Restatement of the Law of Liability Insurance.

Insurers recognize that consequences should attached for having breached the duty to defend – but they see forfeiture of otherwise applicable coverage defenses as going too far. As insurers view it, there are less severe remedies that could be applied for a breach of the duty to defend.

While forfeiture of otherwise applicable coverage defenses is a harsh penalty for a breach of the duty to defend, there is a state where not following its duty to defend rules could be seen as even more severe. This place is New Jersey.

Under New Jersey law, an insurer that wishes to take the common course of action of appointing panel counsel to defend its insured, while at the same time sending its insured a reservation of rights letter, setting out reasons why, notwithstanding providing a defense, the insurer may not have an obligation to pay some or all of any damages awarded, must advise the insured of its right to object to being defended in such a matter. New Jersey courts have imposed a simple sanction on insurers that fail to obtain their insured’s consent to being defended under a reservation of rights – loss of the insurer’s ability to assert an otherwise applicable defense to coverage.

To put it another way, in New Jersey, an insurer can acknowledge that a defense is owed to its insured, retain counsel, spend unimaginable sums in the defense and then be found to have breached the duty to defend, and be subjected to loss of otherwise applicable coverage defenses, because it did not obtain its insured’s consent to being defended under a reservation of rights.

In a way, this is an even harsher rule than one where an insurer that breaches the duty to defend forfeits otherwise applicable coverage defenses. In that scenario, the insurer did not defend its insurer. It took no action and the insured was left to defend itself. But under the New Jersey scenario, the insurer did no such thing. To the contrary, it acknowledged that a defense was owed to its insured, retained counsel and may have even spent boatloads of cash providing such defense. But none of that will matter if the insurer did not obtain its insured’s consent to being defended under a reservation of rights. Gone will be any otherwise applicable coverage defenses. Poof.

I sometimes meet people involved in claims for a long time, even in New Jersey, who are unaware of this rule – despite the fact that it’s been in place since 1962 – or who doubt its existence. It’s surprising. This was also surprising to one New Jersey jurist. In concluding that an insurer was estopped from denying coverage, because its reservation of rights letter did not comport with this “consent” rule, the trial judge in Selective v. Allstate Ins. Co. (described in the Appellate Division’s decision at 2005 WL 3839975) stated: “Borrowing from my own experience, every once in a while you see something and you scratch your head and you wonder why a carrier that’s in the business of doing this type of thing would not know how to do it appropriately. It’s not particularly difficult, but those things happen I guess.”

New Jersey’s rule, that to defend an insured under a reservation of rights, the insurer must advise the insured of its right to object to being defended in such a matter, was on display last year in Petersen v. New Jersey Mfrs. Ins. Co. (N.J. Super. Ct. App. Div. May 2, 2014). Discussing this decision in Coverage Opinions has been on my to-do list for a while – as you can see.

In Peterson, the court held that, although New Jersey Manufacturers could have done a better job at it, the insurer did comply with the consent requirement when it assigned counsel and undertook its insureds defense under a reservation of rights. Peterson got into the often-seen side issue of whether the insured in fact consented to the reservation of rights defense. This issue can come about because, while insureds do not always formally consent to the defense offered, their consent to it can be inferred from their failure to reject it. But to have acquiescence by silence, the insureds must be fairly informed that the defense may be accepted or rejected. So lots of factual issues about whether there was consent can arise.

In any event, in case you are a non-believer of the New Jersey “consent” rule, the Peterson court should convert you. The court stated: “In order to properly reserve its rights, so as to control the defense while avoiding estoppel, an insurer must advise its insureds of the potential of disclaimer, fairly inform the insureds of their right to reject the insurer’s defense on those terms, and secure the insureds’ explicit or implicit consent.”

 

 

 
 
Vol. 4, Iss. 3
March 18, 2015
 
 

This Insurer Is Not Man’s Best Friend
In a story recently reported on WABC TV New York’s website, a woman on Long Island had a $300,000 fire damage claim denied because she owned a pit bull, Bella, that was not listed on the policy’s application for coverage. [This is why dogs should not play with matches.] The policy was subject to being voided because pit bulls are on the insurer’s list of prohibited breeds. There is seemingly more to the story in that the woman stated that a broker completed the application with her, via phone, and she was never asked if she had a dog. If she had been asked, she says, she would have said so. So the application was submitted with a “N” in response to the question about pets. You can find the story online. Search for Bella Fire Claim WABC.

Oh Lordy Lordy: I Can’t Believe This
In a story recently reported on lots of websites – so it must be true; but I’m not convinced – an elderly British minister was sent a letter from her insurance company warning that, by putting Jesus-themed bumper stickers on her car, she was jeopardizing coverage. The minister had submitted photos of her car as part of a claim. The photos revealed bumper stickers that read “Christ Must Be Savior” and “Christ For Me.” The insurer responded that it had not been told of these “modifications” to the car at the time of the application. If it had, the application would have been rejected. The insurer denied that its decision had anything to do with the religious message of the stickers. It was simply a question of such “modifications” not fitting the insurer’s “acceptance criteria” for auto insurance. This seems ridiculous and sounds like one of those situations where there’s more to the story. You can find the story online. Search for Wena Parry Bumper Stickers.

Colorado Supreme Court: No Prejudice Required For “Claims Made” Policy Breach
In what can hardly be viewed as a surprising decision, the Colorado Supreme Court held in Craft v. Philadelphia Indemnity, No. 14SA43 (Colo. Feb. 17, 2015) that, despite late notice in the context of “occurrence” policies being subjected to a prejudice requirement, that is not the case when it comes to “claims made” policies. The Craft court stated: “We hold that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy. In a claims-made policy, the date-certain notice requirement defines the scope of coverage. Thus, to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract.”