Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe

Vol. 7 - Issue 7
September 26, 2018


If Your Coverage Was Coppertone: Coverage Opinions In August:
What You May Have Missed

  • Very Interesting Development: Ohio Legislature Says No To The ALI Restatement of the Law, Liability Insurance

  • Most Insane Duty To Defend Decision I’ve Ever Seen

    Insurer Would Have Benefitted From The New ALI Insurance Restatement

  • Determining Covered Vs. Uncovered Claims: Court Slams The Door On One Insurer’s Effort

  • First Court Decision Post-ALI Restatement Adoption

  • Policyholders Will Shout Doobious Decision: Marijuana Coverage And An Issue I’ve Never Seen Before

  • The Great Insurance Policy Mystery

Coverage Opinions was on hiatus in August. Lots of people were on vacation and I needed a break from the task of putting together a full-blown issue, including the time-consuming interview. But I didn’t want CO to go completely silent. So I did some mini issues – a case here and a case there, here a case, there a case…. In case you were more focused on sun and sand, than coverage, in August, here’s what you missed in the Coverage Opinions mini issues.

Very Interesting Development: Ohio Legislature Says No To The ALI Restatement of the Law, Liability Insurance

On July 30th, Ohio Governor John Kasich signed into law SB 239. According to the Governor’s press release, it modifies the law concerning regional councils of governments to clarify that a municipal corporation eligible to designate a tourism development district may designate more than one district. Obviously, that’s important to someone.

SB 239 also names certain highways after people. For example, a portion of Interstate Route 270 in Franklin County is now designated the “Officers Anthony Morelli and Eric Joering Memorial Highway.”

But SB 239 doesn’t stop there. It then adds this provision: Sec. 3901.82. “The Restatement of the Law, Liability Insurance’ that was approved at the 2018 annual meeting of the American law institute does not constitute the public policy of this state and is not an appropriate subject of notice.”

I couldn’t locate much in the way of legislative history for this. A footnote in the Bill Analysis states: “Restatements of Law are nonbinding treatises on legal subjects that seek to inform judges and lawyers about general principals [sic] of common law. The American Law Institute is an organization of judges, legal academics, and practitioners that publishes the Restatements. The General Assembly may set the public policy of the state while the judicial power is vested in the courts of Ohio. Ohio Const., art. IV, sec. 1.”

On its face, the Ohio legislature’s statement, that the just-approved ALI’s Restatement of the Law, Liability Insurance does not constitute the public policy of Ohio, and is not an appropriate subject of notice, is not a big dent in the Restatement. Look, I love Ohio. I even had my picture taken a few years ago with the Red’s Mascot, Mr. Redlegs. Really. I can send you the picture. But Ohio is just one state.

But this Ohio action is still very significant. The insurance industry’s displeasure, with the Liability Insurance Restatement, has been well-documented. This legislative achievement demonstrates just how strong that objection to the Restatement is. Will other states follow suit? Are there any other efforts like this underway?

More broadly, what does this mean in Ohio for the ALI’s many other Restatements that it has adopted over the past many decades?

Does the Ohio legislature’s statement, that the General Assembly may set the public policy of the state and judicial power is vested in the courts of Ohio (cite to the Ohio Constitution) mean that the ALI’s other Restatements do not constitute the public policy of Ohio and are not an appropriate subject of notice? After all, the legislature’s statement addressed Restatements in general, vis-a-via the role of the General Assembly and courts, and did not speak to any specific concerns about the Insurance Restatement. Based on a Lexis search, Ohio courts, not surprisingly, have addressed Restatement provisions of all stripes in thousands of cases.

Most Insane Duty To Defend Decision I’ve Ever Seen
Insurer Would Have Benefitted From The New ALI Insurance Restatemen

Sometimes there is little doubt that an insurer has a duty to defend. Other times there is a lot of doubt. Nonetheless, the court concludes that a defense is owed on account of the operation of legal principles. For example, the court decides that a defense is owed because the duty to defend is broad. So long as there is some possibility of coverage, the court explains -- even if it’s the same possibility as me beating LeBron at one-on-one – a defense is owed. Or a defense is owed because the court, in reaching its decision, was constrained by the allegations in the complaint, i.e., the four corners rule. No matter how clear it may be that extrinsic facts negate a duty to defend, the court simply could not consider them. It was forced to wear blinders. Its hands were tied.

Late last month a Texas appeals court concluded that an insurer was obligated to defend its insured for the later reason. But here the court’s rote application of the four corners rule led to an absurd result. It may be the most insane duty to defend decision I’ve ever seen. As insane as using the self-serve check-out at the supermarket when you have fruit.

Ironically, while insurers have spared no criticism of the ALI’s recently adopted Restatement of Liability Insurance, here, application of the Restatement would have benefited the insurer.

In Avalos v. Loya Insurance Co., No. 04-17-00070 (Tex. Ct. App. July 25, 2018) the court addressed whether an insurer had a duty to defend a motor vehicle accident.

Rodolfo Flores was moving his wife’s vehicle, outside their home, when he collided with the vehicle owned by the Hurtados. Flores’s wife, Karla Guevara, was insured under a policy issued by Loya Insurance Co. But the policy contained a named driver exclusion for Flores. Oh, that’s a problem. Solution -- the Hurtados, Guevara and Flores reported to the police and insurance company that it was Guevara – and not Flores – who was driving the vehicle at the time of the accident.

The Hurtados filed suit against Guevara, the supposed driver, for their injuries. Loya Insurance Company retained counsel to defend Guevara. Loya eventually figured out that Guevara was not the driver, but, rather, Flores was. Loya disclaimed coverage based on the named driver exclusion. Defense counsel retained by Loya withdrew and judgement was rendered against Guevara for $450,000.

The Hurtados, as assignees of Guevara, filed suit against Loya for a host of things – negligence, breach of contract and Texas statutory violations. The Hurtados alleged that Loya breached its duty when its counsel, retained for Guevara, withdrew. Loya filed a counter claim for fraud and a declaration of no coverage for a defense and indemnity.

In a Motion for Summary Judgment, Loya attached the deposition testimony of Guevara where she admitted that Flores was driving the vehicle at the time of the accident. For reasons not detailed in the opinion, the trial court granted Loya’s Motion for Summary Judgment.

The Texas Court of Appeals reversed.

The court’s description of the competing arguments were just what you would expect:

The Hurtados argued that a defense was owed based on the allegations in the complaint. Period. End of story. The court explained: “The Hurtados assert that under the eight-corners rule, an insurance company’s duty to defend its insured in a lawsuit is determined by looking to the allegations contained in the petition and the terms of the insurance company’s policy. According to the Hurtados, because they alleged Guevara was negligently operating her vehicle in the underlying car accident and she is covered by the insurance policy, Loya Insurance Company had a duty to defend Guevara in the negligence suit the Hurtados filed against her.”

Loya argued that all bets were off when Guevara lied about the driver of the car. The court explained: “Loya Insurance Company argues, however, it did not owe a duty to defend Guevara in the negligence suit filed against her. According to Loya Insurance Company, its duty to defend did not arise because Guevara breached the insurance policy prior to the filing of the Hurtados’ negligence suit against her. Loya Insurance Company contends that Guevara breached the policy by falsely representing to the police and insurance company that she was driving the car in the accident.”

Ruling: The court held that Loya had a duty to defend Guevara. Its decision was based on an unwavering, no exceptions allowed, application of Texas’s eight corners rule [which is the Texas equivalent of the four corners rule, except everything is bigger in Texas.]

The court stated: “Under the eight-corners rule, an insurer’s duty to defend is determined by the third-party plaintiff’s pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations. When applying the eight-corners rule, we resolve all doubts regarding the duty to defend in favor of the existence of a duty and liberally construe the allegations in the petition in favor of the insured. Even if the allegations in the petition are groundless, false, or fraudulent, an insurer is obligated to defend. The duty to defend is not affected by facts that may be ascertained before suit or developed during the course of ligation. Thus, facts outside the pleadings are not material to the determination of the duty to defend even if those facts directly contradict the allegations in the underlying petition.” (citations and internal quotes omitted).

The court was also influenced in its decision by the Texas Supreme Court not having adopted an exception to the eight corners rule where the “extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage in the truth or falsity of any facts alleged in the underlying case.” This is a long-standing issue/debate in Texas coverage.

My take on it -- While a duty to defend may be owed even if the allegations in the petition are groundless, false, or fraudulent, this cannot apply to a situation where the insured’s admitted-to fraud, not to mention with active participation by the plaintiff, was the basis for the petition being false or fraudulent.

A concurring judge agreed [concurring only because the Texas Supreme Court has not adopted the extrinsic evidence exception]. The concurring judge noted that the Texas Supreme Court has suggested in dicta that there is a fraud exception to the eight corners rule: “Loya’s duty under the policy to provide a defense to Guevara was for her benefit and to protect her by providing a defense even to untrue allegations. But surely the benefit and protection afforded to Guevara under the policy are intended to benefit and protect her from untrue allegations in the pleadings that are within the control of the pleader, and not from untrue allegations that are brought about by her own fraud and collusion. In this case, the untrue allegations came about as a result of collusion and fraud perpetrated by Guevara, the insured. She should not be able to benefit from her own deceptive, fraudulent acts to the detriment of Loya. . . . [A]n exception to the eight-corners rule should exist in a situation like this one where the undisputed evidence shows the insured participated in collusion and fraud solely to create a duty to defend.”

This is as head-shaking of a duty to defend decision as I’ve ever seen. Robotic application of a rule, with no regard to common sense, especially when the end-result is to reward fraud, may be just the situation needed to get the Texas Supreme Court to adopt an exception to the eight corners rule. The issue has been brewing for a while.

Impact of the ALI’s recently adopted Restatement of Liability Insurance

While the ALI’s recently adopted Restatement of Liability Insurance may not have made a difference here, because the Texas Supreme Court has not adopted an exception to the eight corners rule, it would have at least given the insurer an additional argument. However, and more importantly, the Restatement may very well have made a difference if this scenario arose in a state where the court had more flexibility to adopt an exception to the four/eight corners rule.

Section 13 of the Liability Insurance Restatement adopts a duty to defend standard that is based on the complaint allegations and extrinsic evidence. However, section 13 also sets forth certain exceptions to the duty to defend, including if:

(3) “[F]acts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;” ***

Admittedly, neither of these exceptions apply to Avalos on their face. However, a comment to section 13 offers this: “Courts in a few states have recognized a broader, general exception to the complaint-allegation rules that allows insurers to refuse to defend based on their unilateral assessment of any facts that are not at issue in the legal action for which coverage is sought. Although this Section does not recognize this broader exception, a court following this Section could recognize other narrow exceptions on a case-by-case basis, reasoning by analogy to the exceptions stated in subsection (3).” (emphasis added).

Clearly the situation in Avalos v. Loya Insurance Co. is analogous to these four corners exceptions set out in Section 13 of the Liability Insurance Restatement.

Determining Covered Vs. Uncovered Claims: Court Slams The Door On One Insurer’s Effort

Sometimes I think everyone wants to know if it’s covered, until someone tries to find out.

It is a coverage issue that has long confounded me. The determination whether an insurer has a duty to defend is relatively straightforward. That’s not to say it’s easy. But at least the process is pretty clear-cut. The issue generally arises at the same time – a complaint is filed against the insured and an answer or some response is due. The test for determining whether the insurer must retain counsel is well-defined in just about every state. And the insurer typically has a finite universe of information that it can consider in making its determination – the allegations in the complaint or, in some states, the allegations in the complaint and certain other information. And when the issue is litigated, it is often able to be resolved by way of motion for summary judgment or judgment on the pleadings.

But for the insurer that agrees to defend, the subsequent question, whether it has a duty to pay any settlement or verdict for its insured, can be a far more complicated, and less well-defined, task. The question can arise anywhere along the underlying litigation path – not just at the end -- as it would if a settlement opportunity presented itself. And unlike the duty to defend, where the question is based on a finite set of facts, the duty to indemnify is based on the totality of information developed in the underlying case. That could be a lot to consider. Or the facts needed to determine the duty to indemnify may not even arise in the underlying case. Now what?

Of course many courts are quick to tell insurers that they should file declaratory judgment actions to have these determinations made. But despite their usefulness, DJ actions do not always have the right timing vis-à-vis the underlying action or they can present procedural or other challenges when coupled with an ongoing underlying action. In general, DJs on duty to defend, with only a complaint at issue, can be a lot simpler than those addressing duty to indemnify. There is also the cost factor.

Some courts advise insurers that they should intervene in the underlying action, to seek special jury interrogatories, to have outcome determinative coverage-facts resolved. Policyholders often object to this procedure. And even if intervention is permitted, it may not obviate the need for a DJ action. Some courts are quite opposed to the use of the intervention procedure to have coverage-facts determined.

Here’s my point. The most important and frequently asked question in liability insurance coverage is this: Is it covered? Yet, despite this, and notwithstanding that liability coverage is a world of court made rules, not to mention governed by contract terms, there should be more clear-cut procedures for ensuring that the most important of all questions is answered. Even more confounding – there is nowhere near as much case law as you would expect addressing such an important question. To be sure, the process is never going to be rote. But there is room for improving it.

On August 10, a Florida appeals court addressed one insurer’s effort to determine whether, or to what extent, it owed coverage for a construction site bodily injury. Coverage turned on a fact issue in the underlying case. The insurer sought to intervene to have this issue resolved. Seems simple enough. But it didn’t go well for the insurer.

Houston Specialty Ins. Co. v. Vaughn, 2018 Fla. App. LEXIS 11197 (Fla. Ct. App. Aug. 10, 2018) involved coverage for All Florida Waterproofing. Enoch Vauhn, while applying a protective coating to a mobile home’s roof for All Florida, fell and was rendered a paraplegic. Mr. Vaughn sued All Florida. All Florida had a commercial general liability policy with Houston Specialty. An exclusion eliminated coverage for bodily injury to All Florida’s employees and an endorsement reduced the limits of any coverage if Mr. Vaughn was an independent contractor.

Houston Specialty moved to intervene in the suit to submit special interrogatories and verdict forms relevant to Mr. Vaughn’s employment status. The court described Houston’s purpose this way: “Houston feared having to relitigate the entire tort lawsuit in its declaratory judgment action if a jury found in favor of Mr. Vaughn. Thus, Houston asserted that limited intervention was proper to avoid conflicting findings or verdicts and inconsistent results. All Florida . . . opposed intervention, insisting that permitting Houston to intervene as a party would potentially inflate any damages award.”

Caveat: There are some complex procedural issues here and collateral litigation was going on, including two DJ actions filed by the insurer. This may not be the paradigm case to address an insurer’s effort to use intervention, in the underlying action, to resolve factual issues that affect coverage. However, the court’s discussion, of the insurer’s effort to use intervention, does not read like it was affected by anything about the case before it. It comes across as a general rebuke of the insurer’s effort to use the process.

Putting aside what happened with the trial court, the Florida appeals court ruled that intervention was not permissible. At the heart of intervention is whether the party seeking to intervene has an appropriate interest in the case.

The court concluded that Houston Specialty did not: “Houston has no direct and immediate interest in the state court lawsuit. Houston’s claimed interest is based upon the ‘[t]he fact that [Houston]’s intervention is dismissed would prevent [Houston] from being able to contest that final judgment’ that may be entered in the future between Mr. Vaughn and All Florida and Messrs. Fulford, Mendenhall, and Pflieger. To be sure, however, no judgment has been entered below. If a judgment is entered, it would operate upon Mr. Vaughn and the All Florida defendants. They are the only parties with a direct and immediate interest; they stand to either gain or lose by direct legal operation of that judgment. At this point in the state court lawsuit, Houston has nary a direct or immediate interest. Rather, akin to the insurer in Harbor Specialty, Houston possesses a speculative or contingent interest that will come to fruition only if the trial court enters a judgment against the insured parties and then either Mr. Vaughn or the insured parties through separate legal action seek enforcement of the judgment against Houston through claims of breach of contract or insurer bad faith. Of course, Houston may then assert the legal defenses it deems appropriate.”

The court was not persuaded that the possibility of having to pay the underlying verdict gave Houston Specialty a sufficient interest to warrant intervention: “If the possibility of owing up to the policy limits based upon entry of an adverse judgment was itself a sufficient basis to allow intervention, insurers would be permitted the unhindered and unfettered opportunity to intervene in innumerable tort cases. That is exactly what Houston wants; it seeks to interject itself directly into Mr. Vaughn’s tort lawsuit. We cannot countenance such a result in light of the legislature’s intent to prevent the introduction of such prejudicial information from being introduced to the jury.”

Here the court was referring to the age-old prohibition against the introduction of insurance information into a tort trial. Although I suspect that folks are clever enough to find a way to get the questions in without revealing that they are insurance-based.

Resolving coverage issues, especially in the context of a fluid underlying action, is going to have some challenges. It is complex and no two cases are alike and it does not lend itself to neat and tidy rules as much as other issues do. But it seems that the Florida appeals court was too quick to dismiss intervention as one possible way to address a coverage dispute tied to a fact that could be resolved in the underlying action.

Like I said, sometimes I think everyone wants to know if it’s covered, until someone tries to find out.

First Court Decision Post-ALI Restatement Adoption

Well that didn’t take too long. On August 9th a court issued what I believe to be the first decision addressing the ALI’s Restatement of the Law of Liability Insurance post-adoption.

At issue in Catlin Specialty Ins. Co. v. CBL & Assocs. Props., 2018 Del. Super. LEXIS 342 (Del. Super. Ct. Aug. 9, 2018) was an insurer that secured a determination that it had no duty to defend its insured, in an underlying action, under a Contractor’s Protective, Professional and Pollution Liability Policy. With that win in hand, the insurer now sought reimbursement of the defense costs that it had paid while defending it insured under a reservation of rights.

The issue was to be decided under Tennessee law. The insurer’s position was that it reserved the right to seek reimbursement when it agreed to defend and the insured accepted the defense under that reservation. The insurer relied on the 2007 Tennessee federal court decision in Cincinnati Ins. Co. v. Grand Pointe LLC which it maintained supported its position.

Grand Pointe did support the insurer’s position. And there had been no subsequent Tennessee cases on the issue. So the insured argued that Grand Pointe was a decade old and it did not “reflect the more recent trend away from the then-majority position.”

The court accepted that there has been a trend toward not permitting insurers to seek recovery of defense costs following a no duty to defend determination. The court even noted: “True, most recently, the American Law Institute has revised its Restatement of the Law on Liability Insurance to reflect such a shift. But just as Tennessee state courts had never before directly spoken on this reimbursement issue, they have also not yet adopted the new Restatement’s rule. Moreover, the Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”

The court followed Grand Pointe and held that the insurer was entitled to reimbursement of defense costs.

This seems to be a typical situation in which the ALI’s Restatement of the Law of Liability Insurance will be in play in a coverage case. One party had no applicable case law on point so it turned to the RLLI for support. But while the court discussed the RLLI, and seemingly factored it into the analysis, it did not rely on it because it was persuasive only. In essence, while Grand Pointe is not a precedential statement of Tennessee law, on an insurer’s right to reimbursement of defense costs, it was seen as a more important source of guidance than the RLLI.

As the court noted, “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law.” Translation - Look to see the RLLI most in play in situations where applicable case law is non-existent or sparse.

Had Grand Point not been there, and the Tennessee slate clean, it would not have been all that surprising to see the court rely on the RLLI to deny the insurer’s right to reimbursement.

Policyholders Will Shout Doobious Decision: Marijuana Coverage And An Issue I’ve Never Seen Before

Come on, who doesn’t love a coverage case about property damage caused by a marijuana growing operation? That’s what’s at issue in KVG Properties, Inc. v. Westfield Ins. Company, No. 17-2421 (6th Cir. Aug. 21, 2018). Bud KVG Properties doesn’t stop there. It rolls on and the court then addressed an issue I’ve never seen before in a coverage case. The whole thing is just jointly fascinating.

At issue was coverage for KVG Properties, under a commercial property policy, for damage to a property caused by its commercial tenant. The property had been rented for general office or light industrial business. But the tenant used the property to grow marijuana, causing nearly $500,000 in damages. KVG sought coverage from Westfield under a commercial property policy.

Under the policy, Westfield agreed to pay for “direct physical loss of or damage to Covered Property . . . caused by or resulting from any Covered Cause of Loss,” which is any “risk of direct physical loss.”

The court noted that this “generous insuring agreement” [“Indeed, one would struggle to think of damage not covered by this language”] “is tempered by a litany of exclusions.” The exclusion at issue provided: Westfield “will not pay for loss or damage caused by or resulting from” any “[d]ishonest or criminal act by you, any of your partners, members, officers, …” (“Dishonest or Criminal Acts Exclusion”).

Westfield argued that the Dishonest or Criminal Acts Exclusion precluded coverage as KVG’s tenants’ conduct was criminal under either state or federal law. The court agreed. But it wasn’t so simple, as the court noted: “Cultivating marijuana is a crime under federal law, see, e.g., 21 U.S.C. § 841(b)(1)(A)(vii), but it is protected by Michigan law under certain conditions [medical marijuana].”

Thus, as the court saw it, KVG might have had a strong federalism argument in favor of coverage. “In diversity cases, we act as faithful agents of the state courts and the state legislature. . . . Exercising the Michigan courts’ common-law power to interpret public initiatives, we would hesitate before reading a Michigan insurance policy to bar coverage for a ‘criminal act’ when Michigan law confers criminal and civil immunity for the conduct at issue [citing Michigan’s medical marijuana law].”

However, the court did not go down this interesting federalism vs. states’ rights road and how it could affect coverage. Rather, the court took a seemingly simpler path: “[T]he record contains evidence that KVG itself claimed, in Michigan court, that its tenants violated the law. In its eviction pleadings against each tenant, KVG repeatedly claimed that the ‘[t]enant illegally grew marijuana’ in the unit and stated that the ‘[i]llegal growing of marijuana’ was a ‘continuing health hazard.’ These pleadings were signed by KVG’s lawyer, who sought and obtained immediate possession of the premises under Michigan’s summary eviction statute. . . . Pleadings are binding legal documents that can be admitted as evidence against that party in subsequent proceedings. Furthermore, neither party disputes that federal agents raided the premises as part of a criminal investigation.”

The court also considered that, while the feds generally do not get out of sorts when individuals are acting “in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana,” this does not halt all federal inquiry into marijuana growing that complies with state law. The court presumed that the DEA did not ignore this when deciding to raid KVG’s property.

The court held that, “[t]aken together, these facts are sufficient to meet Westfield’s prima facie case of proving a criminal act by the preponderance of the evidence. It thus falls to KVG to identify record evidence suggesting that its tenants complied with the Michigan Medical Marihuana Act. It has not done so.”

Thus, the court affirmed the trial court’s decision that the Dishonest or Criminal Acts Exclusion applied to bar coverage. The court also held that the exclusion applied even if the tenants had not been convicted.

The Great Insurance Policy Mystery

There are some things in life I just don’t get. Like, why would anyone buy Regular Strength Tylenol when Extra Strength is right next to it on the shelf? Is it for people who want to get better -- but just not right away?

There are also things in insurance policies that I just don’t get – such as how the ISO commercial general liability policy treats loss of consortium. The policy defines “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” Then, in the Insuring Agreement -- 12 pages away – the policy adds that “[d]amages because of ‘bodily injury’ include damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘bodily injury.’”

Wouldn’t it make more sense to include this language, which is addressing loss of consortium, as part of the definition of “bodily injury?” Including what is essentially a definition, in the Insuring Agreement, is out of place enough. But, to do so, when there is an existing definition in the policy, where this language concerning loss of consortium could be placed, just leaves me scratching my head. I get a headache trying to figure out why.


Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved