Additional Insurance: When "Ongoing Operations" Coverage Extends To Damages After Completion

One of the areas of insurance coverage law that can make a legitimate claim to being the most challenging is the area of problems arising out of additional insured status. Additional insurance is frequently required in the construction industry by general contractors, and additional insurance arrangements are extremely common. This involves the GC requiring a subcontractor to add the GC to the subcontractor's insurance policy as an insured to the extent the GC becomes liable for the negligence (sometimes it is stated as the subcontractor's "fault," a broader concept than negligence, or sometimes simply "acts," "omissions," "conduct," "activities," "operations" or similar word). 

Stemming out of the explosion of construction defect litigation in the 1990s, "long tail" liability for construction defect damages became a frequently litigated reality, and insurers responded with a number of measures including exclusions for injuries in progress, multi-unit construction, losses for which pre-policy notice was provided and stacking of multiple policies. Part of this was designed to bring more certainty to indemnity issues under "occurrence" liability policies, but another part was designed to relieve insurers of the duty to defend in many instances -- construction defect cases are often massive and expensive to defend, with defense costs exceeding indemnity exposure in a high percentage of cases. 

Insurers also sought to limit AI responsibilities by producing an endorsement form that specified that the coverage applies to "ongoing operations."  More about that in a minute. One of the great challenges of insurance coverage law is that this field is really just out of its infancy.  Widespread commercial liability insurance is a relatively new product -- since about the early to mid-1960s -- and has been evolving continuously. As a result, in many states, key questions have not even been addressed by the judiciary, or the decisions that do exist aren't very helpful and are perhaps not the most sophisticated or insightful analysis that could be done. This is why I call insurance coverage The Great Workshop of the Common Law. It's a work in progress -- an "ongoing operation," if you will. 

Now, back to AI endorsements.  In 1993 and 1997 the Insurance Services Office produced additional insured endorsements that were supposed to limit exposure to damage that occurred during ongoing operations. The problem is that, many times, courts said the language of the endorsement didn't actually say that: for example, ISO form CG 20 10 03 97 (which as the last four numbers of the form indicate was produced in March 1997) says AI coverage is in respect to "liability arising out of your [the subcontractor's] ongoing operations performed for [the additional insured]." Some courts have said this language actually covers not just damages that occurred during ongoing operations, but damages that occurred after completion. Because the vast majority of construction defect liability stems from water intrusion and related damages that occur after completion of a project, these cases present a problem for insurers. 

I saw a recent Ninth Circuit case that highlights this language: Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co. The case was decided under Arizona law. This case appears to me to involve the 20 10 03 97 form, judging by the language the court analyzed. The Ninth Circuit found that the "arising out of ongoing operations" did not limit the GC's coverage to just liability for damages that the subcontractor caused before completion, but also for damages that occurred after completion, as long as they happened during the policy period. "During the policy period" isn't as much of a restriction as you might think, or the Ninth Circuit appeared to believe -- in the absence of a continuing loss or other exclusion, damages that begin during a policy period are usually covered by a commercial general liability policy if they continue after the policy period.  

The Ninth Circuit said that damages that occur after completion necessarily must have arisen out of ongoing operations -- if the subcontractor didn't do any ongoing operations, there wouldn't have been anything completed. The court said it wasn't going to consider the drafter's history, which I think is a legitimate call, and was going to hold the insurer to what it actually said. I think there is an argument for what the court said, but there is one aspect of its analysis I think is lacking.  The court examined exclusion (j)(6) in the body of the subcontractor's policy, it appears, to show that if the endorsement didn't provide coverage for completed ops damages, there was no coverage at all. Exclusion (j)(6) is the one that precludes coverage for "that particular part of any property that must be restored, repaired or replaced" because the insured's work "was incorrectly performed on it." There is an exception in the exclusion for damages that occur after completion, meaning it applies only to ongoing operations. I take it the Ninth Circuit's point is that, if the AI endorsement excludes completed operations and (j)(6) excludes ongoing operations, there is no coverage and that is ridiculous.

If that is what the court is saying, my reaction is this: (j)(6) might indeed limit the subcontractor's coverage to completed operations only, but as to the additionally insured GC, there is potential coverage for ongoing operations as well as completed ops because the definition of "your work" in a commercial general liability policy has an exception that allows coverage for a GC when work was performed for it by a subcontractor.  In other words, the (j)(6) exclusion will be applied differently to a GC insured as an AI under the policy than to the named insured subcontractor. If this seems weird, don't forget that there is a Separation of Insureds or Severability of Insureds clause in such policies that instructs you to analyze coverage separately as to each insured. 

Because of case law like this, ISO put out an AI form in 2004 that changes the coverage language and contains an express exclusion for damages that occur after completion. But even seven years after this AI form was produced by ISO, not every insurer uses it. Many still use old forms, or use manuscript forms of their own devising, or modify the ISO form. 

I could go on and on and on about AI insurance, but this is a good place to stop for today. There are something like 28 current ISO AI forms, and many, many old ISO forms, out there. Also, there are dozens if not hundreds of manuscript and adapted forms out there, so this issue is one we will keep seeing being constructed and deconstructed again and again upon our visits to The Great Workshop of the Common Law. 

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'Partridge' family reunion: California v. Allstate

I saw this opinion, California v. Allstate, a couple days ago but other things interfered with blogging about it until now. This is a case about coverage for environmental pollution under the "sudden and unexpected" language found in old liability policies, and that is an interesting thing in itself, but what chiefly interested me about this case was the extended discussion of the Partridge case, an influential case that, in days gone by, was in part responsible for the creation of the modern anti-concurrent cause language found in first party policies.

Partridge is not a first party case, of course, but its reasoning resonated beyond the third party liability context, as I discussed in this Appleman's Critical Issues article on anti-concurrent causation analysis from a couple years ago. (The Partridge discussion starts on page 61).  Partridge was cited in a 1982 Ninth Circuit case, Safeco v. Guyton, that in essence overrode California's efficient proximate cause analysis in property insurance cases and endorsed a Partridge approach.  (I know that to folks who may not be steeped in this particular aspect of coverage law, this may all sound like secret code at best or Klingon at worst, and maybe it is, but for good or ill insurance coverage has its own specialized language that is an initial barrier to entering the conversation or even following what it is being said.  This is unfortunate in some respects, but it is a fact of life).

What a Partridge approach means is this: whenever two causes of liability exist, as long as one of them is covered, the liability will be covered, even if the covered cause is a subsidiary part of the causation chain and not the efficient or proximate cause. It just has to be a proximate cause.  As the California Supreme Court later found in Garvey v. State Farm, however, the analysis of concurrent causes that might be appropriate for liability cases, where tort law sets the stage for analysis, is not appropriate for first party causation analysis, where the court said efficient proximate cause was the correct analysis. (California is one of just a few states where statutes have been interpreted as mandating efficient proximate cause and precluding the contractual use of anti-concurrent cause provisions). 

But California v. Allstate is a liability case, and Partridge remains good law in California for those kinds of disputes.  Now, it should be said at this point, that not every state has a case like Partridge, and courts in those states may not buy arguments in the liability context based on the reasoning of Partridge, as I have personally found out.  A few words about what Partridge held:  it involved an insured under a homeowners policy that contained, as most or all of them do, an exclusion for liability arising out of the use of a motor vehicle.  The insured committed two negligent acts -- filing a gun trigger to a "hair trigger" -- so that it would go off with a slight touch, or even, as it turned out, without being pulled at all -- and driving erratically, which led to the gun firing and injuring a passenger.  Partridge featured two independent causes, neither one of which could have caused the result by itself.  You can formulate this circumstance in various ways, that is, you can use different words to describe what it is, but the usual way in this context is to say the causes were indivisible, incapable of being separated. 

The Allstate court used the Partridge analysis to find that sudden and unexpected, or accidental,  releases of pollution, which were covered, could not be divided under the facts presented from releases that were gradual and not sudden and which presumably would not be covered.   The court picked this phrase from Partridge as the most apropos: "whenever an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause," liability coverage will exist.  The result, apparently, is that all the pollution liability of the state is covered. 

Before discussing this a little more in-depth, let me just add a curiosity here.  I noted the analysis of the court on the "sudden and unexpected" language with great interest, because in Oregon, a case called Baxter & McCormick has largely read the "sudden" out of sudden and unexpected, and the analysis would have been quite different -- if this case occurred in Oregon there probably would not have been a discussion of covered vs. uncovered and concurrent tort causes at all. 

Now, let's talk a bit about this idea of concurrent cause in the liability context.  I have thought a great deal about this over the past couple years, and there is something intellectually unsatisfying in doing so.  Trying to nail down the analysis in this area is kind of like sticking your arm in water -- the refraction makes it appear that your arm has become disjointed and separated from itself.  Likewise, in this area, it can be hard to tell illusion from reality.  One possible conclusion is that there is no reality at all, because the entire concept is artificial and a human construct.  Many things are human constructs, of course, and that does not stop us from thinking of them as reality, or at least reflective of something that is or resembles objectively or empirically observable.  But this area is somewhat different, it seems to me, and less prone to being pinned down, tested or verified.

Consider this, when considering Partridge:  think about the motor vehicle exclusion in the homeowners policy in that case, or a "business pursuits" exclusion in a homeowners policy, or perhaps an earth movement exclusion in a contractors liability policy.  In Partridge, the negligent act of altering the trigger mechanism was found to be a proximate cause. So was the negligent use of a motor vehicle.  But no matter how you see this case, one thing has to be admitted -- the use of "negligence" as a cause is particularly prone to manipulation, and I don't say this with malice, I simply observe that this is so.  Since any court case will involve the actions of human beings, no event that will be considered by a court is untouched by potential human negligence, and this can consume and overwhelm any other attempt at analysis.  If you read the Appleman's article I linked to above, you can see this, and this was noted by the Fifth Circuit in some of the Katrina cases, such as In re Katrina Canal Breaches Litigation.  

In other words, if a court will let you, you can always attack an exclusion as not really excluding liability because, although it may exclude liability "arising out of" business pursuits, or motor vehicles, or earth movement, it does not specifically exclude human negligence.  So the question arises: is negligence on par with motor vehicle use as a cause? Are these like comparing apples and oranges, or even further apart, like comparing apples to monster truck tires?   Again, I am not taking sides in this, I merely point out that they are not conceptually equivalent.    

One final word, about the Allstate case.  You have reflected by this point in this post that the facts of Allstate and Partridge are not the same.  As the insurers pointed out in briefing, Partridge involved a single, one-time, injury, but Allstate involved various kinds of pollution releases, some sudden and some not sudden, over a period of a number of years.  The court gives an indication it would have given credence to this argument, if the facts would have allowed the court to see the costs of remediation as divisible into costs associated with overflow of the containment pits versus costs associated with gradual seepage from the pits. That is a very hard distinction to make, if you are in the position to have to make it, and all the chemicals come from the same source and are the same chemicals.  It is easier to do this, in environmental work, where, say, one polluter had gasoline at a site, and another had dry cleaning fluid.  Test monitor wells and soil samples will allow a pretty decent estimate of how much of each kind of chemical makes up the pollution mix.  So, not knowing more about this case, on the surface what the court asks to be done sounds incredibly difficult to do.

I do note one other difference with Partridge.  The analysis of the Allstate court does not, at least it appears to me, go nearly as far as some courts do in separating negligence as a cause from actual events, or in other words what we often think of as "causes."  I'm not sure if this different way of approaching the problem is because of the difference in the facts, or if the Allstate court has a somewhat different way of thinking about the issue than did the Partridge court.    

UPDATE: Almost forgot, I saw this case analyzed in a piece by Robert M. Horkovich at the LexisNexis Insurance Law Center.   Full disclosure: I'm on the advisory board of the ILC, so obviously I have a vested interest, I think it's a good product and I shamelessly plug it when I can.

 

 

         

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McIntosh case punitive damages eliminated, case settled

Holy Cow! The McIntosh case, which I have referred to as the Verdun of insurance litigation, has been dismissed by the plaintiffs' own motion.  Given this litigation had long been the scene of intense trench warfare, consuming attorney fee dollars like five NFL offensive linemen chowing down on popcorn shrimp at an all-you-can-eat  buffet, it is surprising to see this turn of events.

If you remember, Thomas and Pamela McIntosh v. State Farm is the granddaddy of Katrina litigation, or perhaps more accurately, the Mother of All (Insurance) Battles.   This is the case where Kerri Rigsby of Rigsby sisters "whistleblower" fame approved the flood payment to the McIntoshes, and where, strangely enough, the original engineering report on the damage to the home said the damage was from wind, not flood.  Alexis "Lecky" King, a State Farm catastrophe team leader, found fault with the report and asked the engineers to re-evaluate.  The second report noted the presence of both wind and water damage.  Before we move on with the recap, remember that the first report was done by a man named Brian Ford, because his name will come up again. Ford did not work on the second report. 

Now, the McIntosh claims file was among those taken by the Rigsby sisters and fed to Dickie Scruggs for use in lawsuits he was bringing and planned to bring against State Farm.  This is the case that really started all the public uproar about changed engineering reports, insurer fraud, etc. etc.  Keep in mind that Kerri Rigsby and her sister, Cori, who like Kerri was another claims adjuster working with State Farm, both quit and went directly to work for Scruggs in what federal judge L.T. Senter called a "sham" consultant arrangement -- but not before they had performed a massive "data dump," where they and some friends spent the weekend copying State Farm claims files to give to Scruggs and his good friend, Mississippi AG Jim Hood.  (Don't forget Hood once called Scruggs his "confidential informant" and helped him play keep away with the documents the Rigsby sisters took. Jeez, talk about backing the wrong horse -- if you go to the track with Jim, use him as a reverse barometer.)

You may also remember that the Scruggs Katrina Group, besides "employing" the "whistleblower" Rigsby sisters, also discussed hiring Brian Ford as a consultant.  Ford wanted a similar deal to those of the Rigsby sisters, somewhere in the neighborhood of 10-Large per month.  Entrepreneurism at work, you say?  Maybe.  But of course, payments by a party to material witnesses they would be calling to support their case is frowned upon, and in the end, that led Judge Senter to disqualify the Rigsby sisters as witnesses and to disqualify the Scruggs Katrina Group itself as counsel for the McIntoshes. 

Their present counsel, the Merlin Law Group, went a different direction with this than Scruggs did.  Here's a copy of the motion, and here's part of what the motion says:   

After engaging in extensive discovery, the Plaintiffs have determined the following:

(a) the McIntosh dwelling was damaged as a result of Hurricane Katrina;

(b) the majority of the damage to the McIntosh dwelling was caused by flooding;

(c) the McIntosh dwelling sustained flood damage of at least $250,000 to the structure and $100,000 to its contents;

(d) State Farm promptly and properly paid Plaintiffs the full policy limits of their flood insurance policy; and

(e) State Farm promptly tendered payment to Plaintiffs for wind damage covered under their homeowners insurance policy prior to the time that the dwelling was inspected by an engineer.

This has got to the most surprising development since those German and English soldiers met on that World War I battlefield for a soccer game during a Christmas truce.

The motion, which was granted yesterday by Judge Senter, dismissed with prejudice all the punitive claims.  That left only the contract claims, and my understanding is that those were settled. 

I'll discuss this more later. 

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Rigsby sister depositions

Some have been asking that I put the Rigsby sisters' depositions all in one post for ease of access and research.  OK, here they are.

I've talked a lot about these depositions, and don't have the time right now to go over them in detail again. The only thing I will note for this post is to repeat that in Cori's latest deposition, she admits accessing the State Farm claims files using a list of the Scruggs plaintiffs, although she says she can't remember where she got it.  I wonder where it could have come from.  Hmmm. 

If I've left off any of their depositions, let me know.

January 14, 2008 -- Cori Rigsby (portions under seal)

(Kerri Rigsby's deposition from around the same date is under seal)

November 19, 2007 -- Cori Rigsby

November 20, 2007 -- Kerri Rigsby

May 1, 2007 -- Cori Rigsby, Part 1

May 1, 2007 -- Cori Rigsby, Part II

April 30, 2007 -- Kerri Rigsby

May 1, 2007 -- Kerri Rigsby

 

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Anti-concurrent cause, Ontario style

I saw an interesting case on anti-concurrent cause language in a liability policy on the blog for the Cavanagh Williams firm in OttawaHere's a copy of the case, Appin v. Economical Ins. Co., in the Ontario Court of Appeals.  The decision was handed down in mid-February.

The court referred to it by another name -- the concurrent exclusion clause -- but it is worded more or less the same as the kind of anti-concurrent cause clauses we have discussed at length here, except for one thing: this provision is in the liability form of a Commercial General Liability policy, and is attached to a mold exclusion.

The purpose of the anti-concurrent cause language in the policy appears to be to reinforce the exclusion's status as an "absolute" mold exclusion -- no matter what combination of origins, causes, effects, happenings, events, or whatever word you come up with, the insurer does not intend to pay for any liability if the harm is caused in any way by mold.

To consider this clause in the proper context, let's broaden our perspective for the moment.  Anti-concurrent cause language, as I've written about at length, is merely one way of addressing what I have called the Unbearable Lightness of Causation (with apologies to Kundera).  Causal relationships are among the most intellectually perplexing constructs of human thought, and theories of concurrent and sequential causation are likewise theoretically complex.   I've written about it in this article for New Appleman: Critical Issues from last year, and a second article on anti-concurrent causation and Fifth Circuit Katrina cases will come out in the same publication next month.  Anti-concurrent cause language posits an arbitrary analysis of causation -- arbitrary in the sense that the areas of inquiry are limited so that, when certain factors are present, the result of the analysis each time will be the same: no coverage.

These clauses were developed to deal with adverse court precedent in first-party property policies, however, and I have expressed some skepticism about how well the language transfers to liability policies.  Consider this: property insurance causation has traditionally been viewed far differently from tort causation -- the blurring of the distinction between the two, in fact, resulted in the development of the modern anti-concurrent cause clause. But tort causation is what liability insurance is all about, so whenever anti-concurrent cause language is inserted into the liability portion of a policy, sharp lawyers will look to attack it as incompatible with the underlying concept behind liability insurance -- tort law can and does impose liability for concurrent causes of damage, so limitations on that theory of causation, some will say, are inherently ambiguous. 

OK, enough mumbo jumbo, right?  Let's look at the case, and the language of the exclusion.  Now, I know what any normal person is thinking when they look below: "You expect me to read on past this point when the headline is 'Fungi and Fungal Derivatives? See you later'."  Quite true, but those interested in reading a post on anti-concurrent cause language are by definition not normal people, and I have every confidence that those who have stuck with me this far won't let a little fungus deter them from reading to the end.  I have put the anti-concurrent cause language in bold to make it easier to find among the fungi.

This insurance does not apply to:


7. FUNGI AND FUNGAL DERIVATIVES
(a) “bodily injury”, “property damage”, “personal injury”, or Medical Payments or any other costs, loss or expense incurred by others, arising directly or indirectly, from the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, presence of, spread of, reproduction, discharge or other growth of any “fungi” or “spores” however caused, including any costs or expenses incurred to prevent, respond to, test for, monitor, abate, mitigate, remove, cleanup, contain, remediate, treat, detoxify, neutralize, assess or otherwise deal with or dispose of “fungi” or “spores”; or


(b) any supervision, instructions, recommendations, warnings, or advice given or which should have been given in connection with (a) above; or


(c) any obligation to pay damages, share damages with or repay someone else who must pay damages because of such injury or damage referred to in (a) or (b) above.


This exclusion applies regardless of the cause of the loss or damage, other causes of the injury, damage, expense or costs or whether other causes acted concurrently or in any sequence to produce the injury, damage, expenses or costs.

Here, I am not sure the anti-concurrent cause language adds anything to what was already said: we do not cover any liabilities arising in any way from harm caused by mold.   The appellate court agreed with the trial court -- both found the exclusion ambiguous and unenforceable. The reason the court did so, is that the insurer denied the duty to defend the insured against allegations that the claimant was harmed by exposure to mold (uncovered) and bacteria (covered). The court explained it this way:

We disagree with the insurer’s position. The language in clause 7(a) is both unclear and ambiguous in its effect. A plain reading of the provision does not support the insurer’s position. Indeed, the clause is worded in a fashion that would leave most people guessing as to its meaning. For example, on another possible interpretation, the clause could be taken to mean that wherever injury from mould is alleged in a claim, even if it is ultimately established that the injury arose solely from a covered peril, such as bacteria, the claim would exclude both the duty to defend and the duty to indemnify. This would effectively extend the exclusion to otherwise non-excluded perils. 

Now, to me, the key is not whether bacteria might ultimately be proven a cause of harm, therefore calling for indemnity.  The key for the duty to defend question is whether, under the allegations, mold and bacteria are concurrent or sequential causes of the harm claimed.  These are terms with highly specialized meanings in insurance.  Concurrent means independent causes that combine to produce a result that would not have occurred but for the existence of one of the causes.   Sequential can be ruled out -- it refers to dependent causes, one cause causing the other.  It seems highly unlikely that the allegations were that the mold illness caused the bacterial illness or vice versa. 

So the question for anti-concurrent cause is this -- can the allegations be read only one way, that is to say, that no illness at all would have occurred but for the combination of mold and bacteria?  It the allegations can be read to say that harm would have occurred because of bacteria alone, then we are talking about two separate single causes of two separate harms, not multiple causes of one harm.  If the allegations can be read that way, a powerful argument exists that anti-concurrent cause language is not relevant. 

As I mentioned, I'm not sure the anti-concurrent cause language added anything here.  The insurer admitted that if bacterial harm were proven, the insurer would have to pay for the liability.  From what I can see of the allegations from the court's analysis, it is dubious whether a denial of the duty to defend can stand under such circumstances.  There may be things I don't know about this case that were not in the opinion, but from what I see here the court's call is well-reasoned.  I would have liked to see an analysis closer to the one I have explained above -- then I could see if my assumptions about the case are correct.  If courts would use an analysis similar to the one I propose here, their jobs would be easier and their opinions clearer and more bulletproof. 

 

 

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Coverage by admission

There are probably three things from my first year of law school I could do without having to think about again.  One is the Rule Against Perpetuities.  The second is the Statute of Frauds.  The third is the parol evidence rule.  I'm pretty safe on the first one, and seldom have to worry about the second.  But the third lurks around insurance coverage law like some kind of heavy-breathing beast at the edge of the firelight.  It may not go by its rightful name, but questions dealing with the admissibility of extrinsic evidence to prove the meaning of terms in an insurance contract are in fact parol evidence rule questions. 

In contract law, the parol evidence rule states that extrinsic evidence, usually of prior negotiations, is not admissible in interpreting a fully integrated contract unless the language of the contract is ambiguous.  Everyone agrees on that. However, the meaning of the word "ambiguous" is subject to debate -- you could say the word ambiguous is itself ambiguous -- and has produced two main viewpoints. 

The traditional view, of Prof. Samuel Williston, is that an ambiguity must appear on the face of the document before extrinsic evidence is admitted.  This is sometimes called the "plain meaning" approach.  The competing point of view, associated with Prof. Arthur Corbin, is that it is not necessary for an ambiguity to appear on a document's face: instead, extrinsic evidence can be used to show the existence of an ambiguity.  One more thing: even under the Williston approach, extrinsic evidence is allowed to resolve ambiguity once it is found.  A stricter view of contract interpretation exists, referred to as the "four corners" approach, which says that only what is within the four corners of the document should be used -- no extrinsic evidence at all.  Insurance law, which Prof. Michelle Boardman has cogently referred to as "the odd but brilliant prodigy" of the contract law family, has significant differences from regular contract law when it comes to interpretation, particularly the use of the doctrine of contra proferentem. However, because I recently had to research and write a ton on this subject, I don't feel like going into it in great depth here.  Suffice it to say that many jurisdictions use some version of the Williston or Corbin approach for the initial stages of insurance contract interpretation, and many instead use the four corners approach, including Oregon.  (By the way, I'm going to single Prof. Boardman out for praise for writing one of the relatively few law review articles I can honestly say I have enjoyed reading:  Boilerplate Versus Contract -- Contra Proferentem: The Allure of Ambiguous Boilerplate, 104 Mich. L. Rev. 1105 (March 2006).  This article was not only informative, but entertainingly written). 

All of this is a long lead-in to a useful article in the GenRe Research publication Policy Wording Matters written by Randy Maniloff, who has a certain Forrest Gump ubiquitousness -- he's in nearly every publication there is. I wouldn't be surprised to open up my church bulletin at Mass and find an article by Maniloff in there.  The article is on coverage by admission -- examination of changes in policy wording, or perhaps the lack of change, to either show or decide ambiguity. Take a read on the article here -- it's on page 5. I was also impressed by the quality of the entire GenRe publication -- and as you know, I don't hand out praise for writing lightly, I struggle and suffer too much over writing to give anyone else a free pass. 

 

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Do Insurers Intentionally Introduce Ambiguities Into Policies?

Now this is an impressive post on ambiguities in insurance contracts, complete with footnotes, by Chris Robertson, a third-year law student at Harvard. I hesitate to link to it, for fear anyone will expect footnotes from me. If they are waiting for this, they will wait a long time.

The post is well-researched with sources ranging from Judge Richard Posner to Ralph Nader.  The gist of the post is that insurers perhaps intentionally make policy terms and conditions ambiguous as a strategy to deter and intimidate policyholders.  Chris acknowledges that courts decide ambiguities against the insurer, but says insurers may prefer to take their chances knowing that many people won't sue and that sometimes courts will side with insurers.  Chris wrote this post in a scholarly vein, so I hope he won't mind if I take issue with it. The post is in line with a lot of popular sentiment, so I want to address it. 

If this is a strategy by any insurance company in this world, let me give you some free advice: give it up, it won't work.  Instead, don't put any ambiguities in policies and use the same strategy of refusing to pay no matter what, and you will achieve better results.  Let's look at the economic argument in the post this way.  Suppose the market is saturated with insurers whose business strategy manual has one page that contains one sentence: AT ALL TIMES, ACT IN BAD FAITH.  They take in premiums but don't pay. Let's also just say there are no state regulators who will prosecute them or revoke their licenses to sell insurance in the state.  If I come along and start an honest insurance company, or as honest as I can make it considering I may have to hire employees from companies that trained them to operate in bad faith, I will be able to charge higher prices and still dominate the market, because people know with me, they at least have a chance of getting a claim paid.  Whereas with the other companies, giving them money is like making a loan to your brother-in-law.  Neither I nor the bad companies have any incentive to make policies ambiguous -- doing so only gives some judge a free shot at me, and for the other guys, why bother, since they aren't going to pay no matter what the contract says. 

Not to mention that we know that almost all terms in widely used policies originated with the Insurance Services Office or some other trade group that debated endlessly about language to address specific concerns, in response to specific legal developments, and had a specific intention to broaden coverage to include certain things but not others, or to contract coverage to exclude certain things but not others.   These things are written about as well as they can be written.  Plain English doesn't work.  The less that is said about a given thing, and the less technical the term, the more ambiguous you can make it out to be. 

In any event, a good, thought-provoking post.

UPDATE: Make sure you check out the comment below from Prof. Seth Chandler.  He gives you two weeks of course work on ambiguity condensed into a 60-second bite, and you don't have to pay any law school tuition to get it.  

SECOND UPDATE: You'll also want to read Martin Grace's post on ambiguity at RiskProf, and check out Ted Frank's post at PointofLaw.  

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Maniloff's Top 10 Coverage Decisions Of 2006

It is hard to write excellent legal prose for a number of reasons, not the least of which is the surprising resistance one encounters to good writing from many people who treat legal writing as if it is not an art but merely an industrial process, like bleaching wood pulp. These people treat any attempt at originality, creativity or -- heaven forbid -- humor as if you had showed up at a job interview with a Harley tattoo on your forehead. In addition, writing anything good is just plain hard, often agonizing, work.  Strangely enough, really good writing does not bear the marks and bruises of all this laboring, but instead reads as if it flowed naturally from the author's fingertips with little effort.  Good writing glides, turns, shoots and scores like The Great One in his prime.     

So here is an example of legal writing that is really good, by Randy Maniloff, of White and Williams in Philadelphia.  Here is a link to Randy's upcoming article in Mealey's Litigation Report: Insurance on the year's 10 most significant insurance decisions.  When I praise the writing, don't take that to mean I slight the substance, because good writing is substance.  I place this article in my highest category of legal writing -- the Steve Buscemi class -- named after the actor who always brings something fresh, surprising and original to a role, who puts maximum effort into each part without letting you see the effort, and who worked as a firefighter for four years before becoming a star, and then showed up for work at his old firehouse the day after 9/11, working 12-hour shifts at Ground Zero while disdaining publicity. 

I can't quibble with Randy's case selection -- I've written about many of them myself -- although for sentimental reasons, I found myself wishing at least one of the Hurricane Katrina coverage cases, which I have spent so much time analyzing and of which I have grown so fond, had made the list.  My favorite analysis in Randy's piece is French v. Assurance Co. of America (4th Cir. 2006), particularly this excerpt that brings clarity to a construction defect issue that often seems murky:

However, the flaw in this argument is that the subcontractor exception to the your work exclusion is not called the subcontractor exception to the occurrence requirement. The French Court recognized this and concluded that, notwithstanding that the EIFS was defectively installed by a subcontractor, such defective application does not constitute an accident, and, therefore, is not an occurrence under the CGL policy. 

My favorite lede from the analysis of the cases is this one, from Standard Fire Ins. Co. v. Spectrum Community Assoc., 46 Cal.Rptr.3d 804 (Cal.App. 2006):

What's the difference between a John Grisham novel and the continuous trigger? Answer: Nothing.  They are both legal fiction.

And here's a great short summary of Brannon v. Continental Casualty Co.:

-- Supreme Court of Alaska gave an insurer a chilly reception to its argument that the statute of limitations on an insured's action for breach of the duty to defend began to run from the time of the disclaimer . . . .

Print the article out and read the whole thing.  At 23 pages, it will take a little time, but it's worth it.

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Rapper Sues National Union Fire Insurance, Claiming Failure To Pay Indemnity Ordered By Court In 2004

Rapper Dwight Myers, who goes by the name Heavy D, is suing his liability insurance carrier, National Union Fire Insurance Co. of Pittsburgh, saying it has failed to pay him indemnity as ordered by a New York court two years ago.  Heavy D requested indemnity for his liability stemming from an event where he and fellow rapper Sean Combs, who has been known by various names including P. Diddy and Puff Daddy, coached opposing sides at a celebrity basketball game at New York's City College.  A huge crowd showed up, everyone could not fit in the building, and pushing and shoving led to a stampede in which nine people were crushed to death.

Heavy D is seeking $1.5 million from the insurer, including $791,000 in indemnity, $381,000 in interest and a hefty, or Heavy, $324,000 in attorney fees.  Is it just me, or does that sound like a lot of attorney fees for a dispute over the meaning of insurance contract terms that was decided in a bench trial?

Here's a link to the underlying case of National Union Fire Insurance v. Heavy D, which the New York court provided on a publicly available, easily accessible website, unlike federal courts that provide access to most of their stuff only through the ECF system.  (Scroll down to the fifth paragraph of the link).  The trial court rejected the insurer's defense that coverage was precluded by the policy's exclusion for "promoting activities to the extent of contracting with arenas, halls, theaters and other places for theatrical presentations, whereby the business [Heavy D] is holding harmless aforesaid facility." The court found that Heavy D was not the promoter of the event, Sean Combs was, and that the basketball game was not a theatrical presentation like a musical concert or tour.

 

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This Sounds Like 'Defective' Analysis To Me

I'm having a hard time buying the court's opinion in Stansley Group v. Fru-Con Construction Corp., 2006 WL 2711795 (N.D. Ohio September 21, 2006)(click here for a pdf of the case).   Stansley poured some apparently defective concrete in construction of two bridge pylons, although the concrete it poured for 11 other pylons met pressure standards of 10,000 pounds per square inch.  Stansley was sued by the general contractor, and the issue in the case was whether Stansley's insurer owed a duty to defend and indemnify.

The court acknowledged that defective work does not constitute an "occurrence" under a Commercial General Liability policy, and that only damage to other work or property could constitute covered property damage.  Then the court went in a direction I did not anticipate.  Now, to finish out this discussion let's remember that in the construction business wet concrete is called "mud."  It will be more fun and make us feel like construction insiders if, for the rest of this post, we call the concrete "mud."  Let's also remember that many courts will find that if other property has to be destroyed to tear out defective work, the damage to the non-defective work is covered.

Strangely, to my way of thinking, the court said an issue of fact precluded summary judgment for the insurer.  It was unclear, the court said, if all the mud poured for the two pylons was bad mud, or if some good mud was mixed in with the bad.  If some good mud was in the pylons, the court said, destruction of the defective pylons resulted in damage to non-defective property.   I am not agreeing with this.  If I give you a beverage that is 98 percent coffee and 2 percent poison, I am not giving you a drink that is mostly good coffee and a little bad coffee, I am giving you poison.  If I pour some loads of good mud and some loads of bad mud in a pylon, I am not giving you partly a good product and partly a defective product, I am giving you one whole product that is no good.  To my mind, the whole pylon is uncovered defective work.

UPDATE: We're not afraid of dissenting opinions at this blog.  Here is another point of view on Stansley, which focuses on different things about the case, but calls the analysis "great." 

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Court: 'Advertising Injury' Includes Promotional Techniques

The U.S. District Court for the Western District of Kentucky (which, by the way, is among the federal courts that don't provide copies of all opinions on a website readily accessible to the general public) has decided that promotional techniques can constitute "misappropriation of advertising ideas or style of doing business" under the "advertising injury" coverage of a Commercial General Liability policy.  Specifically, the court was talking about the serving of garlic butter, which one pizza chain claimed was its idea that another pizza chain, started by former employees, had ripped off, along with other ideas like toppings poking up through the cheese and the taste of the pizza sauce.  The case is Pizza Magia International, LLC v. Assurance Co. of America, 2006 WL 2241333 (W.D. Ky. August 3, 2006).  

In making its ruling, the court joined other courts that have criticized the Sixth Circuit's Advance Watch case, 99 F.3d 795 (1996), which concluded that "misappropriation of advertising ideas or style of doing business" does not refer to a category or grouping of actionable conduct that includes trademark or trade dress infringement.   The majority of courts have found that trademark and trade dress infringement can indeed constitute advertising injuries under a CGL, depending on the language of the policy and the underlying facts, of course.

The district court also found sufficient nexus between the misappropriation and the injuries suffered.  Advance Watch had said that it was not the appearance of infringing images in a catalog that caused the injuries, but rather the appearance and shape of the product itself, a conclusion that has struck more than one person as a fairly brazen piece of sophistry.  The district court repudiated that line of thinking, but went pretty far the other way, saying that the act of selling is actually a "technique" that in itself constitutes advertising. 

Although the court granted summary judgment on this issue, it found material issues of fact on the loss-in-progress doctrine, and the case will proceed to resolve the question of whether the insured was aware of a threat of loss so immediate that it can be said the loss was in progress when the policy period began.

 

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Court: Insurers Have Right To Seek Reimbursement Of Settlement Amounts Paid For Uncovered Claims

We've discussed an insurer's potential right to reimbursement of defense costs recently on this blog.  Here is a case that discusses an insurer's potential right to get back amounts paid in settlement of liability claims -- Travelers Property Casualty Co. of America v. Hillerich & Bradsby Co., Inc., 2006 WL 2524145 (W.D. Kentucky August 28, 2006). 

Travelers funded the defense of Hillerich & Bradsby, (which if you have ever played baseball or softball you may remember as the name on the trademark of your bat) in a lawsuit alleging claims ranging from anti-trust violations to interference with business relationships in the aluminum bat market.  Travelers agreed to pay the lawyers picked by H&B and also agreed to fund a settlement negotiated by H&B, while reserving the right to seek reimbursement of settlement amounts attributable to uncovered claims.  H&B denied that Travelers had the right to seek reimbursement, and Travelers brought a declaratory action to clarify the issue.

In the declaratory action, Travelers was seeking only reimbursement of uncovered settlement amounts, not reimbursement of legal fees.  The court decided insurers have the right to seek such reimbursement when: 1) they have expressly reserved the right to do so; 2) they have notified the insured of their intent to accept a proposed settlement offer; and 3) the insured either has control of the defense, or the insurer makes an express offer to allow the insured to assume the defense when the insurer and insured disagree over the proposed settlement.  This was the court's decision under general legal principles.  The court left until another day whether Travelers' insurance contract gave it the right to seek reimbursement.

Two asides about this case. 

First, the pdf of this case I linked to is one I obtained via the ECF/PACER electronic filing system for federal courts.  It did not cost anything, but it is not otherwise available on the website of the U.S. District Court for the Western District of Kentucky.  As you may be aware, a few years back Congress directed that federal courts provide electronic "access to the substance of all written opinions . . . in a text searchable format" in the e-Government Act of 2002.  As you can see from the website of the Western District of Kentucky, many courts interpret this to mean it's enough for them to provide opinions through ECF/PACER, not on the website itself, and not available to the common person.  Here is a link to the e-Government Act of 2002.  Read the preamble of the act and Section 205, about the duty of federal courts, and see if you think supplying cases through a data port inaccessible to most people complies with the spirit of Congress' directive.

Second, this case begins with a device I see a lot in both briefs and court opinions and really dislike: "This is an insurance coverage dispute."  I call this type of opening sentence the "modified Gettysburg Address," because I like to imagine how it would have sounded if Abe Lincoln had gotten up after three hours of speaking by Edward Everett, pulled that paper from his pocket, looked at the words he had written and rewritten on the train to Gettysburg, and started off in that high voice of his: "This is a speech about some dead people." 

I realize not every piece of writing is the Gettysburg Address, and I imagine those who use this device see it as a utilitarian information delivery system.  But let me point out that the essence of utilitarianism is functionality and efficiency, not standing hesitantly with one foot halfway forward like the folks at the county courthouse who seem terrified to walk through the metal detector.  Maybe taking the time to come up with a more meaningful and helpful topic sentence would help concentrate the writer to the task at hand, plus show regard for the time of the reader.  Just sayin'.

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These Justices Do A NoDak-In-Exile Proud

When it comes to analyzing insurance coverage for contractor liability or construction defects, a lot of courts have as much trouble as someone trying to rub their stomach and pat their head at the same time.  So I was glad to see ACUITY v. Burd & Smith Construction, Inc. (N.D. August 24, 2006), which you can see for yourself by clicking this link.  As a NoDak-In-Exile (there is no such thing as a former NoDak, only those who wish they could go back and those who don't yet know that they wish they could go back), it does my heart good to see the North Dakota Supreme Court get it so right.

The case is about a messed-up roofing project on an apartment building that led to a lot of rain water getting in and damaging the building's interior as well as some personal property of the tenants.  A man named Mark Ehley apparently did the work, and there was some question whether Burd & Smith did any work at all and whether Ehley had been acting on behalf of the company.  Before all that was  resolved at trial, the building owner and Burd & Smith entered into a stipulated judgment for $412,000 and a covenant to enforce the judgment only against Burd & Smith's Commercial General Liability policy.

Now, you can see the insurer's arguments coming three miles away, like a dust cloud behind a pickup on a NoDak gravel road in August.  First, ACUITY argued that breach of contract claims aren't within a CGL's coverage because breaches of contract aren't accidents.  As the court pointed out, however, it isn't the label on a claim that determines coverage, it's what the policy says.  It is generally accepted that a CGL does not cover replacement of a contractor's defective work, except possibly if it must be torn out to repair other damage, but does cover damage to other property caused by the defective work, even if that other damage is called a breach of contract.  The court also dispensed with arguments about the "assumed contract" and "damage to property."  I'm not going to go into them at length, but the court had a nice, short analysis of each that makes for good reading.  The court found the policy covered the damages to the extent they were for damage to parts of the building other than the roof, but did not cover repair costs to the roof itself.  Sounds right to me.

(Thanks to a Friend of the Blog for tipping me off to this case).

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Minnesota Supreme Court: Insufficient Evidence Of Workplace Violence Precludes Intentional Acts Exclusion

Travelers Indemnity Co. v. Bloomington Steel & Supply, 2006 WL 2167293 (Minn. August 3, 2006) is a tough coverage fight that, from what I can discern in the opinion, was very well argued by the attorneys for both sides.  I thought the court's opinion made a leap in analysis that doesn't fully make sense to me.  However, I'm trying to give the court the benefit of the doubt because the opinion was written by Minnesota Supreme Court Justice Alan Page, who was a star player for the Minnesota Vikings in the 1970s, one of the greatest defensive tackles and kick-blockers in NFL history, and a guy I idolized and watched every Sunday as a kid, and who is perhaps second only to the incomparable Fran Tarkenton in the Viking hall of heroes.  Still, as a coverage lawyer I must remain as objective as possible.

In the case, the issue was whether Travelers should provide coverage for the employer's potential vicarious liability stemming from a manager's assault on a worker.  The manager, Reiners, told the worker to stop speaking Spanish.  Later in the day, the manager found him again speaking Spanish and whacked him with a piece of wood, fracturing his skull.  No surprise, the employee sued the company on the ground that it was vicariously liable for Reiners' conduct.  Travelers brought an action seeking a court declaration that no coverage existed because of the intentional acts exclusion.  The parties stipulated that Reiners had a history of violence, and Travelers argued Bloomington Steel should be charged with this knowledge, especially because he was the head of the company and its shareholder.  That is a powerful argument.

However, the court said the language of the Travelers policies showed that Reiners and the company must be considered separately: the exclusion applied to acts expected or intended from the standpoint of "the insured," not "any insured."  But the court, somewhat mysteriously, concluded merely that the "language of the Travelers' policies does not require that Reiners' intent be automatically imputed to Bloomington Steel." The word "automatically" kind of fuzzes things up.  Should it be imputed or not?

Apparently not, because the court then addressed the second Travelers argument: general corporate law principles charge a company with constructive knowledge of material facts its officers acquire in the course and scope of their employment.  This sounds like a winner, because are you going to tell me Bloomington Steel shouldn't be held to know that its main guy had a history of attacking people in a work setting? If they don't know, the corporate logo should be one of those See No Evil, Hear No Evil, Speak No Evil monkeys.  The trial court granted summary judgment to Travelers, and the Court of Appeals agreed, but the state Supreme Court reversed.  The Supreme Court first said that corporate law principles can't override the language of the insurance contract, but then backtracked and said maybe the company could be charged with knowledge of Reiners' violence; however, the record contained insufficient admissible evidence of that violence.  Excuse me?  I thought the parties agreed the history of violence was undisputed.  Isn't that admissible evidence?  The case was remanded, but for what?  For further evidence of the violence to be developed?  That would make about as much sense as rooting for the Green Bay Packers.

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Breach Of Contract As An "Occurrence"

I don't think I'm going to make too big a deal of Cottonseed v. Coulthard, 2006 WL 2165661 (Wis.App. August 3, 2006), but I was kind of annoyed the court fell back on the tired old cliche that a breach of contract can't constitute an "occurrence" in an insurance policy because an occurrence has to be an accident, while a breach of contract is an intentional act. 

What happened in the case is this: a cottonseed seller sold some product to a dairy farmer that had some mold, yeast and aflotoxin, and which made the cows' milk yield to decrease.  The farmer refused to pay, the seller sued for the unpaid balance, the farmer filed a counterclaim for breach of contract.  The seller filed a third-party complaint against an intermediate seller for indemnity as well as the intermediate seller's insurer.  The court got the right result, but without the right analysis.  The reason no coverage exists is not because a breach of contract happened but rather that something is an occurrence only if it causes bodily injury or damage to tangible property.   The farmer's counterclaim for bad seed does not appear to have alleged that any cows died or that any milk was contaminated, and so there was no occurrence. 

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Seventh Circuit Reverses District Court That Said No Duty To Indemnify Can Arise Where There Is No Duty To Defend

It's hard to figure out how the U.S. district court got it so wrong.  The Seventh Circuit reversed a district court's grant of summary judgment to an insurer on an environmental contamination claim.  The district court believed that, because no lawsuit had been filed, no duty to defend could arise, and because the duty to defend is broader than the duty to indemnify, the insurer could not be responsible for indemnity if it had no duty to defend.  The case is Keystone Consolidated Industries, Inc. v. Employers Insurance Co. of Wausau, 2006 WL 2166469 (7th Cir. August 3, 2006). 

Keystone owned several properties contaminated with industrial chemicals, and the U.S. Environmental Protection Agency ordered a clean-up.  Keystone sought indemnity for some $13 million in remediation costs.  All of the Wausau policies were, of course, before the advent of the absolute pollution exclusion in Commercial General Liability policies in 1985 and one would normally expect them to cover the costs.  Wausau nevertheless refused to pay, and the District Court ruled in the insurer's favor.  The lower court pointed out that the Wausau policies provided for a defense against a "suit," and said the EPA's action did not qualify. (Actually, merely because there was no lawsuit does not necessarily mean there was no duty to defend, because the word "suit" can and has been interpreted to include administrative action like that of the EPA).

Incredibly, the District Court then jumped to the conclusion that because there was no duty to defend, there could be no duty to indemnify.  As Justice Richard Cudahy of the Seventh Circuit pointed out, the language of an insurance policy determines both duties, and the duties are separate and can arise independently of each other.   The Wausau polices said they would pay all covered claims for which the insured became legally responsible for -- nothing was said about a "suit" being necessary for the duty to indemnify to be triggered.  Well, that's why they have appellate courts.

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Connecticut Supreme Court: Loss Of Consortium By Patient's Wife Is Covered Under Physician's Liability Policy

A physician's liability policy that insured against damages "because of bodily injury" covered a claim for loss of consortium by a patient's wife due to an injury to the patient allegedly caused by the doctor's faulty care, the Connecticut Supreme Court ruled.  The case is Connecticut Insurance Guaranty Assoc. v. Fontaine, 278 Conn. 779, 900 A.2d 18 (July 4, 2006).

The Guaranty Association, which as you probably know is a state-created fund that steps into the liabilities of insolvent insurance companies, brought a declaratory action seeking a judgment of no coverage.  The court probably took more pages to analyze this than it needed, finding that the policy contained no clause restricting the damages to the person who suffered bodily injury.  The court could have said the policy language plainly covered the damages claimed by the patient's wife, but instead it found the language ambiguous, or susceptible to more than one reasonable interpretation.  Under that circumstance, the policy must be construed against the insurer and in favor of coverage, producing the same result.

The Guaranty Association also argued that the rule of deciding against the drafter did not apply to it because it didn't draft the policy, but merely inherited its liabilities.  This is a pretty weak argument.  How many insurance policies are out there in which the original underwriting company has since merged or been purchased?  Considering the Insurance Services Office or other trade organizations actually draft much insurance policy language, how far could this argument go?  The court didn't buy it either.  The court affirmed the trial court's judgment for Mrs. Fontaine, the patient's wife, on her cross-motion for summary judgment.

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A Superb Analysis Of CGL's 'Business Risk' Exclusions

First off, let me begin this post by acknowledging that some have made it known to me that there is such a thing as too much Katrina, too much hurricanes, too much Katrina coverage law, too much rising homeowners insurance rates.  I live by one principle: give the people what they want.  So to you folks, I dedicate this day on the blog.  This day will be known as Freedom from Katrina Day.  If I can make it through tomorrow without talking about Katrina, that day will be known as Freedom from Katrina Day: Reloaded.  After that, we'll see.  For those who are saddened and blindsided by these developments and need More Katrina, allow me to refer you to the other zillion posts I've done on the subject.  But before we move on, let me say one last thing: Katrina.  There.  I'm over it.

So let us return today to the roots of this blog, which is insurance coverage case law.   As you may know from reading my bio, I read or at least look at a fair number of new insurance coverage cases most every day.  Some of my reasons are as follows:  so I know what is going on, to broaden my horizons, and because I like coverage law.  Some stuff repels me, of course.  Anything badly written or where it is apparent the writer has no clue gets the skunk eye from me.  In addition, any case that is primarily about ERISA, I run from it like someone is trying to hand me a basket full of snakes. (No offense intended to Steve Rosenberg).  But I find maybe half the cases hold some interest for me, with a small number of those standing out as truly fine work that sheds some needed light on some aspect of coverage law.

In this elite category,  I place Dubrow v. Mike Check Builders, Inc., 2006 WL 1966966 (E.D. Wisc. July 11, 2006).   Almost all the time cases that discuss the so-called "business risk" exclusions in a Commercial General Liability policy, or that discuss construction defect coverage in general, wind up in a total mess.  Hats off to U.S. District Court Judge William Griesbach, who wrote an opinion that succinctly and precisely discusses these exclusions, what they mean, and when they apply.  Based on one reading, albeit a careful one, I find no fault in this case.  I particularly liked how the judge dispensed with the argument over the application of the economic loss doctrine, pointing out that is a remedies principle and not part of an insurance policy analysis.   I am going to keep this case handy for reference when I work on coverage matters with Eric Kekel, who has an amazing construction defect practice.  Since his office is two doors down and he knows where to find me, I need to have answers at my fingertips. 

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Right Result, Dicey Analysis

I generally agree with the result, but I don't like the court's analysis in Amin Realty v. Travelers Property Casualty Co., 2006 WL 1720401 (E.D. N.Y. June 20, 2006).  The court found that a general contractor's liability was uncovered for defective concrete that had to be replaced because of shoddy work of a subcontractor, along with a number of steel beams and supports it had attached to.

The court's initial reasoning was on the right track: defective workmanship, whether by a general contractor or a subcontractor, is never covered by a Commercial General Liability policy.  The moral hazard problem is simply too great, and if you have any personal experience with contractors, you know what I'm talking about.  Defective work that causes damage to property other than itself, however, is another matter, as are tear-out damages.  Basically, I think it's not controversial that the  cost of pulling out the bad concrete and putting in new is uncovered.  One of the simplest justifications, which is not discussed in the case, is that a CGL usually does not cover property damage arising from ongoing operations, so no matter what you call the damages, they are not covered.  Other insurance is available for that, including an additional insured endorsement where the subcontractor insurers the general contractor for liabilities arising out of the sub's negligence for ongoing operations.  For that reason, I'd also say the cost of replacing the steel beams is not covered by the GC's insurance either.

Even though the court didn't say it the way I would like, I'd be OK with the case if the court hadn't muddled up the Business Risk exclusions.  The court relied heavily on an analysis I find to be less than optimal: that the entire building was the general contractor's "product," and fell under the "Your Product" exclusion.  Damages to any part of the building, such as water infiltration after operations are completed, therefore aren't covered by the GC's liability insurance, under the court's view.  I don't think a building is the GC's product or that the GC has any product at all, nor do I think the "Your Work" exclusion applies, partly because the GC doesn't do any "work" on a construction site and also because of the subcontractor exception to that exclusion, which the court failed to even discuss.  

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What Obligations And Rights Does A Policyholder Have After An Insurer Denies The Duty To Defend?

Stipulated judgments after an insurer's denial of the duty to defend were frowned upon by courts not all that long ago, and some jurisdictions still give them the skunk eye.  It used to be that most courts would say that, when an insurer refuses to defend, an insured's stipulated judgment with the underlying plaintiff was not binding on the insurer.  Courts were especially prone to look unfavorably on the usual arrangement: in addition to a stipulated judgment, the insured also obtains from the plaintiff a covenant not to enforce the judgment, except against the insurer through an assignment of the insured's policy rights.  Patrons Oxford Ins. Co. v. Harris, 2006 WL 1652525 (Maine June 16, 2006) highlights the modern trend that enforces the validity of stipulated judgments to the extent coverage exists and the amount of the judgment is reasonable.

The case explains that this was Maine's first crack at deciding this issue, and the court accepted the majority position on every point related to stipulated judgments.  The court said that an insurer who breaches the duty to defend and repudiates control of the litigation is not entitled to second-guess the insured's strategy for getting out of hot water.  It also, in a footnote, repudiated the view that a covenant not to execute means the stipulated judgment is fake because the insured has no real obligation.  Most courts now hold that a covenant not to execute is not a release of the insured's obligation to pay but rather merely a contract not to enforce.

Some years ago, a California coverage lawyer gave me his view on why the modern trend makes sense: when an insurer breaches the insurance contract, the policyholder is relieved from the duty of further performance.  To me, that's on the right track but perhaps a little simplistic, because it's obvious that an insurer's breach does not relieve the insured of all duties under the policy.  Instead, I think a better justification is that the primary feature and the essence of liability policies is not indemnity but defense.  The duty to defend is incredibly broader than the duty to indemnify, and the basic consumer expectation when purchasing a liability policy is a defense.  Therefore, when wrongly denying the basic assumption of the policy, an insurer in fairness cannot enforce the anti-assignment and no-settlement clauses of the policy that stem from the policy's basic assumption. 

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This Seems Like An Easy Call

Coach Bobby Knight has lost a case seeking coverage by Indiana Insurance and the University of Indiana stemming from a 1999 "bumping" of one of his assistant coaches.  The judge found the injury to the assistant was uncovered because it was "expected and intended" from Knight's standpoint.  Sounds right to me.

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Another Court's Approach To 'Ambiguity' In Policy

Yesterday I posted about an appellate case in Florida, Discover Property & Casualty v. Beach Cars, that contained an analysis of policy ambiguity that not every court would agree with.  A case from Georgia shows yet another approach to ambiguity -- defining a term in a way that is contrary to the interpretation of the insurer and actually denies the existence of an ambiguity at all.

In Empire Fire & Marine Insurance Co. v. Daniels, 2006 WL 1479508 (Ga.App. May 31, 2006), Shana Carner drove a rental car belonging to her husband's business, Carver Services, Inc.  Tragically, she was involved in a single-car accident and killed, along with an adult passenger, Joey Allen Daniels.  Carver's daughter, Haley Mosley, and Joseph Patrick Daniels, both minors, were injured in the crash.  In the resulting lawsuit by the Daniels family, the issue was whether Shana Carver was an insured under the policy or a rentee that was uncovered.  As it turned out, she apparently intended to rent the car, but never paid a rental fee.  The trial court found that both the company's primary and excess policies covered Ms. Carver as an insured.  The issue on appeal was the excess policy only. 

The appeals court found the excess policy also provided coverage because it failed to define the word "rent," and the common dictionary definition of rent is that evidence of payment must exist.  That is an unusual methodology -- most courts follow a framework that can result in undefined words being labeled as ambiguous, and if two reasonable interpretations are offered, the insurer loses.  This court skipped a couple steps, but its result is one that many, but not all courts, would have arrived at anyway.  It will be interesting to see if the case is appealed to the Georgia Supreme Court.

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Court: Policy Was Ambiguous About Whether Damages Must Occur In Policy Period

For this blog and for other reasons, I read a ton of insurance coverage cases.  On most days, I at least take a look at every coverage case in the country published the day before by Westlaw.  Out of all of those, my favorite type of cases to read are the ones about ambiguities in a policy, because it's like listening to a debate over who are the five greatest centers in the history of the NBA: you can have your own opinion, but you never know what different courts will say.

One such case is Discover Property & Casualty Insurance Co. v. Beach Cars of West Palm, Inc., 2006 WL 1476061 (Fla.App. 4 Dist. May 31, 2006).  The facts are pretty simple.  A business had a garage coverage policy, and sold a car during the policy.  After the policy period, the car was involved in an accident.  Now, as a matter of insurance coverage theory, everyone knows that in this situation what is relevant is when the accident occurred, not the precursor acts, right? Perhaps.  But the court found that the policy didn't say that -- it did not expressly limit itself to damages that occurred within the policy period.  Remember that, for an ambiguity to exist, all that needs to happen is that each side is able to offer a reasonable interpretation of the policy.  If there are two reasonable interpretations, the court decides against the drafter and the insurer loses.

I think the court's reasoning was pretty good.  The case is only a few pages long -- read it and see if you agree or disagree.  Here's a link to the case to make it easy.

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No Coverage For Board Member's Promise To Guarantee Stock Redemption Price

A promise to redeem resigning employees' stock prices at a certain level was an uncovered breach of contract, not a covered wrongful employment act, the U.S. District Court for the Eastern District of Wisconsin ruled.  The case is Krueger International v. Royal Indemnity Co., 2006 WL 1440852 (May 19, 2006).  

A jury in the underlying case found a company official promised four employees if they quit before December 31, their stock would be redeemed at the share price effective for September 30.  Instead, the company paid them the value as of December 31, which was a lot lower.  The jury found the official had authority to bind the company, and awarded damages of about $4 million.

In the coverage case, the company argued the officer's promise was covered under the plain terms of the policy's definition of "Employment Wrongful Act," which included breaches of employment contracts and employment-related misrepresentation.  The court disagreed, and found the type of breach of contract at issue in the underlying case is not related to employment.  The court said that ordinary breaches of contract are usually not covered by insurance, because it would encourage people to do the very thing covered by insurance.  I think the court's analysis was basically sound, but obviously, the policy plainly does cover some breaches of contract (it is in the definition above), so the court could have better explained the difference between employment-practices breaches and ordinary course of business breaches.

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This Court's Analysis Seems Off-Base

Now, I know what I'm going to say is going to strike some of you as wrong, but hear me out.  In Essex Ins. Co. v. Brown, 2006 WL 1445786 (W.D. Mo. May 22, 2006), the court found no duty to defend or indemnify a security services company or its employees in a lawsuit filed after one of the employees fatally shot a man in Kansas City over a towing dispute.

Here are the facts: Michael and Wendy Eslick of Superior Protective Service, along with one John Speakman of another security company, were directing the towing of illegally parked vehicles from the parking lot of an apartment complex.  One of the vehicles belonged to a man named Russell Brown, who said his vehicle was not illegally parked.  A fight broke out, and Speakman began whipping Brown with a bullwhip.  (I have never before heard of a security guard or anyone else armed with a bullwhip this side of Indiana Jones).  Mr. Eslick then tasered Brown, and then shot him four or five times, mortally wounding him. 

The language of the intentional acts exclusion in Superior's policy bars coverage for injury that is "expected or intended from the standpoint of the insured."  That takes care of Mr. Eslick: it's hard to deny that injury is expected, if not intended, when you taser and shoot someone.  But what about Superior's potential vicarious liability for their acts?  Superior is also an insured, and so is Ms. Eslick.  Vicarious liability can be assessed whether the employer is at fault or not, and while an employee's acts can be imputed to an employer, the employee's motives should not.  Further, one employee's actions can't be imputed to a fellow employee.  Did Superior intend or expect the injury to Brown? Did Ms. Eslick?  I don't think so.  As for Speakman, I'm not even sure why the court included him in the coverage analysis, since it appears that he and his bullwhip worked for another outfit.

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Recommended Reading On Late Notice

Marc Mayerson has written an excellent analysis of late notice law in various jurisdictions, and makes a persuasive argument for the requirement that an insurer show prejudice to its interests due to an insured's late notice to defeat indemnity obligations. 

I agree with pretty much all of what Marc says, but my favorite part of his post is where he explains how the policyholder's arguments in Country Mut. Ins. Co. v. Livorsi Marine, (Ill. May 18, 2006), which I posted about here, would have been more convincing if they had analyzed the larger context of insurance coverage law and shown how the prejudice rule is in keeping with the parties' expectations.  One of my least favorite sights is a brief containing a coverage argument that is nothing more than an incantation of magic words, without any explanation of how the argument makes sense in the totality of the policy and in the realm of insurance law in general. Writers like this give the impression they are constantly grabbing your elbow to hurry you along before you realize how thin and threadbare the brief is.  What they don't realize, of course, is that the natural reaction to this sort of intellectual shoving is to resist the argument.  (I am making this observation not about the briefs in Livorsi, but about legal writing in general).

This is one of the many fascinating aspects of insurance coverage law: it is built upon so many layers and so much hidden history that the lawyer who is willing to act as an archeologist and do some digging can uncover intellectual treasure that truly enhances an argument.  It's funny how lawyers too often are willing to settle for sounding like mere paid shills who want to use the reader as a wastebasket for words, rather than thinking, reasonable human beings who have knowledge to share.  It is also strange how often lawyers forget that a brief is just a chance to communicate one-to-one with another human being, who happens to be a judge.  If we remembered these things, we'd take more care with our legal writing, and our writing would be a lot better and more effective.

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Illinois Supreme Court: Insurers Need Not Prove Prejudice To Prevail On Late Notice

Country Mutual Ins. Co. v. Livorsi  Marine, Inc. , 2006 WL 1348722 (Ill. May 18, 2006) makes no sense to me.  The Illinois Supreme Court affirmed a lower court's holding that an insurer is not required to prove prejudice as a condition of refusing coverage under an occurrence policy's late notice provision.  As a justification, the Supreme Court cited Illinois precedent, but totally whiffed on trying to come up with a better reason for such a rule.

Probably the least persuasive part of the opinion was the attempt to show the difference between Illinois' requirement of prejudice for an insured's breach of a policy's cooperation clause, and the lack of a prejudice rule for late notice.  In my opinion, there really isn't a reason for a prejudice rule in one instance but not the other.  It's mystifying.  Maybe some of you folks in Illinois and elsewhere can make better sense of this than I can.

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'Pollution Incident' Meant Each Contaminated Truckload, Not Entire Project

A policy with a limited pollution endorsement provided coverage for the hauling of contaminated dirt over a five-day period, even though the policy required "pollution incidents" to commence and end within 72 consecutive hours, ruled a U.S. District Court judge in the District of Oregon.  The case is Konell Construction and Demolition Corp. v. Valiant Insurance Co., (May 15, 2006).  Full disclosure: when I was with another firm several years ago I worked on this case on behalf of the insurer, which is a subsidiary of Zurich, and wrote some of the summary judgment briefing.

The decision, by Judge Michael Mosman, provides a textbook clear explanation of the concept of competing reasonable interpretations of a term in an insurance policy.  The insurer argued that the phrase "72 consecutive hours " barred coverage, because it was undisputed the contaminated dirt was dumped over a five-day period (although there was a break for the weekend).  The insured, however, argued that each truckload constituted a separate pollution incident, and each discrete incident of course took place within a 72-hour period.  Judge Mosman found both these interpretations to be objectively reasonable, even though, as he put it, "[i]in a popularity contest, Valiant's interpretation might win most of the time. But this court's task, under governing law, is not to choose the better of two interpretations."  In the event two reasonable interpretations exist, ambiguity results and the decision goes against the insurer who drafted the policy.  The court granted summary judgment for Konell.

Judge Mosman had earlier granted summary judgment to Valiant on other grounds -- that the notice requirement of the limited pollution endorsement was like that of a "claims made" policy, and coverage was precluded because Konell failed to report the incident within the required time.  The Ninth Circuit reversed, saying the insurer had to provide proof of prejudice to prevail on that argument.

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Insurers Are Liable To Insureds For Full Policy Limits, Not Merely Pro Rata Share Of All Limits

In a decision that benefits policyholders, the Oregon Court of Appeals said yesterday that Lamb-Weston allocation principles are merely used to decide responsibilities between insurers, and do not limit an insurer's responsibility to its insured up to the full policy limits. The case is Cascade Corporation v. Employers Reinsurance CorpRead the decision here.

In cases in Oregon and elsewhere in which damages span multiple policy periods and involved multiple insurers, some insurers have taken the position that Lamb-Weston gives them the right to limit both their indemnity and defense obligations to a pro rata share of the total available limits.  This decision repudiates that thinking.

Hat tip to my Dunn Carney colleague and fellow coverage litigator Brian Talcott for calling my attention to the case.

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How Insurance Alters Behavior

A big concern in designing tort and insurance systems is how to spread risk while placing the brunt of the costs on the person primarily responsible for the conduct. If systems can deliver results along these lines, they are thought to reduce "moral hazard" and function somewhat efficiently.  But having insurance can sometimes increase risk, like when a claim of perhaps dubious merit is made because the other party has insurance.  Even if the sued party has its own assets, the presence of insurance often invites the attitude that the party will not fight as hard and may settle because the insurer is really paying.

I don't know for sure, but Essex Ins. Co. v. Redd, 2006 WL 1307634 (W.D. Mo. May 8, 2006) bears some of the hallmarks of this kind of suit.  A woman went into a store to buy beer, and a security guard told her to move her car.  According to the woman, she didn't know the person was a security guard and didn't move her car.  She claimed that when she left the store, the guard followed her out and sexually assaulted her under the guise of searching her.  When the police came, they gave her a citation and the store refunded her money for the beer.  She sued, and the store's insurer brought a declaratory action seeking a judgment that the alleged conduct was excluded by the assault and battery exclusion in the store's Commercial General Liability policy.  You can guess the result -- the court granted summary judgment for the insurer because the alleged damages arose out of the alleged initial assault.  No word on what happened next.

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St. Paul Refuses To Pay Yacht-Maker's $1.6 Million Settlement With Tiger Woods

This story about an insurer's refusal to indemnify a settlement with golfer Tiger Woods caught my eye.  Note that the story doesn't say St. Paul is denying the settlement is covered, merely that the settlement was reached without the insurer's permission.  The Associated Press isn't noted for picking up on coverage nuances, however, so there undoubtedly is more to it.   print this article Posted By David Rossmiller In Duty to Indemnify
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Fourth Circuit: CGL Covers Damages From Subcontractor's Defective Work, Not Work Itself

French v. Assurance Company of America, 2006 WL 1099471 (April 27, 2006) is not an exceptional case in terms of its result, but its analysis of the "Your Work" exception to a Commercial General Liability policy is one of the best and clearest I've seen.

In the case, decided under Maryland law, a general contractor hired a subcontractor to side a house with EIFS -- Exterior Insulation and Finishing System.  For those who haven't encountered this, it is basically a styrene foam board covered with stuff that is supposed to look like stucco.  There are a huge number of cases involving water intrusion from applications of EIFS.  The French court found that the general contractor's CGL covered it for property damage to the home from water intrusion, but not the cost of repairing the defective EIFS itself.  This is the result most jurisdictions will reach, although the lack of coverage for repair often becomes somewhat academic because the defective work has to be torn off to do repairs underneath, and the replacement can thus become "covered" in that way -- as tear-off damage.

This case has an excellent analysis of why neither a general contractor's nor a subcontractor's defective work is covered under the general contractor's CGL, with an explanation that goes beyond the usual "performance bond" reasoning.  The case also has a good explanation of the way in which insurers expanded the coverage of a CGL to meet demands from contractors who wanted broader coverage.  Some people focus only on exclusions that have been added to CGLs and other policies in recent years, without realizing that, in the broad sense, insurers are selling more insurance to cover more risk than ever.  Risk is the ocean that insurers swim in, and the more of it, the more demand for their products.

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Sales Of Fireworks Was 'Business Pursuit' And Excluded By Homeowners Policy

The Michigan Court of Appeals reversed a trial court and held that sales of fireworks, although seasonal, fell within the business-pursuit exclusion of a homeowners policy.  The case is Michigan Miller's Mutual Ins. Co. v. Awad, 2006 WL 1084351 (April 25, 2006). 

The case arose out of a fireworks injury.  Jason Awad, a college student, operated a fireworks stand from a tent for two weeks in 2004.  On July 4, Jason Jones, apparently a teenager, was pestering Awad for free fireworks.  Finally, Awad gave him some bottle rockets.  Strangely enough, after begging for free fireworks for some time, Jones then "threw a few dollars in Awad's car window."  Jones apparently was quite a piece of work, because he then set off one of the bottle rockets from inside a vehicle and shot it out the window.  Somehow, it managed to hit someone in the eye who was getting out of the other side of the vehicle.  She sued Jones and Awad.

Awad's homeowners insurance denied coverage under the business pursuits exclusion.  The trial court granted summary judgment against the insurer, saying two weeks of fireworks sales did not mean Awad was "customarily engaged" in the business.  In reversing the trial court and granting summary judgment to the insurer, the appeals court said the short duration of the fireworks business did not mean it wasn't a valid business.  Because of the seasonal nature of the business, the court said, two weeks was consistent with being customarily engaged in it.

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Fifth Circuit Finds Prejudice To Insurer When Claim Not Reported Until After Trial

It's not easy for an insurer who issues an occurrence policy to win on a defense of prejudice to the insurer's interests, but that is what happened in Clarendon National Insurance Co. v. FFE Transportation Services, Inc., 2006 WL 997718 (5th Circuit April 17, 2006).

The insureds were a frozen food company and a related trucking company.  One of their vehicles was involved in an accident, resulting in several claims against the companies.  Most of the claims were settled for $219,000, but the remaining claim went to trial.  The companies rejected a $700,000 settlement offer, and were hit with a $1.1 million jury verdict.  Three months after the verdict, the companies gave its first notice to the insurer, Clarendon.  The apparent reason notice wasn't given before is that the insureds had a $1 million self-insured retention -- in effect, a deductible.  The insurer paid $220,000 in post-judgment negotiations to help settle the claim for $1 million, then sought reimbursement from the insureds.  The U.S. Fifth Circuit Court of Appeals, applying Texas law, found actual prejudice to the insurer and gave Clarendon its money back, because the case could have settled for $700,000 at no cost to the insurer.

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11th Circuit Asks Florida Supreme Court To Clear Up Coverage For Repair Of Construction Defects

In most jurisdictions, it's a sure bet that a Commercial General Liability policy will be interpreted as not covering the cost to repair or replace defective construction work, whether the defective work was done by the general contractor or a subcontractor.  On the other hand, damage to property other than the work itself is usually covered.  The customary reasoning is that a CGL is not a performance bond.

In Florida, however, the 11th Circuit found an unsettled question of law on this issue in Pozzi Window Co. v. Auto-Owners Insurance, 2006 WL 1009341 (April 19, 2006).   Most of the cases cited by the 11th Circuit seemed to me to indicate that Florida is with the rest of the country on this issue.  However, a couple Florida Court of Appeals cases gave the court pause, and the 11th Circuit certified the question of coverage to the Florida Supreme Court.  For those who aren't lawyers, when federal circuit courts of appeals are deciding a case based on state law, they often consider issues that haven't been definitively established by state courts.  Sometimes these courts guess at the result, but because federal courts are courts of limited jurisdiction and need to defer to state courts on state law questions, they often ask for clarification by "certifying" a question to a state supreme court.  My guess on the answer?  That there is no coverage for replacement of defective work.

(Someone who knows Florida law better than I do may want to chime in).

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Homeowners' Insurance Covers Parents For Basketball Incident

Here is a very strange story on multiple levels, about an unfortunate kid who was partially paralyzed when he dunked the ball in the closing minutes of a game and celebrating fans tackled him.  A considerable portion of the $3.5 million settlement comes from the homeowners' insurance of parents whose kids were involved in the melee.  I've blogged recently about how the intentional act of one insured, a child for example, does not preclude coverage for the vicarious liability of a parent.  So I can see the duty to defend arising there, but without knowing more about how the parents could have been responsible, it's hard to figure out the duty to indemnify on this one.

On another note, posts will be light today due to work demands (advice to prospective law students: being a lawyer may interfere with your blogging, don't say I didn't warn you). 

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Lawyers' Allegedly Fraudulent Acts Not Covered Merely Because Complaint Labeled Them Negligent

Two lawyers who allegedly manipulated and controlled a client's company, using other clients' money they stole, were not covered under their professional liability policy, the U.S. District Court for the District of Arkansas ruled.  The case is Continental Casualty Co. v. Moser, 2006 WL 827319 (March 29, 2006).

The court found the lawyers' insurer had no duty to defend or indemnify them for a lawsuit by Bob Bomar, a former client who owned 49 percent of a company called Scanning Technologies.  The other 51 percent allegedly was owned by dummy corporations set up with a purported president and director who actually knew nothing of her supposed jobs.  In fact, according to Bomar's lawsuit, his attorneys were actually taking money from other clients' trust funds and investing the cash in Scanning Technologies.  He filed suit after his attorneys allegedly blocked the sale of the company by scaring off prospective buyers with demands of money.  The alleged motive for disrupting the sale was to keep Scanning Technologies under their control so they could continue to launder clients' money.

Even though the lawsuit alleged negligence, as well as fraud, the court said the gravamen of the complaint was willful conduct, and the label "negligence" alone could not create coverage.  The actions were therefore excluded under the intentional acts exclusion.  The court also said the lawyers' conduct was uncovered because of exclusions for those who act as a company's directors and for those who control a company's finances.

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Ninth Circuit: Day Care Endorsement In Policy Does Not Cover Molestation By Homeowner

The molestation of a girl at a home day care center was an excluded intentional act of an insured, the U.S. Ninth Circuit Court of Appeals ruled in Farmer v. Allstate Ins. Co., 2006 WL 620899 (March 14, 2006). The molester, who was convicted and sentenced to six years in prison, was apparently the husband of the woman who ran the day care center. The husband and wife were both listed as "insureds" under the terms of a homeowners' policy with a home day care center endorsement. The policy also contained an intentional acts exclusion that precluded coverage for damage or injury intentionally caused by an insured. In almost every jurisdiction, courts hold that all damages resulting from sexual abuse are intended by the criminal, even if he did not form a mental intent to cause the specific harm that resulted.

In this case, the victim's guardian sued the day care provider, and received an assignment of indemnity rights under the policy, the probable reason being that the day care owner was judgment proof. Therefore, the lawsuit decided by the Ninth Circuit was made directly by the victim's guardian, although the same coverage analysis applied, because the insurance company's contract was with the day care center owner, not the victim.

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Iowa Court Of Appeals: Self-Defense Is Excluded From Homeowners' Coverage

A woman who shot and killed an apparent intruder in her home is not covered for defense or indemnity by her homeowners' policy, an Iowa appellate court ruled yesterday. She was sued for wrongful death and other claims by the dead man's estate. The case is AMCO Ins. Co. and Allied Property and Casualty Ins. Co. v. Estate of Dustin Wehde and Tracey Roberts. The case isn't out on Westlaw yet, but here is a link to the case via the court's website.

I posted about an Oregon case in which a claim of self-defense was at issue here. According to the facts offered by Roberts in the case, the mother of three was attacked in her home by two intruders. Her two sons were 11 and 3, and her daughter was 1. She put them all in a room together and confronted the two men.

Contemporaneous accounts I found on the web, which may or may not be reliable, indicated her husband was away on a business trip. I have not gotten my hands on the appellate briefing yet, so the motive of the attackers is unclear, but it appeared to be robbery. The case said Roberts was choked unconscious, and awoke on the floor, hearing the two intruders down the hall.

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Unauthorized Sharing Of Student Information Found To Be Covered As Invasion Of Privacy

The National Research Center for College and University Admissions (NRCCUA) was covered for "advertising injury" and "personal injury" under its State Farm liability policy for using information it gathered on high school students for commercial purposes that were not disclosed, the U.S. Eighth Circuit Court of Appeals has ruled. The case is State Farm Fire and Casualty Co. v. National Research Center for College and University Admissions, 2006 WL 590363 (March 13, 2006).

NRCCUA is an organization that gathers information from millions of high school students to provide to college admissions offices. The organization was investigated by the Federal Trade Commission beginning in 2001 for unauthorized commercial use of student survey information. Eventually, NRCCUA and the FTC entered into a consent decree ordering the organization to stop misrepresentations and make clear and conspicuous disclosures. NRCCUA's Commercial General Liability policy, the court said, covered the violations because they were "advertising injury" or "personal injury." For both terms, the policy includes the definition "oral or written publication of material that violates a person's right of privacy."

State Farm argued the FTC complaint, and a later lawsuit by 26 state attorneys general, were over misrepresentations, not invasions of privacy. The court disagreed, giving an ordinary plain reading to the term "right of privacy." The court also found that the word "damages" in the policy included equitable relief, and therefore said State Farm had a duty to defend NRCCUA in both the FTC and state actions. Most of the approximately $300,000 NRCCUA paid as a result of the lawsuit by the state attorneys general, however, was not covered as damages because it was in the nature of a fine or penalty.

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No Duty Under D&O Policy To Indemnify Breach Of Collective Bargaining Agreement

I had a subrogation case picked out to blog about, and then I remembered that when someone says the word "subrogation" even the coverage lawyers start to go to sleep. I'll hold onto that case for another day and maybe mix it in with something a little more caffeinated.

Instead, let's consider Union Mutual Fund v. Ulico Casualty Co., 2006 WL 561235 (S.D.N.Y. March 1, 2006). The court found that a Directors and Officers Liability policy that insured three labor/management trust funds did not cover damages for the funds' failure to abide by the terms of a collective bargaining agreement (CBA). The D&O policy covered negligent acts and breaches of fiduciary duty, the court said, but the violation of CBA terms is akin to a breach of contract and is uncovered.

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Texas Court Says Defective Workmanship Not An "Occurrence"

The Court of Appeals of Texas (Fort Worth) found an insurer had no duty to defend or indemnify a construction company for defective workmanship that caused no further property damage or bodily injury. The case is Grimes Construction, Inc. v. Great American Lloyd's Ins. Co., 2006 WL 563286 (March 9, 2006). This is a good opinion to read for the prevailing judicial view on coverage of construction defects.

Most courts now analyze defects that cause no damage beyond the defective work itself as not constituting an "occurrence" under a Commercial General Liability (CGL) policy. Remember, something is an occurrence in a CGL only if it is an accident that causes bodily injury or property damage that is unexpected and unintended from the standpoint of the insured during the policy period. The majority of courts, realizing that trying to wade through the "business risk" exclusions of a CGL is a frustrating and often fruitless endeavor, choose to look at the coverage grant itself instead.

Defects could fit under the rubric of "property damage," which is usually defined as "physical injury to tangible property," but coverage of defective workmanship is analyzed as violating the fortuity principle of a CGL. A practical policy reason for court decisions like Grimes is that many contractors are already priced out of the CGL market due to premium increases imposed to cover the greater risk of claims against contractors. If defective workmanship were covered, of course, most insurers would stop insuring contractors completely, and what insurance could be purchased would be impossibly expensive. Interestingly, the people who sued the contractor apparently tried their best to create coverage, alleging negligence in the construction. But the court said the gravamen of the allegations was poor workmanship no matter what the label on the claim.

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California Court: D&O Policy Does Not Cover Breaches Of Contract

A condominium association that refused to pay a construction company was not covered by its Directors and Officers Liability Policy. The question of whether breaches of contract and intentional acts are covered by D&O policies is a recurrent problem with such policies. In Oak Park Calabasas Condominium Assoc. v. State Farm Fire & Casualty, 2006 WL 391557 (Cal.App., Dist. 2, February 21, 2006), the court said the D&O policy's coverage of "wrongful acts" was limited to negligent conduct.

"Wrongful acts" was defined in the policy as "any negligent acts, errors, omissions or breach of duty . . . ." The court said a plain reading of the phrase would apply the adjective "negligent" to all the words following it, not just to the word "acts." The insured had urged a reading that would make errors, omissions and breaches of duty subject to an intentional standard. According to the court, that reading would violate the fundamental insurance premise of fortuity by allowing an insured to refuse to pay someone, then shift the burden to its insured.

The condo association had earlier made a claim under its commercial general liability policy, but apparently dropped that claim because the breaches of contract failed to constitute "property damage," and therefore was not an occurrence, under its CGL policy.

UPDATE: From time to time I get questions about which cases I pick to write about and when I review them. Sometime during the day or evening, I try to look at every coverage case reported in the country the day before (there aren't as many as you might think, but with three kids and a full-time practice, it isn't always easy). Of course, just because a case was reported in an electronic service doesn't mean it was decided the day before. Usually there is a lag of a few days or even a couple weeks between the time when the court made its decision and Westlaw puts the case in its database. I pick cases that present issues that I see frequently, or that are on emerging or unsettled coverage issues. I welcome reader input about what kind of cases you may be interested in. Feel free to send me an e-mail if you have a particular interest I'm not addressing.

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Court: Intentional Acts Preclude Homeowners' Coverage

An insurer had no duty under a homeowners' policy to indemnify a man who pre-emptively struck another man, an Oregon federal judge ruled. The case is Allstate Ins. Co. v. Daniken, 2006 WL 516814 (D.Or. March 1, 2006). In the case, Daniken, the insured, admitted that he struck first against another man, Horton, but said he did so in self-defense. Daniken pleaded no contest to criminal charges of fourth-degree assault, and was later sued by Horton. The insurer, Allstate, brought a declaratory action to dispute defense and indemnity.

Judge Ann Aiken said that because Daniken pleaded no contest, his conviction did not definitively establish that his actions were criminal, only that he consented to the conviction. Therefore, Judge Aiken found that, because the complaint alleged negligent as well as intentional conduct, Allstate had a duty to defend. In Oregon, the duty to defend is determined solely with reference to the allegations of the complaint and the language of the policy, and extrinsic facts are not considered. However, the duty to indemnify depends on the facts. Judge Aiken found that Daniken's intentional acts of striking Horton precluded coverage under the exclusion for intentional acts.

A basic premise of Oregon law is that an intentional acts exclusion precludes coverage for "acts done with the subjective intent to cause harm." Abrams v. General Star Indemnity Co., 335 Or. 392, 395 (2003). In Abrams, the Oregon Supreme Court decided a question certified by the U.S. Ninth Circuit Court of Appeals (meaning the court was uncertain of Oregon law and asked the state supreme court to answer the question). The state court found that a duty to defend can exist even when the complaint alleges uncovered intentional conduct, when the claim could be proven through unintentional conduct. On the other hand, Oregon precedent is that, when the subjective intent to cause harm is an element of a tort, such as malicious prosecution, the claim cannot be proven through unintentional conduct and, if only intentional conduct is alleged, it is excluded by an intentional acts exclusion and there is no duty to defend. Abrams is not a duty to indemnify case, however, and Oregon appellate courts have not decided an indemnity case involving self-defense, including whether it qualifies as an "occurrence" in a policy and whether it is excluded by an intentional acts exclusion.

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Riding In Vehicle Is Not "Use"

A passenger riding in a car that collided with another vehicle, killing the driver, was not covered by the passenger's auto policy, the Indiana Court of Appeals held in Estate of Sullivan v. Allstate Ins. Co., 841 N.E.2d 1220 (February 10, 2006). The passenger would have been covered by his auto policy's "non-owned auto" provisions for third-party liabilities only if he was engaged in use of the car. The court said that "use," although not defined in the policy, connoted directing or propelling the car, not merely occupying it as a rider.

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Good Fences, Bad Neighbors

John F. Ames, a Virginia man, and his insurance company paid $100,000 to settle a wrongful-death lawsuit after Ames shot and killed a neighbor in a property line feud. (The insurer paid, probably, because a jury in Ames' criminal trial found that he acted in self-defense). Fueling the dispute was a $45,000 lien Ames had filed in 1989 on the neighbor's property after Ames built a fence around his 670-acre farm, and under an old state law, billed his neighbors half the cost. The lien wasn't taken care of in the settlement and the dispute over it continues.

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Parents' Liability For Son's Shooting Spree Is Covered Under Homeowners' Policy

One of the most astonishing things about insurance law to many people is that injured parties frequently file lawsuits claiming a vicious criminal negligently injured them. After all, it seems obvious to most people that the attack was intentional, which is why it was a crime in the first place. However, insurance does not cover liability for intentional hurting someone, thus the claim of negligence. Before anyone is tempted to think the claims of the victims are deceptive, in that they are obviously fine-tuned to try to implicate insurance coverage, remember that these people did not ask to be attacked or hurt and are often doing their best to put their lives back together.

That being said, insurance contracts are not built on compassion for third parties but rather on a defined obligation between insurer and insured as stated in the policy. In Donegal Mutual Ins. Co. v. Bauhammers, 2006 Wl 362537 (Pa.Super. February 17, 2006), the question was whether a homeowners' policy and an umbrella policy covered liabilities of the parents of a man, Richard Bauhammers, who went on a shooting spree in April 2000, killing five people in Scott Township, Pennsylvania, and seriously injuring another. The trial court ruled the primary policy covered the parents' liabilities, but the excess policy did not. The appeals court agreed.

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Beer Mug Attack Before Policy Began Is Not Covered Merely Because Victim Died After Policy Incepted

Of all the insurance coverage questions I hear, the most frequent is one that is presented in Allstate Ins. Co. v. Cameron, 2006 WL 314337 (W.D.Wash. February 8, 2006). The issue is whether injury or property damage occurs at the time some event sets it in motion, or instead when the injury or damage becomes evident. In the case, a man and some friends were partying in 1998, when one of the friends allegedly smashed a beer mug into the head of another person named Glenston Anderson, who went into a coma for six years. Anderson died in 2004, and the most likely cause, according to the medical examiner, was the original blow to the head.

A lawsuit against the party's host and his mother alleged they were liable for the battery on Anderson. The complicating issue in the case was that there was no insurance at the time Anderson was hit on the head, but the mother did have homeowners' insurance from Allstate at the time Anderson died. She requested Allstate defend and indemnify her and her son. Allstate brought a declaratory action seeking a ruling of non-coverage.

Generally, an act or event itself is not the "occurrence" in a so-called occurrence policy. Homeowners' policies are occurrence policies, meaning coverage exists only if there is an occurrence, which the policies basically define as an accident that produces bodily injury or property damage within the policy period. Occurrence policies constitute the majority of insurance policies in existence today, and have a long history of use back to the first days of commercial insurance in Europe centuries ago. However, the tort system has changed a great deal in 300 years, and long-tail liability, which was previously unknown, is common today. This can present difficulties in determining when the occurrence happened in construction defect, environmental pollution and toxic torts, among others.

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Insured Is Liable For Damages After Insurer Becomes Insolvent

The ripple effects of the insolvency of Reliance Ins. Co. will continue to be felt for a long time. In one of the latest examples of the ill-effects of Reliance's failure, the New Jersey Supreme Court found that a business that had purchased a $1 million liability policy from Reliance is liable for most of a potential judgment against the business. The case is Johnson v. Braddy, 2006 WL 229903 (February 1, 2006).

The New Jersey Property-Liability Insurance Guaranty Association (PLIGA), like similar funds in other states, was set up to provide some level of insurance coverage when insurance companies become insolvent. However, typically the state funds provide coverage only up to a maximum of $300,000. In the case, an employee of the Braddy Trucking Co. hit a parked car, severely injuring a man, who sued the company. Braddy had ample insurance, including the $1 million primary policy from Reliance and an umbrella policy from National Union Ins. Co. up to $25 million. However, after the injured party sued Braddy, Reliance was declared insolvent. Braddy asked the court for a grant of summary judgment that, because it had been insured, it was not personally liable for amounts between the $300,000 PLIGA would provide and $1 million, where the excess carrier's responsibilities would start. The court said that, although it was unfortunate that a party with the foresight to obtain insurance was in Braddy's position, the company was potentially personally liable for up to $700,000 in damages. From the case, it was unclear the exact amount the injured party is seeking, but it is apparently well above $300,000.

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Another Installment In The Washington Urine Sample Videographer Case

Normally I wouldn't write about a case in which the court denied summary judgment, but the continuing litigation surrounding John Moeller, a urinalysis lab director alleged to have secretly videotaped people in the act of providing urine samples, always has some fascinating new twist.

In the latest chapter, Specialty Surplus Ins. Co. v. Second Chance, Inc., 2006 WL 223806 (W.D. Wash. January 30, 2006) a U.S. District court considered a summary judment motion over whether the insurer had committed bad faith by failing to pay policy limits to claimants against Moeller. The claimants then reached agreement with Moeller in which he stipulated to a $4.9 million judgment (about $100,000 per claimant) and an assignment of his rights against Specialty Surplus and the Washington Insurance Guarantee Fund, in return for a covenant not to execute against his personal assets.

Notes from the claims file appeared to show the insurance company was planning to offer only about $700 per claimant, and that the insurer claimed the policy limit was only $1 million, not $3 million. The court plainly was skeptical of the insurer's argument that it demonstrated a greater concern for the interests of its insured, Moeller, as for its own interests, especially in light of the fact the insurer failed to disclose the policy limits demand to Moeller. At the end of a very long opinion, the court held there were disputed issues of material fact and denied the claimants' motion for summary judgment against the insurer on the bad faith issue.

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General Contractor Not Covered For Defective Work Of Subcontractor, Iowa Court Says

The scope of insurance coverage for construction defect liability is still in flux in many areas, but most courts would agree with the Iowa Court of Appeals that a general contractor is not insured for the defective work of his subcontractors. In Continental Western Ins. Co. v. Jerry's Homes, Inc., 2006 WL 228917 (February 1, 2006) the key to the ruling was that damage in a new housing subdivision (buckled roads, sidewalks and driveways) was merely defective workmanship and did not cause other property damage. Almost any court, under similar circumstances, will hold there is no "property damage" as defined by a Commercial General Liability policy, and therefore no "occurrence," the precursor to coverage under a CGL. It is a long-standing observation that a CGL is not a performance bond for defective work, and covers only property damage and bodily injury arising out of work by the insured or someone operating on his behalf.

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Insurer Claims St. Louis Cardinals Made False Representations About Pollution Under New Stadium

The St. Louis Cardinals' brand new $400 million stadium, next door to their old stadium, also comes with a $14 million price tag to clean up environmental contamination under the site. One of the Cardinals' liability insurers is suing the team to rescind its $20 million pollution liability policy, claiming the Redbirds falsely said that no relevant environmental studies had been done on the property. Allegedly, studies had been done in 1995-96 showing historical use of the property for gas stations and other businesses that one would suspect caused pollution.

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Attorney Fees Awarded To Insured Even After Insurer Agrees to Pay

If there was any chance the public was on the verge of believing that insurance companies are stocked with competent and honest people from top to bottom, cases like Dhyne v. State Farm Fire and Casualty Co. shatter that possibility into little bits. The case cite is 2006 WL 224280 (Missouri January 31, 2006).

Kristen Dhyne was hit be an uninsured motorist, and received a broken pelvis, right kidney failure and nerve damage to a finger. A State Farm claims representative told her she was not covered by her Uninsured Motorist coverage, except for a small part of her wages not being paid by Workers Comp, that her premiums would go up if she filed a claim and that if she got any money from State Farm, it would go to repay her Workers Comp carrier. Two weeks later, the insurer asked a lawyer, who said Dhyne was in fact covered. The insurer failed to tell Dhyne that, however. She sued.

During the lawsuit, State Farm paid up. She continued the lawsuit, seeking statutory damages and attorney fees. The court held she was entitled, under Missouri law, to vindicate her right to be free of unreasonable denials of benefits. The court also said that if Dhyne and others like her couldn't collect their attorney fees merely because the insurer paid before judgment, insurer misbehavior would be encouraged.

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Court Overturns Jury Malpractice Verdict Against Insurance Coverage Lawyers

There are a number of ways to look at Baker Donelson Bearman & Caldwell, P.C. v. Muirhead, 2006 WL 177593 (Miss. January 26, 2006). First, it shows why forum shopping is alive and well, because this case would not have happened in a state with different bad faith laws, like Oregon. Second, it can be looked upon as a rags to riches story about a guy who beat someone up in a parking lot and wound up several years later with a judgment in his favor for $1.6 million. Third, it shows why insurance coverage is considered a specialty field best left to the experts. It is full of minefields, traps for the wary and unwary alike, abandoned wells and deadfalls.

The bizarre events of the case began with a hotel drinking party attended by numerous employees of a company, followed by a fight in the parking lot between one of the employees, Jack Muirhead, and a stranger. The stranger's leg was broken, and he sued Muirhead. Muirhead hired his own attorney, and for some reason did not tender the defense to his company's insurer. The insurer, however, became aware of the lawsuit after the plaintiff amended the complaint and added Muirhead's employer and the hotel as defendants.

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Insured's Volitional Acts Fell Short Of Uncovered Intentional Conduct

Damages caused by an insured who messed up a shipment of cleaning solution by adding the wrong chemical mix were covered as an "occurrence" in the insured's Commercial General Liability (CGL) policy, the Michigan Court of Appeals has held. An occurrence is defined in a CGL as an event that produces, within the coverage period, property damage or bodily injury that is unexpected and unintended from the standpoint of an insured.

In J. Collins, Inc. v. Cleaning Solutions, Inc. v. Citzens Ins. Co., Inc., WL 170428 (January 24, 2006), the appellate court affirmed the trial court and explained that intentional acts that cause intentional damage are different from intentional acts that cause unintentional damage. The analysis, the court said, is of subjective intent from the point of view of the insured. The court cited precedent in which pulling the trigger on a gun the insured thought was unloaded produced unintended damage, while starting a fire to cause smoke damage to inventory that led to a runaway fire produced excluded, intended damage.

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Sale Of Fake Native American Crafts Does Not Constitute "Advertising Injury"

The U.S. Seventh Circuit has held that falsely claiming to sell authentic Indian arts and crafts did not implicate the "advertising injury" section of a Commercial General Liability (CGL) policy. In Native American Arts, Inc. v. Hartford Casualty Ins. Co., 2006 WL 172194 (January 25, 2006),the court ruled that a business' primary and excess insurers had no duty to defend it in a lawsuit brought under the Indian Arts and Crafts Act, 25 USC Section 305.

Advertising injury in a CGL is defined as oral or written publication in an advertisement that disparages a person's goods, products or services, violates a person's right of privacy, copies another's advertising idea or infringes a copyright or title of a work in an advertisement. The court found that falsely claiming goods are authentic products of a certain cultural heritage is not the same as copying the advertising idea of companies selling authentic products. In addition, the court said, coverage was expressly excluded in the policy for trademark and other claims concerning the "designation or origin or authenticity" of products.

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Truck Crash With Multiple Cars Was One "Occurrence"

A lot of people who should know better hopelessly botch an analysis of choice of law. On the other hand, there is Zurich American Ins. Co. v. Goodwin, 2006 WL 177608 (Miss. January 26, 2006), where the court went methodically and thoroughly through a choice of law analysis. The court reversed a lower court that had applied Mississippi law to a coverage dispute because Mississippi is where a multiple-vehicle crash occurred. The lower court incorrectly applied a type of "minimum contacts" analysis appropriate for personal jurisdiction but not appropriate for choice of law.

The case arose out of an accident where an eighteen-wheeler collided with eight other vehicles, killing two people and causing numerous injuries and property damage. The trucking company was insured under a Zurich policy that provided liability insurance of $1 million per accident. Under Mississippi insurance law, each vehicle constituted a separate accident, meaning $8 million was available to compensate victims. Under the law of Iowa, where the trucking company was headquartered, all eight vehicles constituted one accident subject to the $1 million limit. The court held that, under Section 188 of the Restatement (Second) of Conflicts of Laws, Iowa was the state of real interest: the insurance contract was entered into and performed there.

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Exclusion Precludes Coverage If Related Claim Has Genesis In Excluded Conduct

It may sound obvious that where conduct is excluded from coverage, it is still excluded when you rename the conduct with a different legal label. However, this isn't always so obvious when one reads the allegations of a complaint containing multiple counts. Often, the plaintiff's attorney throws in some sort of negligence claim in an attempt to create coverage. Sometimes the negligence claim is actually different from other excluded claims, but a lot of the time it is merely excluded conduct trying to get into an invitation-only ball by wearing a disguise.

In Rayborn v. State Farm Fire & Casualty Co., 2006 WL 162646 (W.D. Wash. January 20, 2006), U.S. District Court Judge Ronald Leighton decided, under Washington law, that the insurer had no duty to defend or indemnify in a professional malpractice lawsuit that also contained a claim of negligent hiring because the insured would not have been subject to a negligence claim save for the existence of malpractice, which was excluded from coverage.

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Archdiocese Sues Insurer Over Alleged Theft Of $1.2 Million By Priest

Considering a grand jury indicted a New York priest for allegedly living the high life on church funds, and for using undue influence to get an elderly parishioner to sign over $490,000 in cash and stock to him, I found the most interesting part of this story to be the defense of the priest by his lawyer: he "may not have been a good bookkeeper, but he was a beloved, effective and honest pastor."

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Razor Wound Was Not Intentional Act And Arose Out Of "Use" Of Car

"Moral hazard" is a buzz-phrase of Law and Economics theory that describes what is believed to be a tendency for people to act more recklessly when they think they are covered by insurance. "Strategic behavior" is a close cousin, where people save themselves time or money by acting dangerously, figuring other people will be careful enough to keep everyone out of trouble.

In Higueros v. Caporaso, 2006 WL 156907 (N.J.Super.L. January 18, 2006), one suspects these theories, founded as they are on rationalism, are somewhat lacking to explain why the following happened. A Mr. Caporaso came back to a gas station to complete an inspection of his car. He was billed $9 for this last piece of the inspection. He objected, saying he had been told he would owe nothing. Mr. Gervasio, the owner of the station, then said he would remove the inspection sticker if payment was not made. Caporaso said to let his car be. Then Mr. Higueros, an employee of the station, came up and joined in the opinion that the sticker must be removed. Unfortunately, he was holding a razor scraper, and made a move toward the sticker with it. Mr. Caporaso tried to stop him, and in the ensuing scuffle Higueros wound up with a slashed abdomen. Higueros sued Caporaso, who then sued the gas station and Caporaso's auto insurer, who denied coverage.

The court held that the insurer, National Continental, had a duty to defend and indemnify Caporaso. The insurer argued two reasons for non-coverage: the injury did not arise out of operation or use of the auto, and it was excluded by the intentional acts exclusion. The court found that the fight didn't constitute operation of the car, but it did stem from the use of the car. The court also disagreed with the insurer about the intentional act exclusion. Although Caporaso intended to stop Higueros, he did not intend to cut him with a razor blade, because it was Higueros who actually held the razor scraper.


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"Damage To Property" Exclusion Refers To Work Done "As To" Property, Not Physically On It

A federal district court held that the Damage to Property exclusion, one of the so-called "business risk" exclusions in a Commercial General Liability policy, does not preclude coverage for damage to a site when the work done by an insured is "directed towards" or "as to" property other than the site itself.

In Ohio Casualty Ins. Co. v. Wholesale Mulch Products, Inc., 2006 WL 87604 (N.D. Ill. January 10, 2006), the court found damage was covered by the liability policy of a company that caused harm to barges while unloading road salt from them. The exclusion had the standard wording: there is no coverage for property damage to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The court said the exclusion does not mean "located on," but rather refers to property toward which work is directed, in this case the salt rather than the barges.

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Only "Traditional" Environmental Pollution Excluded, Court Says

It's hard to say whether more courts have found that the absolute pollution exclusion precludes coverage for any type of contamination, or whether the majority have ruled that it excludes only "traditional" pollution, as the Maryland Supreme Court did in Clendenin Brothers, Inc. v. United States Fire Insurance Co., 2006 WL 27432 (Maryland, January 6, 2006). You can be pretty sure, however, that in the next case that arises one of the briefs will cite seemingly several hundred cases pulled from American Law Reports (A.L.R.) on one side or the other.

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Asbestos Litigation Revived Against St. Paul Travelers

The Third Circuit brought back on procedural grounds a coverage case against St. Paul Travelers by its insured, which believes asbestos claims against it should constitute separate occurrences. Unsurprisingly, Travelers maintains the claims are all one occurrence and the limit for that occurrence is exhausted.

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Pollution Exclusion Applied To Exclude Personal Injuries

Bulk Pack, Inc. v. Fidelity & Deposit Co. of Maryland, 2006 WL 94225 (5th Cir. January 16, 2006) is one of a growing list of cases in which courts have strictly applied the absolute pollution exclusion in liability policies to personal injuries.

The argument in the case was over whether workers' injuries from sludge were excluded by a policy clause denying coverage for bodily injuries caused by "pollutants." The definition of the word included "any solid ... contaminant ... including waste." The court held that the term unambiguously excluded coverage for the injuries.

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Court Says Intentional Fires Don't Become Unintentional When They Burn An Unintended Object

I was raised in North Dakota, and I have also spent a considerable amount of time in Minnesota, and this case about two Minnesota guys who passed the time driving around and setting grass fires for the heck of it reminds me of a lot of people I grew up with.

In Union Pacific Railroad Co. v. State Farm Fire and Casualty Co., 2006 WL 90083 (D.Minn. January 13, 2006), two brothers aged 24 and 20 had been setting grass fires for about nine years using gasoline, lighters and flares. Their venue was open ground in rural areas somewhat west of Minneapolis. In deposition testimony, one brother was asked "Why do you burn grass?" He replied: "Don't know, just do it." He did clarify things by saying they never actually intended to "burn anything down," including a Union Pacific wooden trestle that caught fire in 2000. The railroad sued the brothers, and took an assignment of insurance claims in lieu of seeking payment from the two. Union Pacific then sought to collect under the homeowners' policy of the brothers' parents.

The court held that coverage was precluded by the policy's exclusion for damage that is expected or intended by the insured. Union Pacific echoed the brothers' position that they did not intend to burn anything down. The court disagreed: "This is a case in which an individual with an extensive history of setting illegal fires, and a clear understanding of the dangers of the fires [one of the brothers had once been severely burned by one of the approximately 60 fires they set], intentionally chose a dry windy day to set a grass fire ten to sixty feet away from the wooden trestle."

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Misrepresentations Are Not An "Occurrence"

Two recent cases add to the growing list of courts nationwide that have held that alleged false or deceptive statements are not covered by a homeowners' or commercial general liability policy. The cases are Jennings v. State Farm Lloyds, 2006 WL 66408 (Tex.App.-Austin, January 12, 2006) and Green v. State Farm Fire & Casualty Co., 2005 WL 3556720 (Utah App., December 30, 2005). In both cases, the misrepresentations failed to produce either bodily injury or property damage within the meaning of the policy, and therefore no "occurrence" as required for coverage.

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Insurer's Attempt To Reform Policy Rejected

The Missouri Court of Appeals, which has decided a large number of coverage cases recently, ruled yesterday that an insurer could not reform a liability policy when the mistake in the policy was due to the insurer's failure to properly assess accurate information provided by the insured.

The case is Alea London Ltd. v. Bono-Soltysiak Enterprises, 2006 WL 91451 (Mo. App. E.D. January 17, 2006). The insurer issued a binder to a restaurant that contained a more generous assault and battery exclusion than the insurer intended to issue in the policy. After the binder went into effect, but 13 days before the policy was issued, one restaurant patron knifed and killed another. The court found that the binder constituted the insurance contract in effect at the time of the killing, and the policy covered the assault. The insurer requested that the policy be reformed because it wrongly included a more generous exclusion in the binder based on the belief the restaurant did not serve alcohol. However, the court said the insured provided accurate information about itself, and the mistake was entirely that of the insurer. A contract can be reformed when a mistake is mutual, not when it is unilateral.

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Court To Revisit Decision Allowing Insurers To Recoup Settlement Payments From Insureds

This case and similar developments in other jurisdictions have sent shudders through insureds. It bears watching to see what the Texas court will decide and which way the wind is blowing in other states.

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Theft By Underage Driver Does Not Constitute Permissive Use Of Car

To some, insurance coverage is an opaque, impenetrable soup of jargon and abstract argument that never produces a clear "right" answer. But every now and then, a case comes along that is an easy call. Such is Ison v. Southern Farm Bureau Casualty Co., 2006 WL 73818 (Ark. App. January 11, 2006).

In the case, a 15-year-old boy learned his girlfriend was pregnant, took an overdose of his medicine for attention-deficit disorder, his stepmother's antidepressants, and some nonprescription medicine; took the keys to his father's pickup; slashed the tires to the family's other vehicle; stole his father's truck and drove it to another family member's house, where he stole some guns; led police on a high-speed chase; and finally crossed the median into the opposing lane of traffic, hitting and killing two people. The estate of one of the victims sued the boy's mother, who was divorced from the boy's father and living in a separate household. Her auto insurers brought a declaratory action seeking a ruling they had no obligation to defend or indemnify the mother, and she presented some unique coverage arguments.

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Standing Near Car After Accident Is Not "Occupying" It

One of the most recurrent coverage problems is whether a driver is covered for injuries that happen after he gets out of his car, usually because he was just in an accident. After the driver gets out to check on his vehicle, or talk to the other driver, he is then hit and injured by a third driver.

That is the scenario of Auto-Owners Ins. Co. v. Above All Roofing,LLC, 2006 WL 66708 (Fla. App. Dist. 2 January 13, 2006). An employee of a roofing company was involved in an accident while operating his employer's van. He and the other driver pulled over, and the employee was exchanging insurance information as required by law when he was hit by a third driver. He sought Underinsured Motorist coverage from his employer's insurer. Because he wasn't a first named insured, he was covered under the policy only if he was injured while occupying the van, defined as being in the vehicle or getting into or out of it. The appellate court reversed the trial court's grant of summary judgment for the insured, holding that Florida law, like that of most states, has no doctrine of "reasonable expectations," and the policy language must be enforced as written. Standing away from the car, even to engage in a statutorily mandated exchange of information, did not qualify as "occupying" it.

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L.A. Archdiocese Settles Some Uninsured Cases, Still Fighting With Insurers On "Covered" Claims

This L.A. Times story is another in the long, sad chronicle of the myriad sexual abuse lawsuits against the Archdiocese of Los Angeles. From a coverage standpoint, the clergy sex abuse cases present one of the most intriguing and difficult coverage issues of the last few decades. As the story notes, the Archidiocese has settled some cases that were "uninsured," likely because the acts occurred after insurers began to expressly exclude sex abuse coverage in liability policies around 1986.

A major force that moved insurers toward adopting the sex abuse exclusion was the scandal over allegedly hundreds of molestations at the McMartin pre-school in Manhattan Beach, California. The scandal, which first made the news in 1983, ironically was based on false charges of abuse. Also ironically, several dissections I have read of the scandal and how the false allegations developed, place much of the blame for the McMartin hysteria on a Catholic parish church in the area, to which most of the McMartin parents belonged. It's a measure of how quickly American society evolves that 10 years prior to McMartin, no one talked about sexual abuse, much less imagined it was covered by a Commercial General Liability policy.

http://www.latimes.com/news/local/state/la-me-priest7jan07,1,6434250.story?coll=la-news-state

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Excess Insurer's "Duty To Settle" Is Implicated When Primary Insurer Offers Policy Limits

An excess insurer owes a duty of equal consideration to an insurer whenever a primary insurer makes it known it will settle for policy limits, not merely when the primary insurer actually pays. So ruled Judge Rosyln Silver, U.S. District of Arizona, in State Farm Mut. Auto. Ins. Co. v. Mendoza, 2006 WL 44376 (Jan. 5, 2006).

Judge Silver denied State Farm's motion for summary judgment in a bad faith lawsuit in which the tortfeasor insured allowed default judgments of almost $3.5 million to be taken against her, and then assigned the claims to the injured parties, one of whom filed suit against State Farm alleging failure to settle. Silver also granted plaintiff's cross-motion for summary judgment that State Farm had a duty of equal consideration to the insured, even before primary insurance was exhausted. In a treat for insurance coverage geeks like me, Judge Silver had a long analysis based on Law and Economics theory, and cited The Duty to Settle, a 1991 landmark law review article by Kent Syverud, now the dean of Washington University Law School (and in 1995-96, my Civil Procedure professor at the University of Michigan and a really nice guy).

print this article Posted By David Rossmiller In Bad Faith , Duty to Indemnify
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