A few weeks ago on the DRI Insurance Coverage Message Board there was a thread – wisely started by Patrick Omilian of Goldberg Segalla -- where participants provided one piece of advice – a Pearl of Wisdom – to a new coverage lawyer. It made for very interesting reading. Not to mention that you don’t need to be a new coverage lawyer to benefit from others’ experiences.

This gave me an idea -- the idea to steal Patrick’s idea (Thank you, Patrick). I reached out to DRI folks, and others, to get their Pearls of Wisdom for a new (or old) coverage lawyer. There is a lot of great advice here for all who do coverage work. Thank you to all who participated.

In the last issue of Coverage Opinions I discussed Westchester Surplus Lines Inc. Co. v. Keller Transport, Inc., a Montana Supreme Court decision in which the court held that the undefined term “general aggregate,” in an umbrella policy, was ambiguous. Therefore, the general aggregate applied to each type of coverage provided in the primary policy. Hence, it applied twice, since the claim involved both CGL and auto policies, resulting in an insurer being saddled with an additional $4 million coverage obligation.

In the wow, what a coincidence category, it turns out that Craig Stanovich, of Austin & Stanovich Risk Managers LLC (a risk management and insurance advisory consulting firm), published an article in January, with IRMI, in which he discussed – in detail, and at length – the issue of aggregate limits under umbrella policies. Craig’s article looks at several possible ways in which umbrella policies address the aggregate limit issue.

As I’d expect from my years of reading Craig’s work, his article is superb, not to mention that aggregate limits is just one of several umbrella policy issues that he tackles. The article provides a comprehensive, and high-level, discussion of many aspects of umbrella policies.

Craig’s overarching thesis is this – Because umbrella policy proposals often come at the last minute, it is an “eleventh-hour transaction [that] often results in the buyer paying little or no attention to the actual coverage being purchased.” As Craig sees it, “[t]here is a certain irony to giving short shrift to a liability policy that is only important when damages from a liability claim may be in the range of tens of millions of dollars. In other words, it is not advisable to review your umbrella policy or policies for the first time only after being faced with a complaint that alleges liability for damages in the millions of dollars.”

I highly recommend that you check out Craig Stanovich’s excellent piece. You can find it at irmi.com.

It is not unusual for a lawyer, who has represented insurers, to make a jump to the other side and now represent policyholders against insurers. But when this happens it is also not unusual to wonder if conflict issues could hamstring the lawyer in his or her new position. This was the issue in In re National Lloyds Insurance Company, No. 13-15-521 (Tex. Ct. App. Feb. 10, 2016).

The facts are not complicated. Lauren Chapman was an associate at the law firm of Andrews Kurth from September 2008 to February 2015, when she left the firm and joined the Mostyn Law Firm. Since 2012, Andrews Kurth has been involved in the defense of first party bad faith suits filed against National Lloyds Insurance Company. Right after joining the Mostyn firm, Ms. Chapman began appearing on behalf of plaintiffs in hailstorm cases filed against National Lloyds.

National Lloyds was none too pleased with this and filed a motion to disqualify Ms. Chapman, and the Mostyn firm, based on Chapman’s prior employment with Andrews Kurth.

The trial court denied National Lloyds’s motion to disqualify. A Petition for Writ of Mandamus was filed with the appeals court. Without getting bogged down in the specifics of Texas Disciplinary Rule of Professional Conduct 1.09, addressing former client conflicts, the appeals court concluded that disqualification was not warranted.

As National Lloyd’s saw it, the disqualification was mandated by certain irrebuttable presumptions in the law, which gave rise to the following step-by-step arguments: “(1) Andrews Kurth represented National Lloyds; (2) there is an irrebuttable presumption that Andrews Kurth obtained confidential information during the representation; (3) Andrews Kurth’s knowledge of National Lloyds’s confidential information was imputed to Chapman as an associate at that firm, thereby disqualifying her from representing [hail storm plaintiffs]; and (4) Chapman’s imputed knowledge of National Lloyds’ confidential information was imputed to the Mostyn Law Firm when Chapman joined that firm, thereby disqualifying it from representing [hail storm plaintiffs].”

However, the Texas appeals court did not adopt such a rigid approach. Instead, looking to a Fifth Circuit case for guidance, the court stated that the appropriate rule was as follows: “[A] departing lawyer must have actually acquired confidential information about the former firm’s client or personally represented the former client to remain under imputed disqualification.”

On that basis, the Texas appeals court examined the specific circumstances surrounding Ms. Chapman’s work at Andrews Kurth. The key to the court’s decision was that the parties stipulated that “Chapman ‘did not work on any matter’ regarding National Lloyds and that she ‘did not personally represent National Lloyds Insurance Company, and did not personally receive any confidential information of National Lloyds Insurance Company.’”

Having had no involvement with National Lloyd’s, while working at Andrews Kurth, the court held that Ms. Chapman did not have a conflict in representing the hail storm plaintiffs when she joined the Mostyn firm.

The bulk of the New York Court of Appeals’s decision in Selective Insurance Co. v. County of Rensselaer (N.Y. Feb. 11, 2016) addresses the number of deductibles that the County of Rensselaer was obligated to pay, following a settlement of a class action involving unlawful strip searches in its jail. Various policies had deductibles of $10,000 or $15,000 for all covered damages “sustained by one person or organization as the result of any one ‘occurrence.’” The settlement involved a payment of $1,000 to each of approximately 800 plaintiffs, a $5,000 payment to the named plaintiff and $442,000 in attorney’s fees for the class.

The “number of deductibles” issue was resolved by the court without breaking a sweat. It was dictated by the policy language: “The policy defines ‘occurrence’ as ‘an event, including continuous or repeated exposure to substantially the same general harmful conditions, which results in ... ‘personal injury’ ... by any person or organization and arising out of the insured’s law enforcement duties’ (emphasis added). Thus, the language of the insurance policies makes clear that it covers personal injuries to an individual person as a result of a harmful condition. The definition does not permit the grouping of multiple individuals who were harmed by the same condition, unless that group is an organization, which is clearly not the case here. The harm each experienced was as an individual, and each of the strip searches constitutes a single occurrence.”

Thus, none of the payments ($1,000 each), to any of the plaintiffs, exceeded the deductible.

The more interesting issue is the court’s treatment of the attorney’s fees vis-à-vis the deductible. Selective, seizing on the court’s decision that the injuries constituted multiple occurrences, argued that the attorney’s fees should be allocated ratably among the deductibles. By doing so, about $550 would be allocated to each of the deductibles. Translation, still none of the deductibles are met for a single plaintiff.

The court disagreed: “Equally reasonable is the County’s assertion that given that there was one defense team for all class members, the fee should be attributed only to the named plaintiff, Bruce. It is undisputed that the policies are silent as to how attorney’s fees would be allocated in class actions and therefore ambiguous on this point. Where the language of the policy at issue is ambiguous, and both parties’ interpretation of the language is reasonable, the policy language should be interpreted in favor of the insured.”

So, while the County struck out concerning the $800,000 or so settlement, it was covered for almost all of the $442,000 of the attorney's fees.

It’s an interesting decision, although I’m not sure how often this scenario – involving several aligned stars -- will repeat itself.

Discussion of insurance coverage, concerning the legal use of marijuana – medical and recreational – has been growing. With the number of legal states getting higher, it is a budding area of coverage law.

A few insurers have begun to issue property and casualty policies specifically designed to insure various aspects of the marijuana supply chain. In The Green Earth Wellness Center v. Atain Specialty Ins. Co., No. 13-3452 (D. Colo. Feb. 17, 2016), the court addressed coverage for damage to marijuana plants under an old fashioned commercial property policy. It is a very interesting decision.

The facts are simple and described by the court like this: “Green Earth operates a retail medical marijuana business and an adjacent growing facility in Colorado Springs, Colorado. In April 2012, Green Earth sought commercial insurance for its business from Atain. Atain issued Green Earth a Commercial Property and General Liability Insurance Policy that became effective June 29, 2012. A few days earlier, on June 23, 2012, a wildfire started in Waldo Canyon outside of Colorado Springs. Over the course of several days, the fire advanced towards the city. The fire did not directly affect Green Earth’s business, but Green Earth contends that smoke and ash from the fire overwhelmed it’s ventilation system, eventually intruding into the growing operation and causing damage to Green Earth’s marijuana plants. In November 2012, Green Earth made a claim under the Policy for the smoke and ash damage.”

Green Earth sought coverage for damage to its growing operation -- $200,000 worth of “‘mother plants and ‘clones.’ For the uninitiated, the court described these as follows: “mother plants” are plants of each individual strain of marijuana that Green Earth offers. Mother plants are not cultivated to produce useable marijuana on their own; rather, they are maintained by the grower solely for the purpose of producing a constant and reliable supply of genetically-identical ‘clones.’ A clone is a portion of the mother plant that is cut off and planted in a growing medium until it produces its own root, becoming a viable marijuana plant in its own right. The clones then grow to maturity.”

The court addressed several issues. I’ll address three interesting ones here:

The insurer argued that the policy’s exclusion for “growing crops” applied. Green Earth challenged this on the basis that “crops,” “by definition, must grow in outdoor soil, and that plants raised indoors in containers – such as its mother plants and clones –– do not fit that definition.” The court was not convinced, seeing “nothing in the plain meaning of the word ‘crop’ that would seem to differentiate between ‘crops’ growing naturally in the solid earth and ‘crops’ of plants growing in pots or otherwise in artificial conditions such as an indoor greenhouse.”

It also didn’t help Green Earth’s cause that the quote issued to Green Earth stated: “Coverage does not extent to growing or standing plants” and that Colorado law permits the consideration of extrinsic evidence for the purpose of ascertaining whether an ambiguity exists in the Policy. However, despite this seemingly easy solution, the court still spilled a lot of ink explaining why the plants were “crops.”

The insurer also argued that the “contraband” exclusion applied since the possession of marijuana for distribution purposes constitutes a federal crime. However, the court didn’t see it this way: “Attain offers no evidence that the application of existing federal public policy statements would be expected to result in criminal enforcement against Green Earth for possession or distribution of medical marijuana, nor does Atain assert that Green Earth’s operations were somehow in violation of Colorado law. In short, the Policy’s ‘Contraband’ exclusion is rendered ambiguous by the difference between the federal government’s de jure and de facto public policies regarding state-regulated medical marijuana.”

It also didn’t help the insurer’s cause that it issued the policy to Green Earth knowing that it was operating a medical marijuana business and knowing – or should have known – “that federal law nominally prohibited such a business.”

Lastly, the court rejected the insurer’s argument that public policy precluded it from providing coverage. The court was guided by the lack of any clear and consistent federal public policy concerning marijuana and on the basis that the insurer issued the policy “of its own will, knowingly and intelligently” and, thus, it was “obligated to comply with its terms or pay damages for having breached it.”

Thus, following this lengthy opinion, a need existed for a trial concerning coverage for approximately $40,000 for damage to harvested marijuana buds and flowers damaged in the Waldo Canyon fire.

It is black letter, in just about all states, that an insurer has a duty to defend the entire complaint filed against its insured, so long as just one claim (of many) is potentially covered. For this reason, the issue of how to allocate an insured’s defense costs, between potentially covered, and not covered, claims, has little reason to arise. This is not to say that it doesn’t (see California) – but, for the most part, it has little reason to. [A close cousin of the issue is whether an insurer that it defending its insured is obligated to pay for the insured’s legal fees associated with its pursuit of a counterclaim.]

But now consider an insurer that is defending an insured, and the insured’s counsel is also defending other defendants, that are not insureds. While there is a rule that an insurer has a duty to defend all claims, so long as it has a duty to defend one of them, there is no rule that an insurer has a duty to defend all defendants, so long as it has a duty to defend one of them. In this later situation, an insurer would like to be relieved of its duty to pay defense costs incurred on account of the non-insured defendants.

This was the issue before the federal court in High Point Design, LLC v. LM Insurance Corporation, No. 14-7878 (S.D.N.Y. Feb. 3, 2016). The underlying litigation, that gave rise to the defense costs issue, involved infringement of a slipper patent (really, that’s what it says, a slipper patent). It is not necessary to unravel the specifics of the underlying litigation to make the points here. Consider this – a court determined that Liberty Mutual had a duty, under liability policies, to defend its insured, High Point Design, in the patent litigation. Two law firms defended High Point Design, as well as other defendants – called the “Retail Defendants.”

At issue before the Gotham federal court was the amount of defense costs that Liberty owed to its insured, High Point, considering that the law firms also represented the Retail Defendants, which were not Liberty insureds.

The parties agreed on one point, that “any ‘additional expenses’ which were incurred in the Underlying Action solely in defense of the Retail Defendants fall outside of the insurance coverage High Point purchased from Liberty and are not recoverable.” However, they did not agree on another: “[W]hether defense expenses in the Underlying Action that redounded to the benefit of both High Point and the three Retail Defendants are entirely recoverable (High Point’s position) or should be divided pro rata between the four benefiting parties (Liberty’s position).”

The court set out to resolve the issue, noting that “[c]ase law on the proper apportionment of defense costs among insured and non-insured defendants is scattered and ‘rather sparse.’”

Since the parties agreed that Liberty had no obligation to pay any costs that were incurred solely in defense of the Retail Defendants, the real issue was how to determine which defense costs were incurred for what.

The court placed this burden on Liberty, stating that “the law is clear that the party seeking to allocate expenses bears the burden of proving what amount of allocation is appropriate once the insured has made a prima facie showing that certain amounts were spent in its defense.”

As for how to achieve such allocation, the court explained that “the amount that should be allocated to the non-covered parties, and thus not recouped from the insurer, are any ‘additional expenses’ which would not have occurred but for the inclusion of the non-covered defendants. Which expenses were in fact “additional” is …’a substantial fact issue.’”

While the court gave Liberty the right to allocate defense costs, between covered and non-covered defendants, trying to determine which client benefits from certain defense efforts may not be easy to do. Litigation is not always a neat and tidy process where you can determine that certain defense efforts satisfied a specific purpose. Thus, there are likely to be challenges for an insurer attempting to establish that certain defense costs would not have been incurred “but for” the inclusion of the non-covered defendants. Not to say it can’t be done. But it is easy to see why Liberty advocated for a simple pro-rata approach.

In many states, late notice law can be characterized as a tale of two cites: One involving “occurrence” policies, which require an insurer to prove that it was prejudiced, by an insured’s failure to provide notice of a claim as soon as practicable (or something along those lines), to be able to disclaim coverage. This can be a high burden for the insurer to meet. The other cite involves “claims made” policies, which do not require an insurer to prove that it was prejudiced, by an insured’s failure to satisfy the reporting requirement – such as, a claim must be made and reported during the policy period -- to be able to disclaim coverage. This is an easy burden. Just look at the calendar.

There may be no better example of this dichotomy of rules than New Jersey. There, an insurer seeking to disclaim coverage, under an “occurrence” policy, based on an insured’s failure to provide notice of a claim as soon as practicable, has a high burden: proof of a likelihood of appreciable prejudice from such untimely notice. Conversely, an insurer in the Garden State, seeking to disclaim coverage, under a “claims made” policy, based on the insured’s failure to satisfy the reporting requirement, has it easy: simply prove that the reporting requirement was not satisfied and there is no additional need for the insurer to prove that it was prejudiced by such failure.

These two general rules have been staked out nationally for a long time. But what happens when an insurance policy’s notice obligation contains both requirements – a claim must be reported to the insurer as soon as practicable (“occurrence” policy requirement) and within the policy period (“claims made” policy requirement)?

This was the issue before the New Jersey Supreme Court in Templo Fuente De Vida Corp. v. National Union Fire Insurance Company (N.J. Feb. 11, 2016). An insured provided notice of a suit to its insurer six months after it had been served. Even if that were sufficient to satisfy the requirement, that the claim be made and reported during the policy period, it was conceded that such notice of the claim to the insurer was not “as soon as practicable.” But, as far as the insured was concerned, that should not have been fatal to coverage because, under New Jersey law, the insurer needs to prove that it was prejudiced by the insured’s failure to provide notice “as soon as practicable.”

The crux of the case is that, under New Jersey law, it is in fact clear that, for an insurer to disclaim coverage, under an “occurrence” policy, based on the insured’s failure to provide notice “as soon as practicable,” there must be proof of a likelihood of appreciable prejudice to the insurer. Thus, the issue was whether this rule applied when the “as soon as practicable” notice requirement was not satisfied -- but it was within the context of a “claims made” policy, where the “claims made and reporting” timing requirements have been satisfied.

The court applied the no prejudice rule, i.e., treating the policy as “claims made,” despite containing the “as soon as practicable” notice language that is akin to “occurrence” polices. The basis for the court’s decision was its characterization of the sophistication of insured parties. The insured was a 14 or so employee company, that engaged in complex financial transactions concerning financing, and the policy at issue was D&O.

To this point, the court explained: “We have historically approached ‘claims made’ and ‘occurrence’ policies differently due in large part to the differences between the policyholders themselves. For example, in Cooper, where the ‘occurrence’ policy at issue was a contract of adhesion entered into by parties with unequal bargaining powers, we required the insurer to show prejudice before denying coverage to prevent an unfair result. ... Indeed, in the vast majority of ‘occurrence’ policies, the policy holders are ‘unsophisticated consumer[s] unaware of all of the policy’s requirements.’ As a result, ‘courts have taken special consideration of the fact that the policy holders were consumers unlikely to be conversant with all the fine print of their policies’ and ‘found that strict adherence to the terms of the notice provisions would result too harshly against [such insureds.]’” (citations omitted).

In contrast, the court observed, “[t]hose equitable concerns based on the nature of the parties do not control in our analysis of the ‘as soon as practicable’ notice requirement of the Directors and Officers ‘claims made’ policy here, where the policyholders ‘are particularly knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers[.]’ In this arena, insurers are ‘dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing [.]”

Importantly, for policyholders, the court made the point that, “[i]n this instance we need not make a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice requirement in ‘claims made’ policies generally. We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities. Its notice conditions contain mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer ‘as soon as practicable,’ pursuant to section 7, thereby preserving the insurer’s rights, under section 8, to associate and influence how the litigation proceeds from its inception.” Thus, the court seems to have left the door open to policyholders to attempt to distinguish Templo Fuente De Vida Corp. v. National Union.