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Coverage Opinions
Effective Date: July 15, 2015
Vol. 4, Iss7

Declarations: The Coverage Opinions Interview With New York Times #1 Best Selling Author Brad Meltzer
Decoding Brad Meltzer: History’s Yenta

Randy Spencer’s Open Mic
Barry Manilow And Cyber Coverage: Court Writes The Songs For Policyholders

Win A Free Copy Of General Liability Insurance Coverage –
Key Issues in Every State

I Am The King Of State Farm

Travelers: Don’t Even Think About Using An Umbrella
We Will Rain On Your Parade

Thank You Louisiana Claims Association
What do you call a policyholder in Louisiana who has had a claim denied?

Mickey Pleas: McDonald’s Gets Sued… Again

Update: ALI’s Restatement Of The Law Of Liability Insurance

Three Sheets To The Win: Policyholder Rewarded For Being Drunk

The Most Important Coverage Case Of 2015
Jeff Waltz Checks In With An Analysis From The Bayou

Top 10 Case of 2015:
Court Addresses Impact Of Punitive Damages On Bad Faith Failure To Settle

Court Rejects 10,000 Page Pollution Exclusion

A Really Curious Coverage Case

There’s Been No “Tender” – Does Insurer Still Need To Respond?

Two Courts Hold That Adjuster Can Be Personally Liable For Wrongful Claims Handling Conduct

Court Tackles Statute Of Limitations For Bringing A DJ Action

Tapas: Small Dishes Of Insurance Coverage News And Notes
· Federal Appeals Court Addresses Proof Of Lost Policies
· Supreme Court Allows Excess Insurer’s Bad Faith Claim Against Primary

Back Issues:

Vol. 4, Iss. 7
July 15, 2015


Barry Manilow And Cyber Coverage:
Court Writes The Songs For Policyholders

Not a day goes by it seems without news of a cyber attack resulting in the release of 4 trillion people’s personal information. It has gotten to the point where one’s identity could seemingly be stolen several times a month. Perhaps the solution for identify theft is to simply wait for your fake identity to be stolen. Clearly not all data breaches -- and probably most do not -- cause any identifiable or quantifiable harm to the person whose personal information was so-called “compromised.” After all, for decades there was a major breach of personal information that didn’t seem to bother anyone – it was called The White Pages.

Looking at the insurance side of things, it has also been all-cyber all-the-time. Insurers have been actively marketing cyber insurance policies and coverage professionals have been analyzing the claims – real and potential. We are likely on the cusp of lots of coverage claims, and possible disputes, under all of these new-fangled cyber policies that are being sold. For now, the cyber/data breach coverage issues have been tied to plain old commercial general liability policies. [But this will likely diminish soon on account of data breach exclusions being added to CGL policies, in addition to the popularity of specialized cyber policies.]

While cyber/data breach coverage cases under CGL policies are not long for this world, last week’s decision from an Oregon trial court demonstrates the fun that we’ll be missing. In Oscines v. Mt. Hood Insurance Company, Circuit Court of Oregon, Benton County, No. 1401-426 (July 2, 2015), the Oregon trial court addressed the potential for coverage, for a data breach, under a commercial general liability policy. The coverage dispute arose out of the following situation, as described in the underlying complaint at Billingsley v. Oscines, LLC, Circuit Court of Oregon, Benton County, No. 1401-125.

Chuck Billingsley was an accountant in Corvallis, Oregon. But his hobby was far removed from counting beans. Billingsley participated in “tough guy” competitions. As the court described it, the participants compete in races while hauling heavy and bulky items such as truck tires and bricks. Other competitions involve tearing phone books, pulling trucks, lifting boulders and chopping wood. The court made the point, for a reason, that being a “tough guy” had become Billingsley’s ingrained identity.

Billingsley kept his music library on a music server called Oscines (Latin for song bird). In October 2013, Oscines’s server was hacked and the identity of all of its users, and the contents of their music libraries, became public on the internet. As a result, it became known that Billingsley’s music library included several albums from Barry Manilow, Neil Diamond, Abba and the Carpenters. The information also revealed that Billingsley had once played Copa Cabana 32 times in a five hour period. This resulted in Billingsley being teased by other “tough guy” competitors. He also alleged that a co-worker hummed Dancing Queen when he walked into a meeting and that the disc jockey at the company’s holiday party played The Carpenters’s Rainy Days and Mondays and dedicated it to him. Billingsley alleged that the release of this information, given his public persona as a “tough guy,” caused him extreme emotional distress. Billingsley filed suit against Oscines seeking damages for invasion of privacy.

Oscines tendered the suit to Mt. Hood Insurance Company and sought coverage under a commercial general liability policy. Mt. Hood denied a defense on the basis that the allegations against Oscines, in Billingsley’s suit, did not trigger coverage. Specifically, Mt. Hood argued that Billingsley was not injured on account of the “oral or written publication, in any manner, of material that violates a person’s right of privacy.” So the insurer’s argument went, the Billingsley suit did not seek damages for “personal and advertising injury” to trigger coverage under the CGL policy. Shortly after the denial of coverage, Billingsley and Oscines settled the matter for $65,000. Oscines then filed suit against Mt. Hood for the recovery of the settlement amount and $8,000 in defense costs.

The parties in the coverage dispute filed competing motions for summary judgment. The trial court in Oscines v. Mt. Hood held that Billingsley had alleged that he was injured on account of “oral or written publication, in any manner, of material that violates a person’s right of privacy.”

First, the court concluded, despite Mt. Hood’s argument to the contrary, that there had been oral or written publication, in any manner, of material. Mt. Hood argued that there is nothing oral or written about the actions of a hacker and subsequent release of information on the internet. As Mt. Hood saw it, hacking does not involve speaking or the written word. The court pointed to the “in any manner” language and concluded that its intent was to not limit publication so specifically.

The court also rejected Mt. Hood’s argument that the contents of one’s music library is not personal, such that its release to others qualifies as an “invasion of privacy.” The court looked at this issue closely. The opinion suggests that this may in fact be the case in some situations, but not here. Given that being a “tough guy” was such a significant part of Billingsley’s identity, knowledge by others that he had huge collections of music by Barry Manilow, Neil Diamond, Abba and the Carpenters was sufficient to qualify as an invasion of privacy. The decision is a Beautiful Noise for Oscines and Song Sung Blue for Mt. Hood.

Let’s end it with this:

I’m on the top of the world looking down on creation
And the only explanation I can find
Is the love that I’ve found ever since you’ve been around
Your love’s put me at the top of the world

Good luck getting that out of your head before Thursday. Sorry.

That’s my time. I’m Randy Spencer. Contact Randy Spencer at





Vol. 4, Iss. 7
July 15, 2015

I Am The King Of State Farm



I bet this is Chairman Ed Rust’s chair!

There may be nobody on planet Earth who was more excited to see this chair than yours truly.



Vol. 4, Iss. 7
July 15, 2015

Travelers: Don’t Even Think About Using An Umbrella
We Will Rain On Your Parade

The Wall Street Journal recently ran a Front Page story about Travelers and its extensive efforts to stop other companies from using an umbrella logo -- either to identify themselves or in their advertising. And Travelers’s efforts don’t stop at insurance companies. The moral of the article: Travelers takes its iconic red umbrella seriously. Like, really serious. Like, don’t even think about it seriously. I’m now afraid to even talk about insurance coverage in the rain.

It’s a fun article -- and I had the thrill of being quoted in it. Check it out here:



Vol. 4, Iss. 7
July 15, 2015

Thank You Louisiana Claims Association



What do you call a policyholder in Louisiana who has had a claim denied? A Po-Boy. Wow! That is just about the worst joke I have ever written.

Thank you to the Louisiana Claims Association for the invitation to present the Keynote Address at its annual claims conference in New Orleans on June 24. Also thank you to Unified Investigations & Sciences, Inc. for sponsoring my presentation – which examined the ten most significant liability coverage cases of all time.

The conference was superb and had a huge turnout. The LCA folks couldn’t have been more hospitable to me.

What an amazing food city. Besides the conference, I fit in some of Nola’s gastronomic specialties. I had an incredible Po-Boy from Killer Po-Boys (located inside the Erin Rose Bar at 811 Conti), threw back a couple of Nola’s own Abita beer and downed some gumbo and swallowed some oysters at the legendary Acme Oyster House. I also stopped by the Louisiana Supreme Court -- conveniently located one block from my hotel -- to check out the spectacular courtroom. No eating allowed there. The New Orleans Police Department was happy to see me leave given all the extra security and overtime that was needed to accommodate my trip to Bourbon Street.

Thank you again to the Louisiana Claims Association for its wonderful hospitality.

[Drop me a note if you are interested in having me address your company or claims organization. I promise a fun speech -- but very serious in content and learning objectives.]



Vol. 4, Iss. 7
July 15, 2015

Mickey Pleas: McDonald’s Gets Sued… Again

Folks who go to McDonald’s sometimes have a beef with the experience. When this occurs they may turn to the legal system for redress. For the lawyer they hire, it was in fact a happy meal.

Not long ago there were news accounts of a lawsuit filed against McDonald’s in Illinois state court. At issue – an allegedly defective Chicken McNugget. According to the Chicago Tribune, a golden arches patron alleged that, in May 2013, he ate a Chicken McNugget containing one or more sharp bone shards that caused him severe injury when he swallowed it. The Tribune stated that the suit contends that McDonald’s employees failed to inspect and test the Chicken McNugget in question for bone fragments prior to serving it.

Now I don’t know how many McNuggets McDonald’s sells a year – but it’s gotta be at least a bazillion. That being so, it is hard to argue with The Wall Street Journal Law Blog’s observation about the suit: “[A]n individual nugget-shard-inspection requirement would seem like a tall order.”

Given the huge number of McDonald’s stores, how many people they serve and the nation’s appetite for litigation, lawsuits against the hamburger purveyor seem inevitable. McDonald’s is also no stranger to the left-side of the caption. It has sued its share of folks for using the name McDonald’s or “Mc” in their business names. [So much for McCoverage Opinions.] To give you an idea of what I’m talking about -- there is an entire Wikipedia entry devoted to “McDonald’s Legal Cases.”

Consider these news headlines that were easily found just using a Google search (and ALL within just the past couple of years)

• “Lawsuit filed: Teen suing McDonald’s restaurant claims his iced tea had bleach, cleaning solution in it” (fox6now.com)

• “Napkin Argument Leads to Customer’s $1.5M Lawsuit Against McDonald’s” (nbclosangeles.com)

• “Man Speared Through Throat By McDonald’s Orange Juice Sues” (jdjournal.com)

• “McDonald’s Sued For $10M After Man Dies Of Heart Attack In Locked Bathroom” (consumerist.com)

• “McDonald’s Is Getting Sued Again Over Alleged Hot Coffee Burns” (businessinsitder.com)

The Plaintiff’s lawyer in this Illinois case no doubt has it all figured out. Require McDonald’s to put all of its Chicken McNuggets through an x-ray machine – and then file suit against the company for radiation exposure.


Vol. 4, Iss. 7
July 15, 2015

Update: ALI’s Restatement Of The Law Of Liability Insurance

It has now been nine months since the American Law Institute did a switcheroo and converted its Principles of the Law of Liability Insurance to the Restatement of the Law of Liability Insurance. Just a one word change – but an impact that speaks volumes. So what’s been happening with the project during this period? To find out I checked-in with the Restatement’s Reporter – Professor Tom Baker of Penn Law School. Tom was kind enough to send me an informative letter, which I set out here. [Thankfully Tom did not employ some law professor Socratic method thing and make me answer my own question.]

Dear Randy,

Thank you for your interest in the American Law Institute’s Restatement of the Law, Liability Insurance. As you requested, I am providing a brief status report on the project.

The Restatement will have four chapters. Chapter 1 addresses Basic Liability Insurance Contract Rules and contains three major topics: interpretation, waiver and estoppel, and misrepresentation. Chapter 2 addresses the Management of Potentially Insured Liability Claims and contains three major topics: defense, settlement, and cooperation. Chapter 3 addresses General Principles Regarding the Risks Insured and contains three major topics: coverage provisions (e.g. insuring clauses and exclusions); conditions; and the application of limits, deductibles and retentions (e.g. number of occurrences and allocation). Chapter 4 will address enforceability, remedies (including for bad faith), and, tentatively, broker liability.

The ALI approved drafts of Chapters 1 and 2 in May 2013 and 2014, when the project was known as the Principles of the Law of Liability Insurance. In October 2014 the ALI Council reviewed the nomenclature for ALI projects and determined that the Liability Insurance project should be renamed a Restatement. In the Forward to the April 23, 2015 Discussion Draft of the Restatement of the Law, Liability Insurance, ALI Director Richard Revesz explained the name change as follows:

“The Council decided that, consistent with our traditional practice, the Restatement label should be used for projects that seek to provide guidance to courts and where there is a body of established positive law. In contrast, the Principles label is appropriate for projects where the main intended audience for the Institute’s guidance are institutions other than courts, such as legislatures, administrative agencies, or private actors. Under this categorization, Liability Insurance clearly belonged on the Restatement side of our ledger and the Council approved the name change.”

Following that action by the Council, Associate Reporter Kyle Logue and I made a thorough review of Chapters 1 and 2 in light of the new status of the project. Under ALI policy, Restatements “aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might appropriately be stated by a court.” The new drafts of the Chapters appear in the April 2015 Discussion Draft, which is available on the ALI website and also on WestLaw. The Reporters’ Memorandum to that draft lists the most significant changes that we made to the two chapters in that process.

ALI members discussed the revised Chapters 1 and 2 at the May 2015 Annual Meeting. The ALI Council will consider those chapters at its Fall 2015 meeting and, if the draft is approved, the Council will submit the two chapters to the membership for consideration and a vote at the May 2016 Annual Meeting.

Kyle Logue and I plan to submit a complete draft of Chapter 3 to our Advisers and Members Consultative Group this coming October for their comments and suggestions at our November 2015 project meetings. If the project moves along as planned, we will submit a further revised draft of Chapter 3 to the Council for consideration at the January 2016 Winter meeting.
Depending on how much progress we have made, the Council may also approve that Chapter and submit it to the membership for consideration and a vote at the same May 2016 Annual Meeting. Either way, there will be a lot of liability insurance on the agenda at the 2016 Annual Meeting.

Our current plan is for Chapter 4 to follow a similar schedule in 2016-17, with the goal of having all four chapters finally approved as of May 2017.

Thank you again for your interest and for your efforts to keep insurance practitioners informed about the Project. I look forward to seeing you at the Members Consultative Group meeting in November.

Very truly yours,
Tom Baker


Vol. 4, Iss. 7
July 15, 2015

Three Sheets To The Win: Policyholder Rewarded For Being Drunk

The court in IDS Property Casualty Ins. Co. v. Schonewolf, No. 13-6039 (E.D. Pa. May 26, 2015) gave away the ending right at the get-go: “Although I am mindful that courts should not lightly allow a wrongdoer to avoid responsibility by ‘drinking himself into insurance coverage,’ at this juncture I cannot rule out the possibility that coverage exists.”

But to really give away the ending, the court’s decision, that someone can drink themselves into coverage, has a twist -- to get such reward they must be really, really plastered. Just somewhat drunk is not going to cut it.

At issue in this federal court case is coverage for Michael Schonewolf (and Dan Lagreca) who was sued for violently beating John Sweeney in a concert parking lot. The complaint alleged that Schonewolf, who was underage, was intoxicated. Schonewolf sought coverage under his parents’ homeowners policy issued by IDS Property Casualty. IDS provided a defense to Schonewolf and filed an action seeking a determination that it had no duty to defend or indemnify him.

At issue was whether the IDS policy’s “occurrence” requirement was satisfied. Further, the IDS policy contained an expected or intended exclusion.

The policy defined “occurrence” as: “[A]n accident which is unexpected or unintended from your standpoint resulting in bodily injury or property damage during the policy period. It also includes repeated or continuous exposure to substantially the same general harmful conditions.”

The court began its task by turning to the definition of “accident” under Pennsylvania law: “an unexpected and undesirable event occurring unintentionally, and that the key term in the definition of the ‘accident’ is ‘unexpected’ which implies a degree of fortuity. . . . An injury therefore is not ‘accidental’ if the injury was the natural and expected result of the insured’s actions.” The court further noted that, in determining whether IDS had a duty to defend Schonewolf, it must view the events from the perspective of Schonewolf.” From all this, the court concluded: “Given the definition of ‘accident’ in Pennsylvania, ‘an insured is not entitled to coverage for damages caused by his intentional assault on another person.’” A further principle of Pennsylvania law, noted by the court, is that an actor is presumed to intend the natural and expected results of his actions.

On one hand, the court observed, the injuries suffered by Sweeney “were certainly the natural and expected result of Schonewolf’s violent acts, or at least to be expected or intended by one who is not intoxicated.” On other hand, based on Pennsylvania law, “imbibed intoxicants must be considered in determining if the actor has the ability to formulate an intent.” The court explained: “An insured who is intoxicated may lack the ability to formulate the requisite intent to appropriately label his conduct as intentional. That rule is not without its limits. Intoxication would have to be so severe that a court could find that the assailant did not intend the natural and probable consequences of his actions.”

Following a detailed analysis of Pennsylvania law on this issue, the IDS court reached this conclusion:

“As a general rule, a court interpreting an insurance contract seeks to ascertain the intent of the parties as manifested by the terms used in the written insurance policy. It is unlikely the parties expected an alcohol-fueled assault would fall within the realm of homeowner’s insurance. Nonetheless, Mehlman [589 F.3d 105 (3d Cir. 2009)] makes clear that there are circumstances under Pennsylvania law where the intoxication of an insured can negate intent to a point where the insured’s actions qualify as an ‘accident,’ as the term is understood in Pennsylvania homeowner’s insurance contracts. As noted above, the complaint here pleads less than the ‘alcoholic blackouts’ in Stidham [618 A.2d 945 (Pa. Super. Ct. 1993)], but more than the mere fact of intoxication in Mehlman. Given that I must construe the allegations liberally and resolve doubts in favor of coverage, I conclude that the language stating that Schonewolf, as an underage drinker, had ‘consum[ed] alcoholic beverages ... knowing that it would cause significant impairment and lapse of judgment and control’ is enough to leave open the possibility that the impairment and lapse in judgment and control was so severe as to negate intent.”

The court applied the same analysis to conclude that the expected or intended exclusion also did not exclude a duty to defend.


Vol. 4, Iss. 7
July 15, 2015

The Most Important Coverage Case Of 2015
Jeff Waltz Checks In With An Analysis From The Bayou

In the last issue of Coverage Opinions I discussed the Louisiana Supreme Court’s recent decision in Kelly v. State Farm Fire & Casualty Co., No. 2014-CQ-1921 (May 5, 2015).

In general, the Louisiana high court held in Kelly that an insurer can be found liable for bad-faith failure-to-settle – even if the insurer never received a firm settlement offer. Insurers generally take comfort in having no risk of exposure for an excess verdict if a demand to settle within the insured’s limit of liability was never made. By taking this significant requirement away, did the Louisiana Supreme Court hand a playbook to policyholders and courts to change the bad faith landscape?

While Kelly v. State Farm is a Louisiana decision, I opined that it had the potential for implications farther and wider than the Pelican State. First, the decision was tied to Louisiana’s version of the National Association of Insurance Commissioner’s Unfair Claims Settlement Practices Act. And just about every state in the country has adopted some version of the NAIC’s Act. Second, it doesn’t seem a stretch that the Kelly court’s reasoning could be persuasive on other courts.

A coverage decision that changes a core principle of bad faith law, and with the potential for national implications, gets my vote as the most significant of the first half of 2015. And I suspect the entire year.

Such an important decision deserves further discussion. And there can be no one better way to accomplish that than to turn to a lawyer who is an expert in Louisiana coverage law and a member of a Mardi Gras krewe. To see what an experienced Louisiana coverage lawyer, who’s fought some alligators in his career, has to say about Kelly v. State Farm, check out this comprehensive analysis by Jeff Waltz, of The Waltz Law Group in New Orleans.




Vol. 4, Iss. 7
July 15, 2015

Top 10 Case of 2015:
Court Addresses Impact Of Punitive Damages On Bad Faith Failure To Settle

The Third Circuit’s decision in Wolfe v. Allstate Property & Casualty Company, No. 12-4450 (3d Cir. June 12, 2015) addresses a very interesting and important coverage issue and one where the existing law, nationally, is sparse. This confluence of factors leads me to conclude that the decision will find a place in my annual end of year Insurance-Palooza.

The decision in Wolfe addresses two important issues associated with a bad faith failure to settle claim. First, some background.

Karl Zierle rear-ended Jared Wolfe. Zierle’s blood alcohol level tested at 0.25%. Zierle had three prior DUIs. Wolfe required treatment at the emergency room. Zierle was insured by Allstate and his policy had a $50,000 limit. The policy expressly excluded coverage for punitive damages.

For ease (mine that is), I’ll provide the remaining background facts verbatim from the opinion:

“Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate valued Wolfe's claim at $1,200 to $1,400, and Allstate responded with a counteroffer of $1,200. Wolfe rejected this offer, and neither party moved from those numbers. Wolfe then filed suit against Zierle. . . . During discovery, Wolfe learned of the extent of Zierle’s intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.

Prior to trial, Wolfe reiterated the $25,000 demand and emphasized that Allstate’s $1,200 offer was too low. Allstate stated that it would not increase its $1,200 offer (despite having authority to offer $1,400) unless Wolfe reduced his $25,000 demand. No further efforts at settlement were made by either party. The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 compensatory damages award, but not the $50,000 punitive damages award. Following the trial, in return for Wolfe’s agreement not to enforce the punitive damages judgment against him personally, Zierle assigned his rights against Allstate to Wolfe.”

Wolfe, in Zierle’s clothing, sued Allstate in the Pennsylvania Court of Common Pleas, alleging, among other things, breach of contract and bad faith conduct under Pennsylvania’s bad faith statute.

So far this is nothing more than the general description of a typical bad faith failure to settle case. But here’s where it gets interesting. Under the breach of contract claim, Wolfe sought to recover the $50,000 in punitive damages awarded against Zierle. This gave rise to two issues before the Third Circuit Court of Appeals: (1) Could Wolfe introduce the punitive damages award from the underlying suit as evidence of his damages?; and (2) Did Allstate have a duty to factor in the potential for punitive damages when considering its obligation to settle within limits?

On the first question, the court held that Wolfe could not recover the punitive damages as part of his damages in a bad faith failure to settle case. The issue is not a pure form of the question whether punitive damages are insurable, but the answer was tied to that. The court noted “Pennsylvania’s longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law.” Thus, “[b]ecause Pennsylvania law prohibits insurers from providing coverage for punitive damages in order to ensure that tortfeasors are directly punished, we hold that Allstate cannot be responsible for punitive damages incurred in the underlying lawsuit. To hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy.”

The court also noted that California, Colorado and New York have similar prohibitions on the indemnification of punitive damages. “[T]hose states highest courts have similarly held that an insured cannot shift to the insurance company its responsibility for the punitive damages in a later case alleging a bad faith failure to settle by the insurer.”

In essence, the court is saying that if an insurer is not liable for punitive damages directly to its insured, then it is also not liable for them in an indirect manner.

While the court’s discussion of the second issue was very brief, it is, in my view, the more important of the two. Here’s the whole kit and kaboodle: “It follows from our reasoning that an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. To impose that duty would be tantamount to making the insurer responsible for those damages, which, as we have discussed, is against public policy. See Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1346 (9th Cir.1983) (affirming the conclusion by the district court that ‘[t]he proposition that an insurer must settle, at any figure demanded within the policy limits, an action in which punitive damages are sought is nothing short of absurd. The practical effect of such a rule would be to pass on to the insurer the burden of punitive damages in clear violation of California statutes and public policy’); see also Wardrip v. Hart, 28 F.Supp.2d 1213, 1215–16 (D.Kan.1998) (same).”

Punitive damages are alleged much more frequently than they are actually awarded. That being so, the fact that punitive damages – in a state where they are fundamentally uninsurable -- are not an appropriate form of damages, in a bad faith failure to settle claim, is not likely to have a lot of applicability. Certainly some, yes, but not as much as the second issue.

When considering whether an insurer is obligated to settle a case, based on the possibility of a verdict in excess of limits, it may be the potential for the punitive damages that has a lot to do with pushing the case into that category – especially one that is relatively small or has fixed damages that do not exceed the policy limit. By taking away insurers’ obligation to consider punitive damages, when assessing whether a verdict can potentially exceed policy limits, the Wolfe court has given insurers justification for taking cases to trial, and then avoiding liability for a verdict in excess of limits, if that’s how it turns out.


Vol. 4, Iss. 7
July 15, 2015

Court Rejects 10,000 Page Pollution Exclusion

When it comes to how insurers have fared in Indiana, in their attempts to enforce the pollution exclusion, they are the mouse inside the boa tank at the pet store. Ironically, it could be the exact opposite. All insurers have to do is draft the pollution exclusion using the simple instructions that the Indiana Supreme Court has provided. In general, in Indiana, for the pollution exclusion to apply, the hazardous material argued to be a “pollutant” must be specifically mentioned in the pollution exclusion. It’s really that simple.

That was one of the issues in St. Paul Fire & Marine Ins. Co. v. City of Kokomo, No. 13–1573 (S.D. Ind. June 25, 2015). The action involves coverage for City of Kokomo, for claims made against it by the Indiana Department of Environmental Management, for damages at a landfill. The City sought coverage from Travelers. There were lots of liability policies at issue containing various pollution exclusions. The one I’ll focus on here – “Indiana Required Endorsement” -- was from 2007 to 2011, which went like this (it’s lengthy, really lengthy, but that’s the point):

If any insuring agreement, endorsement, or other form in your policy contains an exclusion, limitation, or other coverage provision that applies to pollution, the following definition of pollutant:

• replaces the definition of pollutant, or the definition of pollutants, in that insuring agreement, endorsement, or other form if it contains a definition of that term....

* * *
Pollutant means any solid, liquid, gaseous, or thermal substance or material, including smoke, vapors, soot, fumes, acids, alkalis, chemicals, and waste, that:

• is identified as dangerous, hazardous, or toxic, or is otherwise regulated, in any federal or Indiana environmental, health protection, or safety law; or
• has an actual, alleged, or threatened irritating or contaminating effect on any person or property.
* * *
Federal or Indiana environmental, health protection, or safety law means any:
• law of the United States of America, which is also known as federal law; or
• Indiana state or local law;

that’s intended to:
• control pollution;
• protect or safeguard human health, or
• protect any part of the environment, whether indoor air, outdoor air, land, surface water, or underground water.

For example:

The following Federal laws:
• The Clean Air Act of 1970 (42 United States Code Section 7401).
• The Clean Water Act of 1977 (33 United States Code Section 1251).
• The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 United States Code Section 9601).
• The Emergency Planning and Community Right–To–Know Act of 1986 (42 United States Code Section 11001).
• The Federal Insecticide, Fungicide, and Rodenticide Act of 1972 (7 United States Code Section 136).
• The Occupational Safety and Health Act of 1970 (29 United States Code Section 651).
• The Pollution Prevention Act of 1990 (42 United States Code Section 13101).
• The Refuse Act of 1899 (33 United States Code Section 407) .
• The Resource Conservation and Recovery Act of 1976, which is sometimes also referred to as the Solid Waste Disposal Act, (42 United States Code Section 6901).
• The Safe Drinking Water Act of 1974 (42 United States Code Section 300f).
• The Toxic Substances Control Act of 1976 (15 United States Code Section 2601).
The Section of the United States Code referenced after the title of each of the laws listed above is where each such law begins .
Indiana state law: Any provision of Indiana Code Title 13 (Environment).
* * *
Federal or Indiana environmental, health protection, or safety law includes:

• any amendment to such law; and
• any list, regulation, or rule issued or promulgated under such law by a federal governmental authority or an Indiana state or local governmental authority.

Travelers argued that the pollution exclusion met the requisite specificity because it “incorporated multiple state and federal environmental laws, including CERCLA, and that substances classified as hazardous under CERCLA have already been discovered at the Site.” Travelers further explained that the exclusion “expressly bars coverage for damages caused by pollutants identified by CERCLA and that every substance the EPA has required the City to sample for the Site ‘is dangerous, hazardous or toxic under United States or Indiana health, safety, or environmental laws.’”

In response, the City argued that the pollution exclusion was unenforceable due to its “failure to identify substances with specificity.” The City claimed that the exclusion “‘raises ambiguity to an art form’ and that a policyholder of ordinary intelligence would not have a clear understanding of what substances are covered because it generally incorporates so many state and federal environmental laws.”

The pollution exclusion incorporates every federal and Indiana environmental law. I call it the 10,000 page pollution exclusion but I have no idea how many it really is (and maybe it’s even more). But it’s certainly a ton when you consider that it includes any list, regulation, or rule issued or promulgated under any federal and Indiana environmental law.

The Kokomo court was not persuaded by Travelers’s Hoosier maneuver:

“The Court concludes that the definition of ‘pollutant’ in the 2007–2011 Endorsement is not sufficiently specific such that the Court can grant summary judgment to Travelers regarding its duty to defend and indemnify the City. In so finding, the Court is cognizant that a policy is interpreted ‘from the perspective of an ordinary policyholder of average intelligence’ and that doubts about coverage are construed against the insurer and in favor of coverage. The 2007–2011 Endorsement does not specifically reference any of the substances that have already been found or are being tested for at the Site. Instead, it generally incorporates eleven federal laws; the environmental title of the Indiana Code; any amendments to any of those laws; and any list, regulation, or rule issued or promulgated by a federal governmental authority or an Indiana state or local governmental authority. This general incorporation of state and federal laws is insufficient to comply with Indiana’s stringent standard that an insurance policy “specify what falls within its pollution exclusion.”


Vol. 4, Iss. 7
July 15, 2015

A Really Curious Coverage Case

Regular readers of CO know that I constantly discuss how challenging “what is an accident” cases can be. The question whether an event qualifies as an “accident,” to trigger liability coverage, is the oldest and one of the most contentious in the book. It is also one of the most frequently litigated. But despite all this guidance, the answer can still be as difficult to predict as the weather. Whether injury or damage was caused by an “accident” is generally tied to issues involving fortuity. And the answer to such question is often in the eye of the beholder. For this reason, two sides do not always see eye-to-eye on whether an event qualifies as an “accident.” But even when that’s the case, adversaries they can probably at least understand where the other is coming from.

But I’m not sure that I understand one of the sides of the argument in Auto-Owners Inc. Co. v. Nyhof, No. 320256 (Mich. Ct. App. May 7, 2015). And even though I represent insurers, it’s the insurer’s that I’m struggling with.

The facts of Nyhof are unsettling but simple. William Anthony Jones was sentenced to jail for `first-degree home invasion and first-degree criminal sexual conduct against Chandra Nyhof. Nyhof filed suit against Lynn and Glenn Glaser, who were her landlords. Nyhof asserted counts against the Glasers for negligence, breach of the common-law covenant of quiet enjoyment and violation of a Michigan statute requiring a landlord to maintain the premises in a manner fit for use by the intended parties. Nyhof alleged that the Glasers breached their duties to her and such breach was the actual, proximate, and foreseeable cause of the rape by Jones.

The Glasers sought coverage under two policies issued by Auto-Owners, both of which were triggered by bodily injury caused by an “occurrence,” defined, in pertinent part, as an accident. Auto-Owners filed an action seeking a determination that it had no duty to defend or indemnify the Glasers against the Nyhof suit. The trial court granted summary judgment for Auto-Owners. The case went to the Michigan Court of Appeals, which affirmed the decision that the insurer had no duty to defend or indemnify.

Noting that the policies at issue did not define the term “accident” (which is typical), the court turned to Michigan case law, which defines it as “an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected. . . The appropriate focus of the term ‘accident’ must be on both the injury-causing act or event and its relation to the resulting injury.”

From here, the court concluded that the rape was not an accident: “Rape is an intentional criminal act. Jones was convicted of raping defendant, so it is clear that he intended to rape defendant and that the rape was not an accident. Because the rape was not an accident, defendant’s bodily injury was not caused by an ‘occurrence.’”

It would likely be difficult to find anyone who disagrees with the court’s conclusion that the rape by Jones was not an accident. However, the issue before the court was not whether Jones was entitled to insurance coverage. Rather, the issue was whether the Glasers were entitled to coverage on the basis of bodily injury caused by an accident. And the court held that they were not: “In this case, the Glasers’ alleged breaches of duty were not the cause of defendant’s bodily injury. Without the underlying rape, there would have been no bodily injury and, obviously, no basis for defendant’s civil suit. Further, in the underlying complaint, defendant never alleged that the Glasers caused defendant bodily injury. Instead, defendant only alleged that the intentional acts of Jones caused her bodily injury. Therefore, defendant’s bodily injury was caused by the rape.”

I’m having some trouble with this conclusion. Yes, true, without the underlying rape, there would have been no bodily injury and no basis for the underlying suit. However, the court’s conclusion, that the Glasers’ alleged breaches of duty were not the cause of the bodily injury, seems to ignore that the Glasers are being sued for breaches of duty to Nyhof that were alleged to be the actual, proximate and foreseeable cause of the rape by Jones.

If the Glasers are found liable, for having breached duties that allowed the rape by Jones – and that may be an issue fairly in dispute -- it means that, even if one step removed from the actual perpetrator, the Glasers, by their acts or omissions, caused bodily injury. However, the Michigan Court of Appeals concluded otherwise. By doing so, the court seems to have set up a situation where the Glasers can be found liable for having caused bodily injury -- but not be entitled to liability coverage because, well, they did not cause bodily injury.

Have I mentioned how challenging “accident” can be?


Vol. 4, Iss. 7
July 15, 2015

There’s Been No “Tender” – Does Insurer Still Need To Respond?

We’ve all seen this issue. You are handling a claim for a certain insured, and in the course of doing so, you obtain information that another involved person or entity is also an insured and may have rights under the policy. But here’s the rub – this other person or entity has never tendered a claim. Does an insurer have to address coverage for them? Or can it sit back and take a “hey, if they want coverage they’ll ask us” position?

This issue is at the heart of Lincoln General Ins. Co. v. Ryerson & Son, Inc., No. 14C8446 (N.D. Ill. June 18, 2015). The case itself is pretty complex and the opinion eye-glazing. At issue is coverage for a $27 million jury verdict involving personal injury sustained in a trucking accident. As the court put it: “[T]he various insurance companies are battling over who owes what.”

I don’t have the patience to untangle the case and there’s no real need to for purposes of making the points regarding the tender issue. In very broad strokes, one insurer argued that it had no actual notice of a potential coverage claim until ten years after the underlying lawsuit was filed. That being so, other insurers might be estopped from pursuing it now because their delay effectively robbed the insurer from controlling the defense. If, on the other hand, the insurer had actual notice when the underlying suit was filed, estoppel might apply against it for failing to take any action as to the insured.

I’m going to keep this brief and let the court do the talking. In general – putting aside the specifics of Ryerson -- the moral of the story is that an insurer that takes the “hey, if they want coverage they’ll ask us” position does so at its peril. Sitting back and waiting for a formal tender may estop an insurer from taking subsequent positions.

Here are some of the money paragraphs from the opinion:

“As to triggering the duty to defend, courts look to when the insurer knew (or should have known) that it was obligated to defend the insured. The easiest way for an insured to trigger the duty to defend is to tender the defense of the underlying action to the insurer. When this happens, there is no doubt as to when the insurer first had notice that it might be obligated to defend the insured.”

“But tendering the defense is not the only way for the duty to defend to be triggered; the duty is also triggered if the insurer has ‘actual notice.’ An insurer has actual notice only when two conditions are met: ‘the insurer must know ... that a cause of action has been filed against its insured and that the complaint falls within or potentially within the scope of the coverage of one of its policies.’ In most cases, knowledge of the underlying action, by itself, is not enough.”


Vol. 4, Iss. 7
July 15, 2015

Two Courts Hold That Adjuster Can Be Personally Liable For Wrongful Claims Handling Conduct

Needless to say, claims adjusters won’t be happy with the Texas federal court’s decision in Linron Properties v. Wausau Underwriters Insurance Co., No. 15-293 (N.D. Tex. June 16, 2015). The court held that an adjuster could be personally liable for her wrongful conduct in handling a claim.

Linron Properties sued Wausau Insurance and insurance adjuster Sara Springman for the improper handling of an insurance claim under a property policy. Linron sought coverage for the cost of repairs from a storm. Wausau hired Springman to serve as the adjuster. Linron asserted that Springman “conducted an outcome-oriented investigation and also hired experts she knew would under-scope Plaintiff's damages in order to allow Wausau to avoid payment on the claim.” Linron claimed that, as a result, it was wrongfully denied full coverage for the damages sustained to the property.

Linron filed suit against Wausau, as well as against Springman for violations of chapter 541 of the Texas Insurance Code, including for “failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim.” The court explained that, “[u]nder the Insurance Code, an individual who has been damaged by ‘unfair methods of competition or unfair or deceptive acts or practices in the business of insurance’ may bring a cause of action against the ‘person or persons engaging in such acts or practices.’ The Insurance Code defines a “person” as any “legal entity engaged in the business of insurance, including an ... adjuster.”

The Linron court noted that both the Texas Supreme Court and the Fifth Circuit have recognized that an insurance adjuster may be held individually liable for violating chapter 541 of the Insurance Code. The court also pointed out that, despite the abundance of case law supporting adjuster liability under § 541.060, some courts have recently begun to question the appropriateness of holding an adjuster individually liable for unfair settlement practices. These courts have gone in this direction because an adjuster “does not have settlement authority on behalf of [the insurance company]” and his or her “sole role is to assess the damage.”

Nonetheless, despite some courts getting away from holding an adjuster individually liable for unfair settlement practices, the Linron court was not prepared to join them. The court explained: “[W]hile the courts’ reasoning in these cases has some logical appeal, a closer examination of the precise language of § 541.060(a)(2)(a) and the role played by insurance adjusters in the claims handling process belies their conclusions.”

The Linron court analyzed the statutory language as follows:

“Section 541.060(a) (2)(A) prohibits those engaged in the business of insurance from ‘failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement.’ Webster’s defines the word ‘effectuate’ by reference to the definition for ‘effect,’ meaning ‘to cause to come into being’ or ‘to bring about.’ The fact that the statute uses the word ‘effectuate’ rather than a word that conveys finality (e.g., finalize), suggests that its prohibition extends to all persons who play a role in bringing about a prompt, fair, and equitable settlement of a claim.

As the persons primarily responsible for investigating and evaluating insurance claims, insurance adjusters unquestionably have the ability to affect or bring about the ‘prompt, fair, and equitable settlement’ of claims, because it is upon their investigation that the insurance company’s settlement of a claim is generally based. . . . As such, a delay in an adjuster’s investigation will undoubtedly cause a delay in the payment of the claim, and an insufficient investigation may well lead to a less than fair settlement of a claim.”

Following this interpretation of the statute, the Linron court turned to the specific matter at hand and held that Springman’s actions – retaining an engineer and contractor who were known for arriving at findings that favored insurance companies, refusing to identify damage to the structure that was covered under the Policy, and failing to respond to Linron’s inquiries regarding the status of the claim and payment -- were sufficient to support a claim against her, in her individual capacity, for violating § 541.060(a)(2)(A) of the Insurance Code.

[Update: Just as this edition of Coverage Opinions was going to press the Eastern District of Pennsylvania handed down Kennedy v. Allstate, No. 15-2221 (E.D. Pa. July 8, 2015) where the court held that insureds stated colorable claims for negligence and violation of the Pennsylvania Uniform Trade Practices and Consumer Protection Law. The insureds argued that adjusters affirmatively misrepresented and concealed material facts from them to delay the resolution of their claims.]


Vol. 4, Iss. 7
July 15, 2015

Court Tackles Statute Of Limitations For Bringing A DJ Action

Considering the amount of coverage litigation, it has always seemed curious that there isn’t more case law addressing when the statute of limitations begins to run for bringing a declaratory judgment action. This is especially so when you consider that the body of law addressing statute of limitations in general is gargantuan.

In any event, this was the issue before the Pennsylvania Superior Court in Selective Way Insurance Co. v. Hospitality Group Services, No. 1430 WDA 2013 (Pa. Super. Ct. July 7, 2015). The case has a lot of detail that I’ll skip over to get right to the main points.

At the outset, looking at Pennsylvania’s statute of limitations law in general, the court stated that a cause of action for a declaratory judgment action accrues “when an actual controversy exists between the parties.” This was sufficient for the court to reject a per se rule that the statute of limitations for a declaratory judgment begins to run at the time of the denial of coverage. It could be the date, but not necessarily.

Again, skipping a lot of analysis and getting to the black letter rule (which is what statute of limitations cases are about – at least initially), the court held as follows: “[T]he statute of limitations for a declaratory judgment action brought by an insurance company regarding its duty to defend and indemnify begins to run when a cause of action for a declaratory judgment accrues. See 42 Pa.C.S.A. §§ 5502(a), 7538(a). This requires a determination of when the insurance company had a sufficient factual basis to present the averments in its complaint for declaratory judgment that the insurance policy at issue does not provide coverage for the claims made in the third party’s action.”

If the statute of limitations begins to run when as insurance company had a sufficient factual basis to believe that no coverage is owed, then, as a practical matter, in many cases this will be the date when the insurance company is in receipt of the complaint. This is because, under Pennsylvania law (and many other states), the duty to defend is based on the four corners of the complaint. Thus, when the insurer has the complaint in hand it has what it needs to form a belief that no coverage is owed. This point was certainly acknowledged by the Hospitality Group Services court.

Vol. 4, Iss. 7
July 15, 2015

Federal Appeals Court Addresses Proof Of Lost Policies
Back in the heyday of asbestos and environmental coverage litigation it was not uncommon to see decisions addressing whether alleged lost policies were sufficiently proven to possibly owe coverage. These decisions often examined the burden of proof required: preponderance of the evidence or clear and convincing evidence.

Burden of proof wasn’t the issue in Cardigan Mountain School v. New Hampshire Ins. Co., No. 14-2182 (1st Cir. May 27, 2015). But the opinion sheds light on what can possibly serve as proof of the existence of an alleged policy from way back in 1967: “The school has alleged specific facts concerning an audit report that tend to show that it had an insurance policy from New Hampshire Insurance Company as of 1971. And the school has then linked that allegation to the recollections of specific individuals who were involved in the relevant events and are of the view both that the school had a general liability policy in the preceding years, including the crucial 1967–1968 school year, and that there had been no change in carrier during that period of time.”

Supreme Court Allows Excess Insurer’s Bad Faith Claim Against Primary
The Supreme Court of Hawaii held that “an excess liability insurer can bring a cause of action, under the doctrine of equitable subrogation, against a primary liability insurer who in bad faith fails to settle a claim within the limits of the primary liability policy, when the primary insurer has paid its policy limit toward settlement.” St. Paul Fire & Marine Ins. Co. v. Liberty Mutual Insurance Co., No. SCCQ–14–0000727 (Haw. June 29, 2015).

[At issue: Pleasant Travel was sued for damages resulting from an accidental death. The primary insurer, Liberty Mutual, appointed counsel to represent Pleasant Travel. The excess insurer, St. Paul, alleged that Liberty Mutual rejected multiple pretrial settlement offers within the $1 million limit. Trial resulted in a verdict of $4.1 million. After the verdict, the action was settled for a confidential amount in excess of the Liberty Mutual policy limit. St. Paul claims that it paid the amount in excess.]