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Coverage Opinions
Effective Date: January 8, 2014
Vol. 3, Iss. 1
 
   
 
 

6th Annual “Coverage For Dummies”
Seeking Coverage For The Frailty And Imperfection Of The Human Brain

A review of the best cases, from the year just-concluded, that demonstrate attempts to secure insurance coverage for moronic behavior.

Leading Coverage Lawyers:
The Most Significant Insurance Coverage Decisions Of 2013

I had my say about the most significant insurance coverage decisions of 2013. Here is what some of the nation’s leading coverage lawyers think were the most significant ones of the year.
Roberta D. Anderson -- K&L Gates, LLP
John Ellison, Tim Law, Jay Levin and Doug Widin -- Reed Smith, LLP
Laura Foggan -- Wiley Rein LLP
Mike Marick -- Meckler Bulger Tilson Marick & Pearson, LLP
Barry Ostrager and Andy Frankel -- Simpson Thacher & Bartlett LLP
Bill Passannante -- Anderson Kill, PC
Carl Salisbury -- Kilpatrick Townsend & Stockton LLP
Ron Schiller, Dan Layden and Bo Ebby -- Hangley Aronchick Segal Pudlin & Schiller, PC
Tom Segalla and Patrick Omilian -- Goldberg Segalla LLP

Happy New Year From Coverage Opinions

Randy Spencer’s Open Mic
Declarations: The Coverage Opinions Interview With Alex Barnett--The Former Anderson Kill Coverage Lawyer Turned Professional Stand-up Comic

Insurance Personalized License Plate Contest Results

New Jersey Legislature Introduces Bill To Address Construction Defect Coverage
Add the Garden State to the list of states that have turned to the legislature to address judicial decisions that have limited the scope of construction defect coverage

Bionic Woman Wins California Motor Vehicle Issue
But Lindsay Wagner Does Not Respond To Coverage Opinions’s Request For Comment

The Less Talked-About Aspect Of The Pollution Exclusion
A court’s determination to apply the pollution exclusion broadly, to all hazardous substances, may not be the end of the story for a policyholder’s pursuit of coverage.

Loss Of Tax Credits Are Not Covered Under A CGL Policy

The $170 Million Stroke Of The Pen
Even if you are not involved with first-party property claims, this case is worth reading.

Washington Court of Appeals: Significant Excess Exhaustion Case
Broker Warning To Be Heeded

Excess insurers need not drop down after a less-than-limits settlement of the underlying policy, even if the insured pays the shortfall

 
 


 

Vol. 3, Iss. 1
January 8, 2014

 

 


6th Annual “Coverage For Dummies”
Seeking Coverage For The Frailty And Imperfection Of The Human Brain

Liability insurance is, by definition, a product that provides financial protection for when things don’t turn out as planned. Most of the time when this occurs it’s simply a case of bad luck or because, well, stuff just happens. Or the outcome is one that nobody could have seen coming.

But there are other times when liability claims don’t arise just because stuff happens. Instead, they are the result of people’s actions that were so ill-conceived or Tom foolhardy that a liability claim was as predictable as a General Electric dividend. When you read liability coverage cases you are bound to come across some of these. These are the cases where all you can do is shake your head in disbelief and ask yourself – Wow, did he REALLY do that? Eventually the incredulous behavior leads to a lawsuit, which leads to an insurance claim, which leads to a coverage dispute, which leads to a reported decision, which leads to the final stage of this insurance circle of life -- an appearance in “Coverage For Dummies.”

I am pleased to present my 6th Annual “Coverage For Dummies” -- a review of the best cases, from the year just-concluded, that demonstrate attempts to secure insurance coverage for the frailty and imperfection of the human brain. This year’s installment follows. Cases in no particular order.

Remy v. Travelers Home & Marine Ins. Co. (N.D. Ill. June 11, 2013): Mom was out shopping and sisters were arguing. So far nothing out of the ordinary. Then sixteen year old Francesca retaliated against her thirteen year old sister, Gabriella, by pushing a lit piece of paper into a vent connecting their bedrooms. Get this--the house caught fire and was extensively damaged. Francesca then posted pictures of the damaged house on Facebook and got 37 Likes. [I made that part up.] The court addressed the applicability of the intentional loss exclusion under a homeowners policy and could not yet determine if it applied.

Mercury Casualty Co. v. Noll (Cal. Ct. App. Sept. 26, 2013): Two college students were at a bar. One was very drunk and the other drank enough to cause his judgment to be impaired. They were both waiting to use the men’s room and disagreed over whose turn it was to enter. You can see where this is going. One of the men entered (maybe there was some touching in the process) and began using the urinal. The other followed him and demanded an apology for cutting in line. When no apology was forthcoming the spurned man began hitting the other [no word if the other guy was still using the urinal] causing really serious injuries. At least they were fighting over something important. No coverage owed under liability section of homeowner’s policy because no “accident.”

Generali v. Ransdell (S.D. Fla. Sept. 16, 2013): A lessee of a condominium unit lit a candle and placed it inside a wooden cabinet before going to bed. The cabinet ignited, triggering a fire suppression system, causing water damage to another unit. Coverage for the damaged unit was provided under a property policy, leading to the property insurer’s subrogation claim (case involved procedural issues).

Amica Mutual Ins. Co. v. Cody (Conn. Super. Ct. June 28, 2013): A fourteen year old boy played a prank on his friend by hiding his shoes. Eventually he told his friend where the shoes were located. Apparently that was not enough. The friend went home and retrieved a metal baseball bat, retuned and smashed the other’s face, causing, as you can imagine, serious injuries. That is really messed up. At issue was coverage under a homeowner’s policy (case involved procedural issues).

Trustgard Ins. Co. v. Johnson (E.D. Pa. June 12, 2013): A few friends (in their 20s probably), following some beers, decided to explore the grounds of a camp meeting association. They entered an unlit cottage. One of them set an American flag on fire and waved it around in an effort to make an interesting image for his friend to capture on his camera. Incredibly, this isn’t what gave rise to the claim. That was saved for the leaf fires they started. They left the grounds with a leaf fire still burning because it looked safe to leave. The next day one of them learned of a fire at the camp ground and turned himself in to authorities. Criminal charges were brought followed by a civil suit. No coverage was owed under liability section of homeowner’s policy on account of the criminal act exclusion.

Sciolla v. West Bend Mut. Ins. Co. (E.D. Pa. Dec. 18, 2013): Teachers sustained injuries after being thrown off their donkeys while playing “Donkey Ball” in a middle school (playing basketball while riding a donkey). Coverage was owed to the donkey ball organizer because an exclusion for bodily injury to any person, while practicing for or participating in any sports or athletic contest or exhibition that the insured sponsors, was ambiguous.

Nationwide Mutual Fire Ins. Co. v. McDermott (E.D. Mich. July 15, 2013): A marijuana growing operation in the basement of a house tuned into one that manufactured a marijuana by-product called honey oil, a sticky THC-rich substance that is then heated and intoxicating fumes inhaled. The process involved the use of butane. Following the emptying of 24 cans of butane, the marijuana grower lit a welding torch to test the honey oil. Doing so, in a basement full of butane vapor, caused a fire that consumed the house. No coverage was owed under a homeowner’s policy because the loss was not an “accident.”

Nationwide Prop. & Cas. v. O’Neill (M.D. Ga. Nov. 8, 2013): Coverage cases involving fights by people under the influence of alcohol are routine. What is not routine is when the participants are a father-in-law and daughter-in-law that just spent a night on the town. [What is up with that?] They got into an altercation in the front seat of the father-in-law’s pick-up truck upon leaving a bar. The daughter-in-law alleged that her father-in-law placed her in a headlock, hit her on the head, choked her and shoved her out of his pick-up truck. No coverage was owed under the father-in-law’s homeowner’s policy on account of the intentional act exclusion and criminal act exclusion.

Estate of Dobry v. Wilson Mutual Ins. Co. (Wis. Ct. App. Dec. 10, 2013): Firing a .45 caliber handgun at your friends, even if you think there is no ammunition, is just not a good idea. Sadly, a nineteen year old, hosting an underage drinking party while his parents were out of town, did so and killed his friend. The shooter then told authorities that his friend was bleeding because he cut his ear while running in the woods. The court held that, even if the accident requirement in the initial grant of coverage were satisfied, the criminal act exclusion barred coverage.

Metropolitan Prop. & Cas. Ins. Co. v. Cowie (Iowa Ct. App. April 24, 2013): An individual provided his neighbor with his tractor to assist with landscaping. The tractor became stuck in the mud. The neighbor borrowing the tractor attached a chain between his pick-up truck and the front end scoop of the tractor and attempted to pull the tractor at about a 90-degree angle. The tractor tipped over, fell on top of the tractor owner, gasoline ignited and burned more than 50% of his body. [The 90% angle part is probably where this idea went south.] The court held that, for purposes of determining the applicability of the vehicle exclusion in a homeowner’s policy, it was an issue of fact whether the injuries were caused solely by negligent use of the vehicle.

 

 
 
 


Vol. 3, Iss. 1
January 8, 2014


Leading Coverage Lawyers:
The Most Significant Insurance Coverage Decisions Of 2013


For the past 13 years, at around this time, I have sat down and inked a list of the ten insurance coverage decisions of the year just-completed that I believed were the most significant. There was nothing complex or scientific about the process nor authoritative about the results. Neither was the process a collaborative effort. I simply devised a selection criteria and set out to choose the ten cases that I, personally, believed most satisfied it. In general, the cases I selected were those most likely to be examined by courts nationally and influence their decisions. The 2013 list and commentary appeared in the December 18th issue of Coverage Opinions.

Of course, a list of this sort is highly subjective. When putting together my annual list of the year’s most significant coverage decisions I always wondered what other coverage lawyers would have on theirs. Surely there would be some overlap. But the lists would hardly be a mirror image. So this year – now with the benefit of a platform to do so; which I didn’t have pre-Coverage Opinions -- I set out to solicit others’ opinions on the year’s most significant coverage decisions.

I reached out to some of the country’s leading coverage lawyers – both policyholder and insurer side – and asked them to tell me what they believe was the most significant coverage decision of 2013. I was thrilled that so many agreed to participate – especially when they were constrained to a limited number of words to explain their response. This was a difficult constraint -- but necessary given the number of views that I sought.

Set out below – in their own words -- are the most significant coverage decisions of 2013 according to some of the country’s leading coverage lawyers.

Roberta Anderson -- K&L Gates, LLP
Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA (Pa. Super. Ct. Dec. 2, 2013)

The appellate court in Indalex reversed course in the wake of a number of Pennsylvania decisions that took a narrow (if not nil) view concerning the scope of CGL coverage for construction, faulty workmanship and product defect claims. Distinguishing highest court precedent in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co. (Pa. 2006), and Kvaerner’s intermediate appellate progeny in Millers Capital Ins. Co. v. Gambone Bros. Dev. Co. (Pa. Super. Ct. 2007) and Erie Ins. Exch. v. Abbott Furnace Co. (Pa. Super. Ct. 2009), which contain some exceedingly broad verbiage suggesting that such claims simply cannot comprise an “occurrence” due to the lack of any fortuitous “accident,” the appellate court in Indalex reversed the trial court and upheld coverage for tort claims alleging that the insured’s window and door products “were defectively designed or manufactured and resulted in water leakage that caused physical damage, such as mold and cracked walls, in addition to personal injury.”

As the Indalex court succinctly (and correctly) summed it up: “Simply stated…we cannot conclude that the claims are outside the scope of the coverage…Because the underlying complaints alleged defective products resulting in property loss, to property other than [the insured’s] products, and personal injury, we conclude there was an ‘occurrence’[.]” The Indalex court also refused to defeat coverage based on Pennsylvania’s “gist of the action” doctrine, which operates to preclude plaintiffs from recasting ordinary breach of contract claims into tort claims, reasoning that “application of the doctrine in this context would be inconsistent with the duty to defend, which is broader than the duty to indemnify and applicable when a claim is potentially covered.”

Indalex clearly changes the Pennsylvania landscape on the “occurrence” issue, paving the way to coverage for claims alleging unintentional damage or injury resulting from an insured’s faulty work or defective products. A clear victory and holiday treat for Pennsylvania insureds, Indalex appears to be part of a broader, emerging national trend favoring insureds in this area, following this year’s earlier decisions from the highest courts in Connecticut, Georgia, West Virginia and North Dakota.

John Ellison, Tim Law, Jay Levin and Doug Widin -- Reed Smith, LLP
Standard Mutual Insurance Company v. Lay (Ill. May 23, 2013);
K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co. (N.Y. Sept. 3, 2013) (Reargument Granted).

In Lay, the Illinois Supreme Court found that the “manifest purpose” of the Telephone Consumer Protection Act “is remedial and not penal” and that “the TCPA-prescribed damages of $500 per violation are not punitive damages.” The TCPA allows “an action to recover for actual monetary loss . . . or to receive $500 in damages for each such violation, whichever is greater.” The Court’s reasoning can be applied to many other statutes that contain similar damages provisions, such as the Fair Credit Reporting Act, and to policy provisions excluding “fines” or “penalties.” Class actions under such statutes are common, so the Court’s decision should have substantial reach.

In K2, the New York Court of Appeals held that when a liability insurance company breaches its duty to defend, the insurance company may not later rely on policy exclusions to escape its duty to indemnify. Rather, the insurance company “may litigate only the validity of its disclaimer.” Often, an insurance company will demand a trial to parse damages, established by settlement or judgment, between those that are covered and uncovered. The New York Court of Appeals has provided an elegantly simple solution to a common problem. If some damages were potentially covered, such that the insurance company should have defended the case, all damages will be treated as covered.

Laura Foggan -- Wiley Rein LLP
K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co. (N.Y. Sept. 3, 2013) (Reargument Granted)

K2 Investment Group, and the grant of rehearing, are critical because refusing to allow an insurer to raise defenses to its indemnity obligation departs from established New York insurance law and creates a new remedy for the breach of the duty to defend. Estopping the insurer from raising any coverage defenses is contrary to the overwhelming weight of authority in New York and nationwide. Rather, damages for breach of the duty to defend should be limited to the cost of the defense, or other damages that the insured proves arise directly from the breach.

In an instance of a wrongful refusal to defend, adequate remedies exist to protect the policyholder. Indeed, New York law provides that the insurer cannot challenge facts determined, or a judgment or settlement reached, in an underlying suit it wrongfully refused to defend, absent proof of fraud or collusion. However, an insurer should have the opportunity to test the underlying judgment for fraud or collusion, and to litigate its coverage defenses as to indemnity. This case is very important because imposing "automatic" indemnity on the insurer is overbroad and unfairly punitive. In addition, it may have constitutional due process implications.

Mike Marick -- Meckler Bulger Tilson Marick & Pearson, LLP
American Law Institute’s “Principles of Liability Insurance”

A proposed amicus brief in support of the policyholder’s position before the New York Court of Appeals in K2 Investments Group, LLC v. American Guarantee (reargument granted), reveals the potential significance, to both insurers and policyholders, of the American Law Institute’s still unfinished “Principles of the Law of Liability Insurance.” Although the ALI’s “Principles” project is still years away from completion, a draft proposal, that would estop insurers who have wrongly refused to defend from contesting their indemnity duties, has been cited to the New York Court of Appeals by an amicus seeking to sustain the Court’s original ruling in K2.

Unlike ALI’s Restatements, which describe what the law is, “Principles” are aspirational--they purport to describe what the law should be. But from whose perspective? The authors of the draft are the “reporters”—Tom Baker and Kyle Logue, law professors. In their introductory remarks to Tentative Draft No. 1 of the “Principles”, the reporters explained: “In a number of instances ... we propose adjustments to existing rules that we believe are superior. That, of course, is the point of a Principles project.” (Emphasis added.)

One specific “adjustment” suggested by the reporters would be to impose a forfeiture of coverage defenses (i.e., automatic indemnity) upon an insurer which breaches its duty to defend, under an “estoppel” theory. See ALI Tentative Draft No. 1, § 21. The remedy of estoppel, as opposed to more traditional contract law remedies, has been and remains the law in very few states. Draft Section 21 has not been voted upon by the ALI membership, even tentatively. Yet, the proposed amicus brief invokes draft Section 21 as “mak(ing) clear” that estoppel purportedly is “the trend of the law.”

There has been and will be considerable discussion and debate over Section 21, many other sections of the “Principles,” as well as the impact, if any, the final work will or should have on insurance law. By citing even a preliminary draft as authority, however, it is now clear that policyholders’ counsel intend to invoke this work to advance their litigation interests.

Lorie Masters -- Jenner & Block LLP
AstraZeneca Insurance Co., Ltd. v. XL Insurance (Bermuda) Ltd., 1 [2013] EWHC 349 (Comm.),
appeal argued (Nov. 2013)

An early 2013 decision by the English Commercial Court demonstrated how the typically overlooked governing law and dispute-resolution provisions can affect a policyholder’s ability to recover insurance proceeds under a Bermuda Form policy. AstraZeneca construed a Bermuda Form policy that had been amended from the typical Bermuda Form wording by: (i) adopting English, rather than New York, law; and (ii) waiving the typical arbitration requirement. As a result of that waiver, AstraZeneca is one of the few reported decisions to analyze key Bermuda Form policy terms. For that reason alone, the decision deserves recognition as one of the most significant coverage decisions in the past year.

AstraZeneca found that, when an insurance policy includes no duty to defend, the policyholder must establish actual legal liability to an underlying claimant before coverage applies; arguable or alleged legal liability does not suffice. While a settlement or judgment may establish a loss, according to Justice Julian Flaux’s decision, it does not necessarily establish legal liability where coverage applies “by reason of liability imposed by law.” Instead, the court concluded that insurers may “relitigate” in a coverage dispute the basis of the policyholder’s liability in the underlying claims. This distinction arose because of key differences between English and New York law; as such, neither the New York law holdings in Luria and Uniroyal, nor the New York public policy favoring settlements, applied. As AstraZeneca did not prove the basis for its liability in the underlying Seroquel cases, no coverage applied—even for defense costs.

This decision shows how the governing law and arbitration provisions in a Bermuda Form (or other) policy can determine the outcome of a coverage dispute. To avoid this result, policyholders should address these provisions in policy renewals and reject English law as the governing law. Policyholders also can ensure that an alleged liability or loss in a settlement or judgment will suffice as a basis for indemnity under its liability insurance policies.

Barry Ostrager and Andy Frankel -- Simpson Thacher & Bartlett LLP
Plant Insulation Co. v. Fireman’s Fund Ins. Co. (Cal. Super. Ct. April 8, 2013)

Plant Insulation Co. v. Fireman’s Fund is a particularly important decision for a number of reasons. It is the first ruling to our knowledge to adopt the Wallace & Gale approach to completed operations in California. The ruling is substantially more thorough than either the District Court or Fourth Circuit’s ruling in Wallace & Gale, and addresses not just plain language but also arguments about drafting history, extrinsic evidence and the purposes of the products/completed operations hazards. It also addresses exceptions to the completed operations hazard that insureds from time to time rely on. In addition, while W&G was focused on the completed operations hazard, Judge Munter’s ruling applies a similar analysis to the products hazard. Specifically, if an asbestos claimant was injured by virtue of the manufacture, sale or handling of an asbestos-containing product, the claim is a products claim if the product in question was relinquished by the time of the insurer’s policy period--even the exposure arose from an insured’s ongoing operations. This is an important aspect of the court’s ruling as there are few decisions discussing this issue in the context of the products hazard language, particularly with respect to asbestos bodily injury claims, and adds an important new argument in non-products disputes.

In addition, the court adopted our argument on burden of proof, finding that the insured has the burden of showing that a claim falls outside of the products and completed operations hazard where, as here, the aggregate limits had been exhausted. The court also rejected arguments that some of the other insurers made on medical issues and what constitutes “bodily injury” in the asbestos context. The case has gained a lot of attention, particularly in the non-products arena and we think it will be influential nationwide.

Bill Passannante -- Anderson Kill, PC
FDIC D&O Liability Insurance “Recommendations”

In a somewhat unique statement from the FDIC in “Financial Institution Letter in FIL-47-2013” (October 10, 2013) (available http://www.fdic.gov/news/news/financial/2013/fil13047.pdf) the FDIC states “In recent years, the FDIC has noted an increase in exclusionary terms or provisions contained in depository institutions’ D&O insurance policies that may adversely affect the recruitment and retention of well-qualified individuals. When such exclusions apply, directors and officers may not have insurance coverage and may be personally liable for damages arising out of civil suits relating to their decisions and actions. In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language.”

Further the FIL notes that: “The FDIC urges each board member and executive officer to fully understand the answers to the following questions regarding D&O insurance coverage, especially when considering renewals and amendments of existing policies:

What protections do I want from my institution’s D&O policy?
What exclusions exist in my institution’s D&O policy?
Are any of the exclusions new, and if so, how do they change my coverage?
What is my potential personal financial exposure arising from each policy exclusion?

D&O liability insurance is an important risk mitigation tool for financial institutions, and it is vital for directors and senior executives to fully understand the protections and limitations provided by such policies.”

The FDIC may be motivated by its not uncommon position as a receiver of a failed bank. Still the public commentary on D&O liability insurance issues is notable. The obvious question is whether the FDIC will continue down this road of addressing D&O insurance policies.

The Construction Defect Tetralogy
Carl Salisbury -- Kilpatrick Townsend & Stockton LLP

The quote of the year is from a case that was decided by the West Virginia Supreme Court of Appeals. Crediting Felix Frankfurter, it said, “Wisdom too often never comes, and so one ought not to reject it merely because it comes late.” The decision is one of four that, together, constitute the most significant development in coverage law in 2013.

The trend began April 5, 2013. The North Dakota Supreme Court in K&L Homes, Inc. v. American Family Mut. Ins. Co. overruled an earlier precedent and held that a subcontractor’s faulty workmanship can constitute a covered “occurrence” under a CGL policy. On June 11th, the Connecticut Supreme Court joined the same chorus, singing from the same hymnal, in Capstone Building Corp. v. American Motorists Ins. Co.

Next, the West Virginia Supreme Court of Appeals decided Cherrington v. Erie Ins. Prop. and Cas. Co. What made Cherrington noteworthy is that it was expressly swayed by the tide of opinion from its sister courts that faulty workmanship can be accidental. Finally, there was Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., where the Georgia Supreme Court also overruled precedent to align itself with the majority.

It is hard to remember the last time four state high courts reached the same conclusion on the same contentious question in four months -- doubly so when three of them overruled prior decisions to get there. The willingness of so many state Supreme Courts to revisit what was, for them, a settled issue, and to reverse themselves on the strength of the majority decisions of their sister courts, suggests that the remaining outliers – those courts that cling to the minority view that faulty workmanship can never be accidental – may yet see their own way clear to correcting prior erroneous precedent on this issue.

Ron Schiller, Dan Layden and Bo Ebby -- Hangley Aronchick Segal Pudlin & Schiller, PC
Executive Risk Indemnity Inc. v. Cigna Corp., (Pa. Super. Ct. July 18, 2013);
United HealthCare v. Columbia Casualty Co. (D.C. Minn. Apr. 25, 2013)

In 2013 there were two significant decisions addressing the all-important issue of allocation of covered and uncovered claims.

Executive Risk Indemnity involved a claim by Cigna Corp., for a $170 million settlement with health care providers, for allegedly conspiring to underpay them billions of dollars for benefits owed over a decade. Cigna sought coverage from numerous insurers including Executive Risk, the only one not to settle.

In a 2009 decision the Pennsylvania Superior Court held that, while a “Contract and Benefits Due” exclusion of the Executive Risk policy applied, the settlement with the providers encompassed both breach of contract and RICO claims, the later which were possibly within the scope of the policy’s coverage. The case was remanded to the trial court for further proceedings on the issue of allocation. A trial was held in November 2010 and the court held for Executive Risk and against Cigna on all claims. Cigna appealed again, arguing that the trial Court incorrectly placed the burden of establishing coverage via allocation on Cigna, the insured.

On July 18, 2013, in the first appellate decision addressing the specific point, the Pennsylvania Superior Court held that the insured (i.e., Cigna) bears the burden of allocating a settlement between covered and non-covered claims when, as here, it controls all aspects of the case, including settlement.

In United HealthCare, United was sued by the American Medical Association for a variety of claims alleging that United provided inadequate reimbursements for covered out-of-network medical services. In addition to the AMA Litigation, United faced two other actions for its alleged misconduct concerning inadequate reimbursements. In 2009, United announced its settlement of the litigations for $400 million collectively and submitted the settlement for coverage by its insurers, including Executive Risk.

The Minnesota District Court held that aspects of United’s settlement were per se not covered and that United – not its insurers – having controlled and executed the settlement, without the consent of its insurers, bore the burden of proving the allocation of the settlement between covered and non-covered claims. Importantly, United bore this burden regardless of the reason the claim was not covered including whether the claim was barred by an exclusion. Like the Pennsylvania Superior Court later held in the Cigna litigation, the District Court found that, where the insured controlled the settlement, it and not its insurers legally and logically bore the burden to prove the amount of its covered loss.

Both cases represent a trend of courts holding that, with regard to the all-important issue of allocation in the context of settlement, the insured can and often should bear the burden of establishing its loss even when the non-covered part of the settlement is barred by an exclusion. That is, once the insurer proves the existence and applicability of an exclusion, the insured still must establish how much, if any, of its settlement is covered. This levels the playing field for insurers since the insured often controls settlement negotiations and the written terms of the settlement agreement.

[For more information on United HealthCare see the May 8, 2013 issue of Coverage Opinions.]

Tom Segalla and Patrick Omilian -- Goldberg Segalla LLP
Travelers Indemnity Co. v. Excalibur Reinsurance Corp. (April 8, 2013)

This past year yielded few significant reinsurance decisions. In USF&G v. American Re-Insurance, New York’s highest court clarified the follow the settlement doctrine as to an insurer’s settlement allocations. USF&G received much attention. A subsequent decision from the District of Connecticut, Travelers Indemnity Co. v. Excalibur Reinsurance Corp. (“Excalibur”), sought to reconcile USF&G with another leading New York reinsurance case, namely Travelers Cas. & Sur. v. Certain Underwriters at Lloyd’s of London (“Travelers”). Excalibur is a must-read for every reinsurance practitioner both for its substance and its rare literary enjoyment.

In a thoroughly reasoned, well-articulated, and curiously entertaining decision, Judge Haight, in Excalibur, explained, when USF&G and Travelers are read together, the rules of law governing follow-the-settlements and settlement allocation are made manifest. Those rules are: (1) A follow the settlements clause in a reinsurance contract requires that deference be given to a cedent’s decision on the allocation of settlement payments among reinsurers; however: (2) A cedent’s allocation decisions are not immune from scrutiny, which includes: (3) Consideration of whether the allocation is a reasonable one, that is, one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at if the reinsurance did not exist; and: (4) In any event, an allocation by a cedent that violates or disregards provisions in the reinsurance contract is invalid and cannot be sustained by a court.

Excalibur provides thorough guidance regarding the propriety of insurer’s settlement allocations and is a useful case for cedents and reinsurers alike.


 
 


Vol. 3, Iss. 1
January 8, 2014

Please accept my best wishes for health, happiness, prosperity and interesting coverage issues in 2014. Thank you for making the first full year of Coverage Opinions a success. I had simple objectives when I started CO – alert readers to important insurance coverage developments, identify lessons from cases that can be relevant in the future and sit down with interesting insurance-related people and tell their stories. And do all of this in a light style, that makes it fun to read and with minimal typos. I hope you feel that I achieved these. I have a lot of new things in store for 2014.

Happy New Year!

Randy

 

 

 
 


Vol. 3, Iss. 1
January 8, 2014

 

Declarations: The Coverage Opinions Interview With Alex Barnett--The Former Anderson Kill Coverage Lawyer Turned Professional Stand-up Comic



 

Alex Barnett is a lawyer that does stand-up comedy. That a lawyer does stand-up comedy is not anything unusual. For some reason lawyers seem to gravitate to it. But Alex Barnett is a different kind of lawyer that does stand-up comedy. He’s a professional. Most lawyers doing stand-up, like yours truly, are just hobbyists. But even being a pro wouldn’t make me consider him for an interview for the Declarations column. Just no insurance angle. But then I learned this little factoid about him (thanks to a tip from a CO reader) – he used to work for Anderson Kill, the stalwart policyholder insurance coverage firm, doing asbestos, breast impact and hazardous waste coverage work. Let me repeat that. He used to work at Anderson Kill. Whoa! This is manna for the Declarations column. Alex also co-founded a stand-up comedy group called “Comedians at Law.” He graciously agreed to speak with me about going from Anderson Kill to killing as a professional stand-up comic.

First some biographical facts. Alex was born in Brooklyn and grew up on Long Island. He is a 1988 graduate of the University of Pennsylvania and completed St. John’s Law School in 1992. He had his mind set on a career in politics – running for New York State Assembly in November 1992. This endeavor had him campaigning during his third year of law school and the summer of the bar exam. As a Democrat running for a long-held Republican seat he had little chance of winning. And he didn’t. But he had a very respectable showing and from there Mr. Barnett went to Washington.

 
 

In the nation’s capital Alex worked as a Legislative Intern for a Congresswoman and then a non-profit. But without a trust fund it is not easy to live in Washington and do such jobs for a long time. This drove Alex to private practice and from 1994 to 1996 he was an Associate in the DC office of then Anderson Kill Olick & Oshinsky. While at Anderson Kill he worked on cases involving coverage for Celetex for asbestos liabilities, Dow Corning for breast implants and a variety of hazardous waste claims.

Unfortunately, Alex wasn’t involved in stand-up during his Anderson Kill days. So my hopes of learning that he was telling jokes about the continuous trigger or pollution exclusion were dashed.

Alex’s days as a coverage lawyer were short-lived. He spent the next twelve years doing plaintiffs’ class action work in DC and New York. He became involved in stand-up in 2004 but not with any sort of professional devotion. He did what many upstart stand-up comics do – take classes, do shows where you have to bring your own audience, perform at open mics and just try to get any stage-time you can.

Next came 2008, the financial crisis and struggles for many law firms. The New York office of his firm that he was managing closed. At age 41 and out of a job, Alex took the opportunity to throw himself into stand-up comedy. He was single so this was easier than it might have been. To pay the bills he landed a job with the New York City Law Department as a Special Assistant Corporation Counsel. He still holds this position today, where he handles litigation involving New York City water, sewer, and roadway infrastructure, as well as civil rights claims. The benefit of working for the City’s Law Department was that, unlike a litigator in private practice, he had his nights and weekends free and a predictable schedule.

For the next four years Alex went full speed ahead into stand-up comedy. It was during this period that he went from someone who dabbles in stand-up to a true stand-up comic. He performed at clubs and colleges nationally and made the contacts needed to succeed. Part of his success came from something as simple as a willingness (that others didn’t have) to rent a car to do gigs in Pennsylvania, New Jersey, Delaware and other places that were inaccessible to comics in NYC without cars – which was just about all of them.

Alex married and his son was born in 2011. Once again a major life change called for a response in his stand-up career. Tired of the grind of the road and with the need to spend time at home, Alex has now turned to producing stand-up comedy shows. He currently produces four different shows at Gotham Comedy Club in New York City. Gotham isn’t just any club. It is one of the most prestigious in the country.

This is where it was easy to see that Alex is a really smart guy and understands the business of comedy. There are a lot of funny comics. But the vast majority can’t make a living at it. For most, stand-up comedy does not offer a middle class, Alex explained. Comics either live in abject poverty or achieve superstardom.

But understanding how difficult it can be to fill seats in a club, Alex doesn’t just produce the typical stand-up show that includes a few comics each doing a set of whatever it may be. He produces shows with themes. His shows are designed to appeal to a certain audience. By offering comedy that the audience can relate to, they have more of a reason to attend.

He produces “Glass Half Full” – A reminder that even when things seem like they’re at their worst, there are still plenty of things to provide laughter and joy.

“The Diversity Show” -- Bringing people together one joke at a time. Three comedians – an Indian, an African-American and a white Jewish male seek to break down racial and ethnic barriers through laughter. Alex is Jewish and married to an African-American woman (who converted to Judaism) and this plays a large part in his comedy.

“Dads of Comedy” – A comical view of fatherhood.

“Comedians at Law” – This is a comedy group that Alex co-founded and, as the name suggests, it is made up of lawyer stand-up comics. The group performs nationally. There are currently eight members of Comedians at Law (half in NY and half in LA/Phoenix). The material is definitely not all lawyer jokes. The extent of lawyer/legal humor varies by comedian and venue. In other words, more lawyer humor is used at a show for a bar association or law school.

Alex has been featured in numerous media, including The Wall Street Journal, The Huffington Post and CNN.com. He has much bigger plans for stand-up comedy – both performing and producing. But his hard work, intelligence, understanding of the business of comedy and willingness to rent a car have all put him on the right path.

But Alex it’s never too late to go back to insurance coverage. Read a few cases about trigger and allocation and it’ll be like you never left. And I bet that Celotex asbestos issues are still floating around.

I wish Alex Barnett all the success in the world.

More about Alex Barnett here: http://www.alexbarnettcomic.com

More about “Comedians at Law” here: http://www.comediansatlaw.com

And lots of clips of Alex’s stand-up on You Tube.



 



Vol. 3, Iss. 1
January 8, 2014


Insurance Personalized License Plate Contest Results

As I knew would be the case it was not easy to choose the winners of the Insurance Personalized License Plate contest. The response was great and it was very difficult to find three that stood out from the rest. So many could have won. The three that I selected as winners did a great job of achieving the objective -- saying something that, while readable, would make no sense to anyone who is not in the insurance or coverage world -- but complete sense to someone that is. Congratulations to the winners. Each will receive a $25 gift certificate for the great stuff available on InsuranceIsFun.com.

Suzan F. Charlton
Covington & Burling, LLP
Washington, DC
Kevin M. Toner
Faegre Baker Daniels LLP
Indianapolis, Indiana
Dianne M. Zepp
Assistant Vice President
Berkley Re Direct, a W.R. Berkley Company
Dublin, Ohio
 
 
 


Vol. 3, Iss. 1
January 8, 2014


New Jersey Legislature Introduces Bill To Address Construction Defect Coverage


Over the past few years some state legislatures have no longer been able to hold their tongues in the face of what they see as dissatisfaction with courts ruling that damage to an insured’s defective workmanship does not qualify as having been caused by an “occurrence.” Legislative involvement in construction defect coverage kicked off in Colorado in May 2010. In 2011, three states followed Colorado’s lead – Hawaii, Arkansas and South Carolina -- and adopted legislation directly in response to court decisions in their states that they believed did not provide adequate coverage to contractors for construction defects. Interestingly, while all four states set out with the same motivations, each one adopted a different approach to achieve its objective.

In late November, Bill No. 4510 was introduced in the New Jersey Assembly. Following introduction it was referred to the Assembly Financial Institutions and Insurance Committee.

The proposed Garden State statute states that “a commercial liability insurance policy shall not be delivered, issued, executed, or renewed in this State, on or after the effective date of this act, unless the policy contains a definition of occurrence that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship.” The proposed statute further provides that it “shall not be construed to restrict or limit the nature or types of exclusions from coverage that an insurer includes in a commercial liability insurance policy.”

The bill’s Statement of Purpose provides that, notwithstanding that liability coverage is most often written on standard form insurance policies, courts have varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore within the definition of an occurrence, for which coverage is provided. The Statement goes on to cite a few New Jersey cases as well as one from the Tenth Circuit. The Statement concludes: “By providing a definition of occurrence that addresses both accidents and faulty workmanship, the bill is intended to reduce confusion in industry practices by resolving coverage issues arising from the holdings in various court decisions.”

As with other statutes of this type, by providing that it shall not be construed to restrict or limit policy exclusions, the bill does not create coverage for the repair or replacement of an insured’s own defective workmanship. That would remain excluded by the “your work” exclusion. So presumably the objective is to enable a general contractor to reach the “your work” exclusion’s “subcontractor exception,” which is not possible when an initial determination is made that faulty workmanship does not qualify as an “occurrence.”

Coverage Opinions will follow the progress of Assembly Bill No. 4510.

 


Vol. 3, Iss. 1
January 8, 2014


Bionic Woman Wins California Motor Vehicle Issue
But Lindsay Wagner Does Not Respond To Coverage Opinions’s Request For Comment


When I was 11 years old I loved the bionic woman -- Lindsay Wagner. What 11 year old boy wouldn’t? She was beautiful, bionic and hung out with Steve Austin, The Six Million Dollar Man, the coolest guy on the planet. That is not a debatable question. [The Fonz was no. 2.]

I recently saw that the California Court of Appeal issued an opinion in Kent Smith v. Lindsay Wagner, No. B245821 (Cal. Ct. App. Dec. 19, 2013). Lindsay Wagner. But could it be THAT Lindsay Wagner? Surely she can’t be the only woman in American with that name. But who would want to sue Lindsay Wagner? Although it would present an opportunity to meet her at her deposition. And the case involved a car accident. With her bionic legs why would she need a car? No, it couldn’t be her.

So I did some poking around on the internet and discovered that Lindsay Wagner, the defendant in Smith v. Wagner, was in fact the super-strong Lindsay Wagner. So I read the case, found Lindsay’s e-mail address on her website and sent her off a note asking about the decision – which she won! Of course. This was my chance to speak to my dream girl. Plus I could ask her how Oscar Goldman is doing (Richard Anderson, age 88 and dashing as ever). Sadly, she did not respond. It’s possible (likely even) that she didn’t even know what decision I was talking about since it looks like the case was all handled by her insurer. It just wasn’t meant to be I guess. But it brought back some great memories of Jaime Sommers.

Smith v. Wagner has nothing at all to do with insurance, other than involving a motor vehicle accident where the defendants, including, Lindsay, were represented by State Farm. So I’ll keep this brief. In September 2008, Kent Smith was injured when his vehicle collided with one driven by Regina Samsel. Wagner owned the vehicle that Samsel was driving. Samsel was employed by Wagner and her company, Lindlear Corporation. Smith made a section 998 offer to compromise to Wagner and Samsel. The offer was not accepted and the case went to trial. Following a jury verdict the court entered judgment in favor of Smith and against Samsel, Wagner and Lindlear. The amount of the judgment was more than the amount of the section 998 offer to compromise.

Section 988 provides for a reallocation of allowable costs when a party rejects an offer to compromise and the offering party subsequently obtains a more favorable judgment. At issue before the California appeals court was whether Smith was entitled to recover certain costs on account of his judgment being more than the amount of his section 998 offer. For various reasons that are not important here, the appeals court affirmed the decision of the trial court that Smith was not entitled to recover costs because his section 998 offer was not valid.

Lindsay – it’s not too late. If you can hear me – and I know you can with a bionic ear – please get in touch.

 

 


Vol. 3, Iss. 1
January 8, 2014


The Less Talked-About Aspect Of The Pollution Exclusion


When a case involves the applicability of the pollution exclusion it usually follows a familiar pattern. First, the court addresses whether its precedent calls for it to interpret the exclusion narrowly – limiting it to hazardous waste or industrial pollution, often referred to as “traditional environmental pollution.” Alternatively, is the exclusion to be applied broadly, based on a linguistic reading, making it applicable to claims involving any hazardous substance.

If a court determines to apply the pollution exclusion as written, it will frequently conclude that it bars coverage, given the broad definition of the term “pollutant,” often any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” But if a court concludes, fundamentally, that the pollution exclusion should be interpreted narrowly, and limited solely to traditional environmental pollution, it may be inclined to conclude that the exclusion does not bar coverage. After all, if it were so clear that the substance at issue is traditional environmental pollution, then it is unlikely to have been litigated.

But sometimes a court’s determination to apply the pollution exclusion broadly, followed by the expected determination that the substance at issue is a “pollutant,” may not be the end of the story for a policyholder’s pursuit of coverage. This scenario was demonstrated by the Court of Appeals of Nebraska in State Farm Fire & Cas. Co. v. Dantzler, No. A-12-1042 (Neb. Ct. App. Dec. 17, 2013). Dantzler arose like this.

Jerry Dantzler owned a rental property in Omaha. Tenants filed a lawsuit against Dantzler alleging that a minor was “exposed to high levels of lead poisoning” in the rental property due to high levels of lead paint contamination on the walls and elsewhere, causing him serious and permanent injury. Dantzler sought coverage from State Farm under a Rental Dwelling Policy.

State Farm filed a declaratory judgment action seeking a declaration that the policy did not provide coverage for the claims made against Dantzler because of its “pollution exclusion,” which excluded from coverage “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants ... at or from premises owned, rented or occupied by the named insured.” “Pollutants” was defined broadly as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The trial court found that the pollution exclusion precluded coverage for the claims against Dantzler.

The case made its way to the Nebraska appeals court, which undertook the usual analysis. The court concluded that the pollution exclusion was unambiguous and barred coverage for injuries caused by all pollutants, not just traditional environmental pollution. Next the court determined that the definition of “pollutant” unambiguously encompassed lead found in paint.

However, despite these two determinations, the Dantzler court concluded that the pollution exclusion did not necessarily apply. The court focused on the aspect of the pollution exclusion concerning the “discharge, dispersal, spill, release or escape” of pollutants. The court noted that, while no Nebraska court had ever addressed whether exposure to lead-based paint constitutes a “discharge, dispersal, spill, release or escape” of pollutants, other jurisdictions have and there is a split of authority.

The court concluded that it could not determine how the minor was exposed to the lead or whether his alleged lead poisoning resulted from ingesting or inhaling lead dust or lead chips, chewing on intact surfaces, a combination of these, or some other source of exposure. As the record did not demonstrate that the minor’s injuries resulted from a “discharge, dispersal, spill, release or escape” of lead, there was more than one reasonable interpretation of these terms. Thus, since ambiguity existed, there was a genuine issue of material fact as to whether there was a “discharge, dispersal, spill, release or escape” of the lead, as required for the pollution exclusion to exclude coverage of the claims against Dantzler. Therefore, the court held that summary judgment in favor of State Farm was not appropriate.

In reaching this decision, the Dantzler court was persuaded by the Supreme Court of Pennsylvania’s 2001 decision in Lititz Mutual v. Steely, which held: “One would not ordinarily describe the continual, imperceptible, and inevitable deterioration of paint that has been applied to the interior surface of a residence as a discharge (‘a flowing or issuing out’), a release (‘the act or an instance of liberating or freeing’), or an escape (‘an act or instance of escaping’) .... Arguably such deterioration could be understood to constitute a ‘dispersal,’ the definition of which (‘the process ... of ... spreading ... from one place to another,’ ...) may imply a gradualism not characteristic of the other terms. Any such inconsistency in meaning simply indicates, however, that the exclusionary language does not clearly include or exclude the physical process here at issue, but is, as to that process, ambiguous. Such ambiguity requires that the language be interpreted in favor of the insured.”

As Dantzler demonstrates, sometimes a court’s determination to apply the pollution exclusion broadly, followed by the expected determination that the substance at issue is a “pollutant,” may not be the end of the story for a policyholder’s pursuit of coverage.

 

 


Vol. 3, Iss. 1
January 8, 2014


Loss Of Tax Credits Are Not Covered Under A CGL Policy


Sometimes a coverage case involves a novel issue that is unlikely to arise very often. However, it is just plain interesting. So for that reason it merits a look. Such is the Washington federal court’s decision in Country Mutual Insurance Company v. Deatley, No. 13-3029 (Nov. 21, 2013).

At issue in Deatley was coverage for disallowed tax credits. The tax credits came about like this (as described just about verbatim by the court). A conservation easement is an agreement between a private landowner and a government entity stipulating that a parcel of real property will remain permanently undeveloped. Due to their restrictive nature and infinite term, conservation easements can significantly diminish the value of real property. In an effort to neutralize this undesirable effect—and encourage donations—many states allow landowners to “write off” any decrease in value attributable to a conservation easement as a tax loss. As a further incentive, some states also allow landowners to sell their deductions on the open market as transferrable tax credits. In those states, tax credits are commonly sold to investors at a discount for tax shelter purposes.

Alan Deatley sold conservation easement tax credits to investors that were rejected by the Colorado Department of Revenue. Two actions were filed against him by plaintiffs seeking monetary damages in the total amount of $792,000 as compensation for their lost investments. Deatley sought coverage under a series of liability policies issued by Country Mutual. Country defended under a reservation of rights but sought a judicial determination that it had no such obligation to do so.

Country Mutual’s argument that it had no duty to defend was simple. The losses at issue were “strictly economic in nature” and, therefore, could not be construed as “bodily injury,” “property damage” or “personal and advertising injury” within the meaning of the available CGL coverages. The court quickly concluded that the losses were not “bodily injury” or “personal and advertising injury.” However, whether coverage was available for “property damage” was, the court observed, a “closer question.”

In general, the definition of “property damage” was physical injury to and/or loss of use of “tangible property.” With no definition of “tangible property” in the policy, the court turned to dictionaries for guidance. Based on these definitions, the court held that the tax credits were not “tangible property” and, therefore, Country Mutual had no duty to defend. “Unlike real property or chattels, tax credits do not have a physical form or substance that can be detected by the human senses. Indeed, tax credits are a prime example of intangible property; although they have value, they exist only on paper. Given that the damages actions arise solely from the Colorado Department of Revenue’s denial of Deatley’s conservation easement tax credits, the Court concludes that the plaintiffs in those actions cannot establish injury to and/or loss of use of ‘tangible property’ so as to trigger coverage.”

The court also rested its decision on the general rule that loss of an investment does not constitute damage to tangible property under a commercial general liability policy. “In the final analysis, the plaintiffs in the damages actions purchased the conservation easement tax credits from Deatley as tax shelter investments. Like the investors in the cases cited . . . , they ran the risk that their investments would decrease in value or be rendered worthless. Unfortunately, that is precisely what occurred when the Colorado Department of Revenue disallowed the tax credits.”

 

 

 


Vol. 3, Iss. 1
January 8, 2014


The $170 Million Stroke Of The Pen


Coverage Opinions
does not do a lot with first-party property cases. From my surveys and focus groups I know that the bulk of the readership is more closely aligned with liability coverage issues. Further, property coverage disputes are more likely to involve unique policy language. That makes the decisions less likely to have impact in subsequent cases.

But sometimes a property case comes up that is worthwhile to read even if you are not involved in that area of coverage. It may be because the issue is interesting. Or it may be because there is a lot at stake. Or maybe the case does in fact foretell future decisions. Or there could be a lesson to be learned that has applicability in the liability context. Or maybe it’s all of the above, as in the case of Federal Mogul Corp. v. Ins. Co. of the State of PA, No. 12-12005 (E.D. Mich. Dec. 10, 2013). [I’m also happy to include Federal Mogul here as there is a loyal Coverage Opinions reader that gives me grief about not including property cases.]

A lot of dollars were on the table in Federal Mogul -- as in $58 million according to the insured, and even as many as $170 million. A coverage case with $58 million on the line is unusual but not extraordinary. But usually when that much money is at stake the case involves several insurers and a lot of facts and issues and litigation that goes on for years. That wasn’t the case in Federal Mogul. It involved one insured versus one insurer. Further, the case was filed on May 3, 2012 and concluded, in favor of the insured, on December 10, 2013 (the insurer filed a notice of appeal a week later; and there seem to be some lingering procedural issues). And despite the amount at stake, the court was able to resolve a major issue on summary judgment.

At issue in Federal Mogul was the extent of coverage available for an October 2011 flood at FM’s facility in Thailand. FM alleged that the damages exceeded $88 million and filed a claim with the insurer under its policy. The insurer paid $30 million on the basis that the “High Hazard Zone” flood provision in the policy capped its obligation at that amount. FM disputed that the High Hazard provision applied and filed an action seeking coverage under the policy’s $200 million annual aggregate limit for flood liability.

The policy’s limit of liability section stated: $200,000,000 Flood Aggregate Limit of Liability for all locations combined in any one policy year, except: $70,000,000 Flood for Moderate Hazard Zones (Annual Aggregate); $30,000,000 Flood for High Hazard Zones (Annual Aggregate).

The policy defined High Hazard Zone for Flood as follows: a) all property at a “location” that is partially or totally situated in an area which at the time of loss or damage has been designated on a Flood Insurance Rate Map (FIRM) to be a Special Flood Hazard Area (SFHA), and/or b) all property in areas where the National Flood Insurance Program (NFIP) is not in effect, and where all property at a “location” is partially or totally situated in an area which is within a 100 year flood plain or its worldwide equivalent, and/or c) all property at a “location that is partially or totally protected by dams, dikes, levees or walls which were intended to protect such property from the level of a 100 year flood or its worldwide equivalent, regardless of any Zone or Area designation or assignment by the Federal Insurance and Mitigation Administration (FIMA) or other recognized authority having jurisdiction.

So the issue boiled down to this. Was the flood within a High Hazard Zone?

First, the court determined that, since the insurer was relying on an exclusion or sublimit to exclude certain payment, it bore the burden of proof.

Turning to the substantive issue, the court was required to interpret clause (b) of the definition of High Hazard Zone for Flood: “all property in areas where the National Flood Insurance Program (NFIP) is not in effect, and where all property at a ‘location’ is partially or totally situated in an area which is within a 100 year flood plain or its worldwide equivalent.”

Following an interpretation of clause (b) of the definition of High Hazard Zone for Flood, that was tied to clauses (a) and (c), the court held that “the policy unambiguously requires that a predetermined 100–year flood plain must have existed at the time of the flood. The parties agree that neither Thailand, nor any country or governmental/private body, had determined that Plaintiff's facility was in a 100–year floodplain before the flood.” Therefore, the High Hazard Zone limit did not apply and FM was entitled to assert claims over the $30 million limit.

Cases like Federal Mogul are not going to arise every day. But major flooding outside the United States seems to happen a lot. And there have been other coverage disputes over the 2011 Thailand flooding. It is hard to imagine Federal Mogul not having an impact in any other coverage disputes involving this 100–year flood plain issue. It is also hard to imagine any insurer, that writes coverage for floods taking place outside the United States -- especially using policies that apply different limits for different types of floods, and tying coverage to a predetermined 100–year flood plain -- not taking a close look at Federal Mogul in conjunction with its own policy language. Even if the insurer ultimately prevails on appeal, a review of such policy language is no less important.

As for Federal Mogul providing a lesson to be learned in the liability context, it is simply that sub-limits can be tricky. A sub-limit in a policy is often an invitation over a dispute whether it, or the main limit, applies.

 


Vol. 3, Iss. 1
January 8, 2014


Washington Court of Appeals:
Significant Excess Exhaustion Case
Broker Warning To Be Heeded

I’m coming up on my deadline to get this issue of Coverage Opinions to the designer. So I’ll keep this brief. But make no mistake – that is no statement on the significance of the Washington Court of Appeals’s decision in Quellos Group LLC v. Federal Ins. Co. (Wash. Ct. App. Nov. 12, 2013). Despite the brevity here, the decision is very important. I’m just pressed for time. Also, there is a write up of the case, and its significance, from the policyholder perspective, in the November/December issue of the Anderson Kill Policyholder Advisor.

Quellos sought coverage from several insurers for a settlement of claims related to a fraudulent tax shelter. An AISLIC primary policy had a $10,000,000 limit. AISLIC agreed to pay $5,000,000 under the policy. Quellos agreed to pay the gap – the $5,000,000 in policy limits that AISLIC refused to pay. Nonetheless, the court held that no exhaustion took place to trigger the Federal and Indian Harbor excess policies.

These excess carriers agreed to provide coverage only after exhaustion by payment of the insurer of the underlying policy limits. The Federal policy required payment by AISLIC “in legal currency” for the full amount of the underlying insurance. The Indian Harbor policy stated that coverage does not attach unless the underlying insurance coverage is exhausted by the “actual payment” of the claim by underlying insurers AISLIC and Federal.

The Quellos court concluded that the plain and unambiguous language of the excess policies stated how the underlying insurance was to be exhausted. The policies required the underlying insurer to pay the full amount of its limits of liability before excess coverage is triggered. However, AISLIC paid only one-half of the $10 million policy limits. “Because the exhaustion language in the Federal and Indian Harbor excess insurance policies is clear and unambiguous, we must enforce it as written.”

Interestingly, policyholders like to demand that policy language be interpreted based on just what it says. And that’s what they got here.

In reaching its decision, the court noted that the record showed that an amendment was available from Indian Harbor that allowed the insured, as well as the underlying insurer, to pay the full amount of the underlying policy limits to trigger excess coverage. In Anderson Kill’s Policyholder Advisor, Bill Passannante and Joshua Gold make a point about this: “Policyholders might also wonder why Quellos’s broker did not insist on the amendment. Policyholders and their brokers should also take note that it’s now vital to insist that excess D&O policies stipulate the policyholder’s right to make up any shortfall in the underlying policy payout without surrendering excess coverage on exhaustion grounds.”