This “Open Mic” Column appeared in the December 7, 2020 Issue of Coverage Opinions.

https://www.coverageopinions.info/Vol9Issue8/RandySpencer.html

I first read this opinion on a Thursday – and what a throwback it was!
 
In Westfield Ins. Co. v. Sistersville Tank Works, Inc., No. 22-848 (W.Va. Nov. 8, 2023), the Supreme Court of Appeals of West Virginia, answering a certified question from the Fourth Circuit, addressed which trigger of coverage approach applied to latent bodily injury claims. 
 
In doing so, the court provided a tutorial on the drafting history of the commercial general liability policy's treatment of trigger of coverage -- as well as discussed the voluminous body of case law on the subject. 
 
For those who have been doing coverage work for a long time, Sistersville Tank is a read down memory lane.  You will be transported back to that time when courts first addressed trigger of coverage for latent injuries.  It was always a big moment when a new decision came down – even from the most obscure trial court -- and they were shared, via fax, amongst insurers and coverage lawyers.  And then they were reported in Mealeys!  What an interesting and unique experience to watch a body of law develop before your eyes and be a part of it.  As I was reading Sistersville Tank, I thought I was back at Christie, Pabarue, Mortensen & Young a million years ago.
 
At issue before the West Virginia high court was coverage for Sistersville Tank Works for claims brought by individuals diagnosed with cancer between 2014 and 2016 -- allegedly caused by exposure to Sistersville's tanks located at a chemical plant where they worked between 1960 and 2006.
 
Westfield disclaimed coverage under its policies issued to Sistersville from 1985 to 2010.  In the insurer's view – and in the absence of controlling law -- a manifestation trigger applied: only the liability policy on the risk, when the disease is diagnosed, satisfies the requirement of "bodily injury" during the policy period.  In other words, only the policy on the risk when the disease becomes manifest is obligated to provide coverage.  Thus, as Westfield saw it, none of its policies would owe coverage, as the cancers were diagnosed between 2014 and 2016 – after the last Westfield policy was off the risk. 
 
Following its long history lesson, and a discussion of the same arguments and considerations that courts before it confronted, the Mountain State top court, "[a]fter careful review of the language used in the occurrence-based CGL policy," concluded that a continuous-trigger theory applied:
 
"As we discuss below, under the continuous-trigger theory, coverage is triggered when an individual is initially exposed to what the policy calls a 'harmful condition' such as a chemical or analogous toxic, injurious substance. Coverage is also triggered when the individual suffers from 'exposure in residence,' that is, the development period after exposure when the injury is latent and hidden. Finally, coverage is triggered when the sickness, disease, or other bodily injury manifests. Under the continuous-trigger theory, damages that are caused, continuous, or progressively deteriorating throughout successive policy periods are covered by all the occurrence-based policies in effect during those periods."

Choice of law has long-been my least favorite coverage issue.  While it can be critically important – sometimes even the issue that will decide the entire case – my displeasure comes from its fact-driven aspect. 

Unless the choice of law rule says to apply the law of the state where the policy was issued (and only a handful of states still adhere to this older approach), choice of law is generally resolved by rules under the Restatement (Second) Conflict of Laws.  This requires an assessment of numerous geographic factors concerning the issuance of the policy, where the injury or damage for which coverage is being sought took place, the insured’s operations, state’s interests and perhaps other things.  These factors are all stirred together – with some being more important than others – and, voila, an answer should appear.

However, given how fact-intensive the analysis can be – by definition, more than one state has some relationship to the coverage dispute – such analysis (even a thorough one) can sometimes lead to an unsatisfactory answer.  In other words, while you’ve done a lot of work to reach a conclusion, you may end up with less certainty of the answer than you’d prefer.  In general, choice of law can be one of the harder issues for a coverage professional to handicap.     

But, despite all this, following a Restatement multi-factor analysis, the choice of law determination often ends up being the state of the insured’s address on the policy’s declarations page.  Since choice of law is for the interpretation of an insurance policy, which is a contract, the state where the policy was issued – usually the insured’s address on the dec page – often has outsized importance compared to the other factors being considered.  While the location where the claim arose, or the underlying tort took place, is important for choice of law for the underlying action, a coverage dispute is a contact action.  So, the state where the contract/policy was issued is usually given the most weight.

Earlier this month, the Supreme Court of Ohio considered choice of law for a bad faith claim.  While insurance policies were at the heart of the dispute – without it, there was no dispute – the claim here was for bad faith, which is a tort.  Did that make a difference?  That was the issue in Scott Fetzer Co. v. Am. Home Assur. Co., No. 2022-0595 (Ohio Nov. 1, 2023).

In 1968, Scott Fetzer Co. acquired a manufacturing facility in Michigan when it merged with the facility’s prior owner, Kingston Products Corp.  Scott Fetzer continued to operate the facility from 1968 to 1984.

Starting in 1986, Scott Fetzer was called upon by the EPA to remediate environmental contamination at the Michigan site.  Scott Fetzer sought coverage from various insurers that issued policies to Kingston or itself.  This included a predecessor of Travelers that issued policies to Kingston from 1964 to 1968.

The insurers disclaimed coverage and litigation in Ohio ensued, with Scott Fetzer seeking a declaratory judgment that coverage was owed as well as damages for bad faith.

Scott Fetzer sought documents from Travelers “relating to its claims-handling procedures or guidelines for making coverage determinations as well as internal documents and communications relating to its handling of Scott Fetzer’s claim.  Travelers claimed that the information was covered by attorney-client privilege and was work product.”

Enter choice of law…

Scott Fetzer argued that, under Ohio law – Scott Fetzer has its headquarters in Ohio -- the attorney-client privilege does not preclude discovery of documents revealing an insurer’s bad faith.

But, as Travelers saw it, what’s Ohio got to do with it?  Travelers maintained that, under Ohio’s choice-of-law rules, the court was required to apply either Michigan law (where the Kingston manufacturing facility was located) or Indiana law (Kingston was an Indiana company that had contracted for the policies in Indiana).  Doing so, Travelers argued, would preclude the requested discovery as Michigan law does not recognize a cause of action for bad faith and Indiana law does not allow discovery of materials covered by attorney-client privilege.

Travelers was taking a traditional insurance coverage choice of law approach to the situation, arguing that, under the Restatement, choice of law, for purposes of a liability policy, is the principal location of the insured risk.  And that wasn’t Ohio when addressing coverage for a Michigan site under polices issued in Indiana. 

Scott Fetzer saw it differently.  Since bad faith is a tort, what do the Restatement’s choice of law rules for contracts got to do with it? 

But while bad faith may be a tort, Travelers argued, in the court’s words, that the bad faith claim is “effectively inseparable from an insurance contract because the contract creates the claim.”  Travelers added that the contract choice of law rules should apply because, unlike a typical tort, bad faith can only be brough by one contracting party against another.     

But the Ohio top court sided with Scott Fetzer and held that choice of law for a bad faith claim – a tort -- is governed by Restatement section 145, which provides, in general, that “(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.”  In applying the principles of § 6, consider such things as the place where the injury occurred and the place where the conduct causing the injury occurred, and a couple of others.”

If choice of law for a tort is the state that has the most significant relationship to the occurrence and the parties, then, for bad faith, it would be Ohio, as Travelers was handling a claim brought by a company located in Ohio.     
  
The court explained its decision as follows:

“So when one party to an insurance contract brings a bad-faith claim against another, Section 145 of the Restatement is the natural fit for the dispute because it focuses on factors other than the ‘principal location of the insured risk,’ Restatement, Section 193, Comment c, at 612. Here, while the parties might have justified expectations about alleged breaches of the insurance contracts, Scott Fetzer’s bad-faith claim is that Travelers acted without a conscious regard for the legal consequences of its conduct. Given this allegation, it is difficult to find any justified expectations that Travelers might have that are undermined by a complaint alleging bad faith sounding in tort. This is especially so given that Travelers has refused to participate in discovery.  As a result, instead of focusing on factors that seek to protect justified expectations, like the ‘principal location of the insured risk,’ we conclude that the factors identified in Section 145 are the appropriate ones to consider when determining the law applicable to bad-faith claims.”

The Utah Court of Appeals decision in Farm Bureau Mut. Ins. v. Weston, No. 20180699 (Utah App. Ct. Nov. 9, 2023) -- involving a case with a very long procedural history and a car accident from 20 years ago -- is exceptionally long and complicated.  I’m going to focus on the parts that matter here. 

The court addressed the consequences for an insurer’s breach of the duty to defend.  That alone makes the decision a significant one.  And then, while it did not affect the decision, the opinion includes discussion – nuanced in fact – of the drafting history of the American Law Institute’s Restatement of the Law of Liability Insurance.

On February 15, 2004, Jared Weston was involved in a motor vehicle accident and the other driver was killed.  Weston sought coverage under a policy issued by Farmers.  Farmers maintained that the policy had been cancelled. 

The driver killed in the accident was insured by Farm Bureau.  Farm Bureau paid $111,000 to the heirs of its insured for property damage, PIP and UM.  Farm Bureau then filed a subrogation action against Weston.   Farmers, maintaining that the policy had been cancelled, did not defend Weston against the Farm Bureau action.  Farm Bureau obtained a judgment against Weston.

Somewhere in all the complexity a coverage action was filed on the issue whether Farmers had breached its duty to defend Weston.  Following pages and pages of eye glazing discussion, the court concluded that the Farmers policy had in fact been cancelled.  However, the court still concluded that Farmers breached its duty to defend Weston -- as Farmers should have defended him until there had been a judicial determination that the policy had been cancelled.

Now the court turned to the damages to be awarded for Farmers’ breach of the duty to defend.  Remember, while Farmers may have breached the duty to defend, the policy was found to have been cancelled.  So even if, in hindsight, a defense should have been provided, no coverage for damages would be available under the policy.  Right?

No.  The court adopted the “waiver rule” (which it referred to as the “Illinois Rule”): An insurer that breaches the duty to defend is precluded from raising coverage defenses and otherwise challenging the judgment entered against the party that it failed to defend.  The court addressed other potential consequences/damages that could also be assessed against the breaching insurer.

There are going to be consequences for an insurer that breaches the duty to defend.  They vary in severity.  But the waiver rule is the king of the hill, top of the heap.  This draconian sanction is surely why so few states have adopted it.  And, in fact, both the majority and dissenting opinions invited the Utah Supreme Court to address whether that is really where the state’s law should go.   

All of this will sound very familiar to those who followed and were involved in the drafting process of the American Law Institute’s Restatement of the Law of Liability Insurance.  An early draft (before the project was even a Restatement, but, rather, a Restatement-lite Principles Project) called for the adoption of the waiver rule.  Of all the issues that caused serious debate between insurers and policyholders during the Restatement drafting, the possible adoption of the “waiver rule” was the loudest -- and testiest.  Not surprising given its seriousness.    

Indeed, it was the feared adoption of the waiver rule that brought the ALI Restatement into the open for insurers as a product that could cause serious damage to the scope of coverage.  It all started in 2013 with the New York Court of Appeals decision in K2 Investment Group v. American Guarantee that adopted the waiver rule -- and then the high court’s agreement to rehear the case after it was argued that precedent going the other way had been overlooked   (This is real inside baseball and memory lane stuff for those involved in the Restatement drafting process.).

Prior to the attention that K2 brought to the waiver rule, the ALI Restatement was a project that some insurers were aware of, but it was definitely not a cause for concern nor top of mind for the industry.  The ALI Restatement was generally seen as something going on in the academic space.  But now, seeing the waiver rule writing on the wall, insurers coalesced around the Restatement, went to battle and succeeded in getting the waiver rule eliminated from the final Restatement (not to mention other draft provisions that were not in its interests).

[The actual impact on insurers to date of the ALI Restatement has ben benign, on its worst day.  But that’s a whole separate discussion.  I did a webinar on the subject a while back if anyone is interested.]    

Anyway, back to the long and winding road of Weston.  A dissenting judge, following a lengthy review of the waiver rule on a national basis, concluded that it is a minority view and not the law in Utah. The judge’s discussion included the following summary of the ALI drafting history on the issue:

“The propriety of adopting the Illinois Rule (over the majority rule) is one that turns on, among other things, one’s sense of policy and related factors. Commentators have provided cogent arguments on both sides of the question. Compare Richmond, supra note 42, at 614, and Weiss, supra note 42, at 149, with Stanley C. Nardoni, Estoppel for Insurers Who Breach Their Duty
to Defend: Answering the Critics, 50 J. Marshall L. Rev. 53 (2016), and Stempel, supra note 42, at 614-15. Even the authors of the Restatement of Liability Insurance have gone back and forth on the question. In 2014, the drafters decided to align the Restatement with the Illinois Rule, see Restatement of Liab. Ins. 21 (Am. L. Inst., Tentative Draft No. 2, 2014), taking the position that an insurer that breaches the duty to defend loses ‘the right to contest coverage for the claim.’ See
id. 19(1) (Am. L. Inst., Discussion Draft, 2015). In a subsequent draft, however, the drafters sought a middle ground and suggested an estoppel rule that would apply only to an insurer who breaches ‘the duty to defend without a reasonable basis for its conduct.’ See id. 19(2) (Am. L. Inst., Tentative Draft No. 1, 2016). But in 2019, the drafters rejected the Illinois Rule altogether and adopted the majority rule.”
    

It is pretty unusual for me to discuss a property case in Coverage Opinions.  I know the demographics of the readership.  While it includes folks who handle property claims, it’s just not what the vast majority of CO readers are as interested in.

But the decision in Naperville Hotel Partners LLC v. Liberty Mutual Fire Insurance Co., No. 3-22-0440 (Ill. Ct. App. Nov. 1, 2023) caught my attention as particularly interesting and worth addressing here.

At issue was coverage for a hotel for a boatload of rain events between 2016 and 2020 that allegedly caused millions of dollars in damages.  In 2019, the hotel filed claims with Liberty Mutual and Fireman’s Fund.  The Liberty claim involves the issue that led me to discuss the case here.  So I’ll ignore the Fireman’s Fund part of the case.

The Liberty policy was on the risk back in 2017.  The policy included provisions that the insured must “[g]ive us immediate written notice of the loss.”  Another provision required that any legal action based on the coverage had to be brought “within two (2) years after the date on which the physical damage occurred, extended by the number of days between the date you submitted the statement of loss to us and the date we deny the claim in whole or in part.”

Liberty responded to the claim with a reservation of rights letter requesting additional information.  The insurer also cited several exclusions as well as the provision that the insured must give immediate written notice of the loss.

However, the letter did not cite the provision that any legal action based on coverage must be brought within two years after the physical damage occurred.  Liberty ultimately denied coverage, including on the basis that the hotel failed to comply with the two-year suit limitation provision.
  
Coverage litigation ensued and the hotel argued that Liberty waived, and “should be estopped from asserting, its two-year time-limitation provision because (1) it did not include the provision in its June 2019 reservation of rights letter, and (2) its actions during the pendency of the claim indicated its intent to waive the provision.”

It is not unusual to see coverage letters, for property claims, include the language of the policy’s suit limitation provision.  It often appears at the conclusion of the letter.  But what happens if it’s not?  This is the issue that caused me to include this property coverage case here.

The court concluded that Liberty, despite not citing the two-year suit limitation provision in the letter to the insured, did not waive it.

For one thing, the court noted that the hotel did not direct the “court to any statute or regulation that requires an insurance company to include a limitations provision in a reservation of rights” nor was the court “aware of any such statute or regulation that applies in this case.”  
  
As for the cases cited by the hotel, to support its waiver position, the court observed that those involved reservation of rights letters in duty to defend situations.  That, the court concluded, was a different animal: [S]uch cases are ultimately concerned with empowering an insured to ‘intelligently choose between retaining her own counsel, or accepting defense counsel provided by the insurer’.  This is not a case in which the duty to defend is at issue and the plaintiffs have not provided any persuasive argument that cases like Lay and Nwidor should be extended beyond the duty-to-defend context.”

I’ve never seen this issue addressed before.  Those are always cases that I like to include in CO.

Elizabeth Rocha was allegedly sexually assaulted at a party at the home of Jason and Andrea Rusco.  The Ruscos were insured under a homeowner’s policy issued by American Economy.  Counsel for Ms. Rocha sent a letter to American Economy stating that the Ruscos were liable for the injuries sustained by Ms. Rocha and demanded payment of policy benefits.

American Economy filed an action against the Ruscos seeking a declaration that, for a variety of reasons, no coverage was owed under its policy.  The Ruscos filed a motion to dismiss, arguing that there was no legal controversy between the parties.

The court in American Economy Ins. Co. v. Rocha, No. 23-1367 (D. Colo. Oct. 11, 2023) granted the Ruscos’ motion, agreeing that “without any underlying lawsuit, this declaratory judgment action does not present an actual controversy; instead, it involves uncertain or contingent future events that may not occur as anticipated, or indeed may not occur at all.  The mere possibility that proceedings might be commenced against an insured regarding an act of the insured’s as to which the insurer might contest coverage, is not sufficient to create a controversy within the meaning of either the Declaratory Judgment Act or Article III of the Constitution.” (citations and internal quotes omitted).

But besides basing its decision on the Declaratory Judgment Act and Article III of the Constitution, the court also found guidance in Colorado’s duty to defend law: “Colorado law provides that an insurer’s duty to defend arises solely from the complaint in the underlying action.  Thus, to determine whether a duty to defend exists, the Court would need to examine the four corners of a not-yet-filed underlying complaint.  The lack of an underlying complaint in this case—and specific knowledge of the possible claims alleged in relation to the accident—is fatal to [the Court’s] ability to render a decision in this action seeking anticipatory declaratory relief on the issue.” (citations and internal quotes omitted).   

I can’t help but think that allowing declaratory judgment actions, based solely on underlying demand letters, and not suits, would not benefit insurers.  As the court in Rocha noted, the demand letter identified “only potential theories of liability, rather than claims of fixed and final shape.”

Consider the various rules that most states have that benefit insureds in duty to defend cases – the duty to defend is broad, there need only be a potential for coverage, if there are doubts the insurer should defend.  So, if a demand letter is brief or vague and the claims are not in fixed and final shape -- as is often the case; and was here – it would seem that the pro-policyholder standards, for determining a duty to defend, would inure to their benefit. 

I’ve had this issue a lot.  And so have many of you. 

In Southern Owners Ins. Co. v. Midnight Tires, Inc., No. 21-1904 (M.D. Fla. Sept. 19, 2023), the court addressed coverage, under a garage liability policy issued to Midnight Tires, for bodily injury caused by a motor vehicle.  The policy excluded coverage for liability arising out of the use of an auto owned by Midnight Tires or any of its officers.  It was undisputed that the automobile in the accident was owned by two officers of Midnight Tires.  However, the amended complaint made no mention of the car’s ownership.

You can see where this is going.  The argument was made that, under the “eight corners” rule, a defense was owed as the amended complaint did not state that the automobile in the accident was owned by two officers of Midnight Tires.  In other words, while the automobile was in fact owned by two officers of Midnight Tires, that reality could not be considered by the insurer, to deny a defense, because it was extrinsic to the complaint. 

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

It's common sense -- the court added: “Because this undisputed evidence clearly excludes the underlying claims from coverage under the Policy, the Court agrees with Plaintiff that the operative underlying complaint cannot be fairly read to contain claims that may be covered by the Policy. Thus, this is just the scenario where the exception to the eight corners rule is appropriate, for the fact that ‘[a]t some point in legal pleadings, common sense should prevail, which is in essence the basis for the limited exception to the four corners rule.’” (citation omitted).

Court Addresses Trigger Of Coverage For Malicious Prosecution
When it comes to trigger of coverage for malicious prosecution (usually following the exoneration of someone wrongfully convicted), typically only the liability policy on the risk at the time that the wrongful charges were brought is obligated to provide coverage.  Key to the courts adoption of this majority rule is that the policy provides coverage for a personal injury offense (e.g., malicious prosecution) occurring during the policy period. 

Courts usually reject the argument that a continuous trigger should apply, thereby disallowing potential coverage under all policies on the risk from the time that the charges were brought until the exoneree is freed from custody.  In other words, all policies on the risk, while a person was wrongfully incarcerated, are not obligated to provide coverage.      

And that’s what the Kentucky appeals court said in City of Newport v. Westport Ins. Co., No. 2022-CA0384 (Kt. Ct. App. Oct. 6, 2023).  The court held that policies issued by Westport -- providing coverage for a personal injury offense occurring during the policy period -- were subject to the majority rule and not obligated to provide coverage as they were not on the risk at the time that the charges were initially brought. 

In reaching its decision, the court departed from the Sixth Circuit’s 2020 decision in St. Paul v. City of Newport – involving the same underlying claim – that permitted application of a continuous trigger to malicious prosecution. But there, the policies [law enforcement policies] were distinguishable, as they provided potential coverage for “injury or damage that . . . happens while this agreement is in effect.”