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Coverage Opinions
Effective Date: February 18, 2015
Vol. 4, Iss. 2
 
   
 
 
   
 
 

Declarations: The Coverage Opinions Interview With Frank Shorter – Olympic Gold Medalist And Lawyer
Running From The Law; The Amateur Trust Fund; From The Guns In Munich To The Bombs In Boston; The Fight Against Drugs In Sports; The Covers Of Life And Sports Illustrated; Creator Of The Running Boom; Breaking The Two Hour Marathon

Randy Spencer’s Open Mic
Brian Williams And Insurance Coverage

Coverage Opinions’s Take On Nationwide’s Super Bowl Commercial

The 10 Most Significant Liability Coverage Cases – Of All Time
Ten cases, more than any others, that exerted huge influence over the national coverage landscape.

Born To Litigate: Springsteen Makes A Coverage Case
What do you call a coverage case that quotes lyrics from a Bruce Springsteen song?

NFL Highlights Film: The Best Of Football Litigation
When The Gridiron And Courtroom Collide

Suing Bill Belichick For Cheating – Yes, It Has Been Done
Forget about deflate-gate. Another Patriots scandal got to the United States Supreme Court.

It’s Westminster Time: Show Dogs That Bite

The “Top 10’s” Strangest Moment
A crazy coincidence and the 2014 “Top 10 Coverage Cases of the Year” article.

The ALI Restatement: Status And Upcoming “Summit Meeting”
The Anyone Who’s Anyone Insurance Event

Interesting Case In The “What’s An Accident?” Category

New York Court Says N-O To Reimbursement Of Defense Costs
Most Extensive N.Y. Case To Address The Issue

Construction Defect: Court’s Lesson On Drafting A “Designated Work” Exclusion

Tapas: Small Dishes Of Insurance Coverage News And Notes
“Coverage for Dummies” Case Reversed

 
 
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Vol. 4, Iss. 2
February 18, 2015

 

Brian Williams And Insurance Coverage





For years Brian Williams has been telling me about his accomplishments as a coverage lawyer. It’s been a very impressive list. I’ve listened in awe as he’s described each feat. I never once considered them to be anything but true. But now, with some of Brain’s other claims, about things he’s seen and done, being called into question, I am starting to have second thoughts about his coverage career. Here are some of the things that Brain Williams has said he’s done as a coverage lawyer.

He argued Montrose before the California Supreme Court.

Coverage Part B was named for him.

He thought of the idea for the continuous trigger.

The “four corners” rule was named for his pocket square.

He used the “watercraft exclusion” to deny coverage for all Titanic claims.

He’s the only coverage lawyer ever to have a claim involving a sidetrack agreement.

He represented Edward Lloyd, founder of Lloyd’s, in several key maritime coverage cases.

He can recite the definition of “mobile equipment” – backwards.

He sat courtside with Jerry Buss at a Lakers game and they discussed reimbursement of defense costs.


That’s my time. I’m Randy Spencer. Randy.Spencer@coverageopinions.info


 


Vol. 4, Iss. 2
February 18, 2015

Coverage Opinions’s Take On Nationwide’s Super Bowl Commercial


I saw Nationwide’s dead child Super Bowl commercial. And so did you. My jaw dropped. In fact, so much so that two tortilla chips fell out of my mouth. The ad, of course, evoked a lot of negative reaction. A Wall Street Journal story cited to a source that concluded that 64% of the social media conversations about it were negative. I’m surprised it was that low.

Next up – State Farm’s Super Bowl commercial showing a Hatfield and McCoy-looking feud. And as the camera pans over the dead bodies strewn on the ground an announcer’s voice-over says – This is why you need a good neighbor.

Nationwide was in a Catch-22. The ad – designed to promote the prevention of household accidents, by using, as the narrator, a young boy telling of the things that he won’t get to do in life, because he died in a household accident -- was out of place for the Super Bowl. Those commercials are, of course, usually light-fare and watched by many in a social atmosphere. The only thing dead at a Super Bowl party should be the chicken’s wings. But, on the other hand, the issue is serious. As Nationwide’s Chief Marketing Officer said: “If we made it tamer and we had shown it not in the Super Bowl and two weeks from now, no one would have noticed.”

My take – Nationwide was right to do what it did. It achieved its objective. It got people talking (about something other than Seattle’s play call at the end). But here’s the real reason why I come out in favor of Nationwide. Nationwide’s CMO said that the intention of the 45-second spot was not to sell insurance. Now, when an insurance company spends a gazillion dollars on an ad, and says that its intention is not to sell insurance, it is reasonable to be dubious. But I believe Nationwide. After all, since a homeowner’s policy is unlikely to provide liability coverage for a child killed in a household accident – even if on account of the fault of someone else living in the house – there is nothing being sold. [Expect to see a policy exclusion for bodily injury to an insured and the child is an insured.] And since no coverage is owed, Nationwide also can’t be accused of having claim prevention, which benefits its bottom line, as its real motive.

So, since Nationwide spent all that dough on a commercial, with no direct link to one of its products – other than enhancing its recognition as a company generally engaged in the business of risk – I give it a pass. Too bad Seattle did that too.

 


Vol. 4, Iss. 2
February 18, 2015

Born To Litigate: Springsteen Makes A Coverage Case


What do you call a coverage case that quotes lyrics from a Bruce Springsteen song? An embarrassment of riches.

A number of judicial opinions have quoted lyrics from Springsteen. His vivid descriptions and observations of everyday life, the human spirit and ordinary folks just trying to get by, offer countless opportunities for comparison to the real-life dramas that so-often come before courts. But it’s more than just opportunity. Judges who turn to Bruce’s words, when crafting their opinions, also have motive. Doing so no doubt makes them look hip, as well as creating the possibility that their efforts – otherwise possibly destined for the black hole of judicial opinions – may now get noticed. Lawyers don’t forward cases about diversity of citizenship. But if the case happens to quote lyrics from a Springsteen song, it’s another story. Hey, check out this diversity case with Bruce lyrics. That’s how the e-mail from one lawyer-Springsteen fan to another will surely read.

Until last week I had never seen a coverage case quote Springsteen lyrics. And I just checked. As far as I can tell Miami Yacht Charters, LLC v. National Union Fire Ins. Co., No. 11-21136 (S.D. Fla. Feb. 9, 2015) is only the second. [The first, er, incident, was Farr Man Coffee Inc. v. Chester (S.D.N.Y. 1993), using Badlands lyrics in the context of insurable interest. The inaugural case should have been from a Nebraska court.]

As a life-long Bruce fan, and insurance coverage enthusiast, imagine my delight when I read this gem of an opening paragraph from Judge Jonathan Goodman in Miami Yacht Charters: “In the well-known ‘No Surrender’ song released on his ‘Born in the U.S.A.’ album, Bruce Springsteen noted, ‘Well, we made a promise we swore we’d always remember, no retreat, baby, no surrender.’ Springsteen’s ‘no surrender’ philosophy may be fine for a rock and roll song about the importance of being true to one’s own dreams and beliefs, but it is frequently unhelpful in litigation. It is particularly inapplicable and inappropriate here.”

As for what the particular no-surrendering was that displeased Judge Goodman, it arose in the context of coverage litigation involving a marine insurance policy. His Honor summarized it like this: “Basically, National Union is extremely unhappy with the Eleventh Circuit’s ruling. While it is understandable for a litigant to be disappointed about an adverse ruling, that attitude by itself is insufficient to cause this Court to ignore the Eleventh Circuit’s clear ruling. National Union is tenacious, to be sure. But the Undersigned is not persuaded by National Union’s dogged, steadfast determination to again revisit the already-decided issue of whether Plaintiffs have met their threshold burden to establish that the cause of the damage to the vessel in question was fortuitous. That issue has been resolved—and the Eleventh Circuit clearly and unequivocally confirmed that the issue is over and that Plaintiffs have met that burden.”

I started to read the opinion but quickly got lost in the flood. It’s one of those that only the parties can really understand. Besides, what’s the point. When a case quotes Bruce in the opening paragraph, it has but one place to go from there.

Sitting here in my office, on the streets of Philadelphia, I was thrilled to see Springsteen lyrics find a place in a coverage decision. And I’ve always liked “No Surrender.” But it’s curious that a different song from the “Born in the USA” album hasn’t yet gotten the nod – “Cover Me.”

 

 


Vol. 4, Iss. 2
February 18, 2015

NFL Highlights Film: The Best Of Football Litigation
When The Gridiron And Courtroom Collide


I have long been a student of the intersection between sports and the law. And there are countless opportunities to get this education. These two come together in innumerable ways – from the deadly serious to the hilariously entertaining and everything imaginable in between. And there should be no surprise about this collision. After all, sports is our national pastime. Suing people is our second national pastime.

With the Super Bowl just completed and the NFL keeping a lot of lawyers busy in 2014, this seemed a good time to reprise a favorite article of mine from a past issue of Coverage Opinions. [Not to mention that reprising an article is always a good way to save some time.]

The following article, taking a look at some litigation surrounding the National Football League, appeared in the September 18, 2013 issue of Coverage Opinions.

***

A substantial amount of litigation surrounds the National Football League, its players and fans. There are hundreds of NFL-related judicial opinions on Westlaw. And no doubt this tells just part of the story. Surely plenty of cases are filed that never reach the point of a reported decision. [I will do you a favor here and not use trite football expressions to demonstrate that the game and litigation are both an aggressive battle between offensive and defensive opponents. Just in case you did not know that, they are.]

And all this makes sense. The National Football League is a big, really big, business. And it has one of the highest of all profiles. So it is not surprising that there is a lot of NFL-related litigation. In addition, the NFL is, understandably, very protective of its brand and image. The NFL would sue Mother Teresa if they caught her wearing a knock-off Saints jersey. I wouldn’t even chew gum outside the league’s 280 Park office.

Now simply because the NFL is exciting does not guarantee that all of the litigation surrounding it will be. Lots of it is not. While the NFL’s product may be tossing a ball, the league itself is a business. So much of the litigation in which the league finds itself is, well, about business. There are NFL-related cases involving licensing, intellectual property, antitrust, use of players’ likenesses, collective bargaining, labor and draft issues, stadium issues, taxes, workers’ compensation, player eligibility, banned substances and broadcast issues, and so on. And, of course, there is the recently-settled litigation over head injuries suffered by players.

The subject of National Football League-related litigation makes for a long and varied list. But along with the necessary dry commercial litigation involving the NFL are plenty of very interesting and eyebrow-raising cases. Granted football does not offer what baseball does to create fun and interesting litigation – a ball that enters the stands at lightning speed. Nonetheless there are still plenty of cases to keep readers’ interest. Below is a brief description – in no particular order -- of some judicial opinions in interesting cases involving professional football. [Space constraints make it impossible to provide all of the details. While I have to punt there, if anything piques your interest just hand me off a note and I’ll pass you the full case.]

Stoutenborough v. National Football League (6th Cir. 1995): Hearing impaired individuals failed to establish that the “blackout rule,” which prohibited live local broadcast of home football games that were not sold out, violated the Americans with Disabilities Act, because non-hearing impaired individuals could listen to the game on the radio.

Brown v. National Football League (S.D.N.Y. 2002): Player’s suit for damages, from being struck in the eye by a referee’s penalty flag weighted with B.B. pellets, did not implicate the collective bargaining agreement between the players’ union and teams. [Procedure for filing a Notice of Appeal: throw a red challenge flag in the player’s eye.]

National Football League v. Coors Brewing Company (2nd Cir. 1999): Court declined to lift a preliminary injunction that prevented National Football League Players, Inc. and Coors Brewing from using the phrase “Official Beer of the NFL Players” to promote Coors’s products. [By the way, Coverage Opinions is the official insurance coverage newsletter of the National Football League. Kidding. Kidding Mr. Goodell. It was a joke.]

Hackbart v. Cincinnati Bengals, Inc. (10th Cir. 1979): A professional football player intentionally struck by another player has the right to pursue a tort action. The court rejected the trial court’s decision that the only remedy a player has, for receiving an unlawful blow during a game, is retaliation.

Jaguar Cars, Ltd. v. National Football League (S.D.N.Y. 1995): Addressing jurisdictional issues in case by automobile manufacturer, Jaguar, alleging that the Jacksonville Jaguars use of the name Jaguar was trademark infringement in violation of the Lanham Act. [It probably didn’t help the football Jaguars that its president wrote to Jaguar Cars, Ltd. seeking its sponsorship of the proposed team. Really.]

Cox v. National Football League (S.D.N.Y. 1995): Addressing whether Miami Dolphins player, subjected to racial harassment by Buffalo Bills fans, could recover attorney’s fees for suit against National Football League, because such suit brought about changes in the NFL’s security guidelines.

Louie v. National Football League (S.D.N.Y. 2002): Rejecting fan’s claim that the NFL’s Super Bowl ticket lottery system violated the Americans with Disabilities Act because it disenfranchised disabled customers their right to obtain available accessible seats.

Bossier v. National Football League (E.D.La. 2003): Rejecting fraudulent joinder argument in a case brought by an individual that was injured while punting in the NFL Experience at Super Bowl XXXVI. When light rain created unfavorable conditions for punting, wood chips were spread over the kicking area. [Shocking that that didn’t solve the problem.]

Bouchat v. Bon-Ton Department Stores (and several hundred others) (4th Cir. 2007): An amateur artist faxed a sketch for a proposed Baltimore Ravens logo to the team. He said that if they used the logo he wanted a letter of recognition and autographed helmet. The Ravens adopted a logo that had a remarkable resemblance to the artist’s sketch. Years of litigation ensued. [So much for that helmet.]

Sims v. Jones (N.D. Tex. 2013): Court denied class certification to Super Bowl ticketholders who were denied or delayed access to the game or moved to lesser quality seats because temporary seats were not ready by game time. [Several decisions addressing this nightmare situation.]

O’Connell v. New Jersey Sports and Exhibition Authority (N.J. Super. Ct. App. Div. 2001): Addressing responsibility of New York Giants and stadium owner for injury sustained when a Giants fan slipped on snow and ice in the stadium. He was en route to the bathroom and pushed while waiting to pass a fight that had broken out in the seats. [Naturally. Giants fans. Hooligans!]

Gallagher v. Cleveland Browns Football Company (Ohio 1996): Addressing claim by on-field video cameraman injured when a Houston Oilers receiver and Cleveland Browns defender collided while going for a ball that had overthrown the end zone. [This is The Fortune Cookie (1966) with Jack Lemmon and Walter Matthau. Great law, insurance and football movie.]

Coniglio v. Highwood Services, Inc. (2nd Cir. 1974): The court held that it was not a violation of the Sherman Antitrust Act for a professional football team to require a person wishing to purchase season tickets to also purchase tickets to pre-season games. [Such practice may not be a violation of the Sherman Act, but it is a violation of morality.]

The number and variety of cases involving the National Football League provides a clear statement that litigation surrounding the game is extensive. This observation was also made by one court nearly 40 forty years ago -- before every other case on this list was decided: “Whatever else might be said about professional football in the United States, it does seem to breed a hardy group of fans who do not fear litigation combat.” Coniglio v. Highwood Services, Inc. (2nd Cir. 1974).

 


Vol. 4, Iss. 2
February 18, 2015

Suing Bill Belichick For Cheating – Yes, It Has Been Done


Deflate-gate dominated pre-Super Bowl talk. One of the reasons why it received as much attention as it did was because of so-called “Spygate,” an incident in which the Patriots were found to have videotaped New York Jets’ coaches and players, during a September 2007 game, to steal their signals and coaching instructions. So if the Pats were guilty of that, then maybe they deflated some footballs too.

Who knows what the real story is here. That the Patriots won the game, using no-doubt properly inflated footballs, behind a stellar performance by a QB, who supposedly needs help with the pressure in his footballs, takes some air out of the controversy.

As discussed in the above article, the intersection between sports and the law is legion. In particular, a substantial amount of litigation surrounds the National Football League, its players and fans. So it comes as no surprise that Spygate led to litigation.

In Mayer v. Belichick, 605 F.3d 223 (3d Cir 2010), the Third Circuit held that a Jets season ticket holder could not maintain fraud and racketeering claims against the New England Patriots, and head coach Bill Belichick, for the surreptitious videotaping of the Jets coaches and players. The Spygate opinion is long. But, in general, the court held that the season ticket holder held no legally cognizable right, interest, or injury. “At best, he possessed nothing more than a contractual right to a seat from which to watch an NFL game between the Jets and the Patriots, and this right was clearly honored.”

The court’s conclusion is worth reading: “[T]his Court will affirm the dismissal of Mayer’s amended complaint. Again, it bears repeating that our reasoning here is limited to the unusual and even unique circumstances presented by this appeal. We do not condone the conduct on the part of the Patriots and the team’s head coach, and we likewise refrain from assessing whether the NFL’s sanctions (and its alleged destruction of the videotapes themselves) were otherwise appropriate. We further recognize that professional football, like other professional sports, is a multi-billion dollar business. In turn, ticket-holders and other fans may have legitimate issues with the manner in which they are treated. See, e.g., Charpentier, 75 Cal.App.4th at 314, 89 Cal.Rptr.2d 115 (‘It is common knowledge that professional sports franchisees have a sordid history of arrogant disdain for the consumers of the product.’ (footnote omitted)). Significantly, our ruling also does not leave Mayer and other ticket-holders without any recourse. Instead, fans could speak out against the Patriots, their coach, and the NFL itself. In fact, they could even go so far as to refuse to purchase tickets or NFL-related merchandise. See, e.g., Bowers, 489 F.3d at 321 (noting possible effects of bad reputation on future prospects of sport); Seko, 22 F.3d at 774 (stating that, ‘instead of going to the Cubs game, the fan may head south for Comiskey Park and the White Sox’). However, the one thing they cannot do is bring a legal action in a court of law.” Id. at 237.

The best part of the case is that the plaintiff-season ticket holder, representing himself, then sought review by the United States Supreme Court. Man, now that’s a Jets fan. The nine folks who decide things like, who you can marry, how you can speak and whether the police can rifle through your closet, apparently had more pressing matters. Cert. denied. 131 S. Ct. 1607 (2011).

 


Vol. 4, Iss. 2
February 18, 2015

It’s Westminster Time: Show Dogs That Bite

Umpteen articles have been written about legal issues surrounding dog bites. In the February 12, 2014 issue of Coverage Opinions, in honor of the Westminster Kennel Club Dog Show taking place at that time, I took a different tack on the issue – show dogs that bite.

My conclusion: Just because show dogs probably get made fun of at the dog park, and have their lunch money stolen, some have a toughness behind their cucumber facemask.

It’s Westminster time again. Here is last year’s article about dogs that use hairdryers and then take a bite out of someone:

http://www.coverageopinions.info/Vol3Issue3/Westminster.html

 

 
 

Vol. 4, Iss. 2
February 18, 2015

The “Top 10’s” Strangest Moment

 

I had the privilege of addressing a group of senior insurance company executives last month in New York. The topic was my 2014 Top Ten Coverage Cases of the Year article. One of the cases that I discussed was the California Supreme Court’s in Hartford v. Swift Distribution -- involving coverage for intellectual property claims. I must have said the words Hartford and Swift a half a dozen times during this part of the talk.

So, needless to say, it was amusing when I was approached afterwards by a man who introduced himself to me as Chris Swift, from, get ready, The Hartford. Naturally we had a good laugh about this coincidence. Chris Swift is indeed from The Hartford – he is the company’s Chairman of the Board and CEO. Chris was a good sport – agreeing to take a selfie with me for Coverage Opinions. Next year’s Top 10 – Greenberg Construction Co. v. Starr Indemnity & Liability Co.

 
 


Vol. 4, Iss. 2
February 18, 2015

The ALI Restatement: Status And Upcoming “Summit Meeting”
The Anyone Who’s Anyone Insurance Event

 

The American Law Institute’s “Principles of the Law of Liability Insurance” has been one of the most significant aspects of liability coverage over the past several years. Now, with the ALI’s Principles Project being converted to a Restatement, its importance and profile have been elevated immeasurably.

I checked in with the Project’s Reporters, Professors Tom Baker of Penn Law and Kyle Logue of Michigan Law, to get an update. They told me, as I suspected, that they are busy at work making revisions to chapters 1 and 2 for purposes of the transition from Principles to Restatement. These revised chapters will be discussed at the late-March meetings of the Project Advisors and Members Consultative Group.

Much has been said and written about the ALI’s Principles, n/k/a Restatement. While the Project has been part of insurance conferences in the past, never before, until now, has one been held bringing together so many of the key players involved. The Rutgers Law School–Camden Center for Risk and Responsibility is hosting such an all-day event on February 28. The list of speakers (advocates, perhaps a more accurate term) – academic and practitioner, representing both policyholder and insurer interests -- is top notch with many having involvement in the Project in various ways. The discussion can be expected to be nuanced and debate heated. And no ALI Project conference could be truly relevant without the two most important persons involved in attendance. The Project’s Reporters, Professor’s Baker and Logue, will be there and speaking.

If you have been following the ALI Project you’ll want to be there. If you want to begin the process of learning about this hugely significant development for liability coverage, there could be no better opportunity. This is the Yalta Conference of the insurance industry. More information about the Rutgers Law School ALI Restatement Conference here:

https://camlaw.rutgers.edu/apps/mailSystem/law_liability_insurance/message.html

Incidentally, I considered not plugging the conference since Rutgers turned me down for its law school. But that was 27 years ago. So I thought it would be petty to not do so for that reason.

[Disclosure. I have nothing to do with this conference -- other than buying a ticket. I simply know an important conference when I see one.]

 


Vol. 4, Iss. 2
February 18, 2015

Interesting Case In The “What’s An Accident?” Category

 

I have long been a student of the “what’s an accident?” question for purposes of a liability policy. As I am fond of mentioning, the question has been before courts for a very, very, let’s add one more very, long time. There are cases asking it that date back to the early 1800s. And these ancient cases frequently seek guidance from even more ancient cases, often times English ones, with strange citations that very few lawyers practicing in this country understand. Suffice to say, the question whether something was caused by an “accident” has been keeping judges, including ones in wigs, busy for a very long time.

I have come to the conclusion that the question whether something was caused by an “accident” is the oldest continuously running insurance coverage issue. It is the Mousetrap of insurance coverage. If there is an older one please tell me. The earliest American case that I could find, addressing whether an “accident,” for purposes of insurance coverage took place, is from 1835 (Howell v. Cincinnati Ins. Co., Ohio Supreme Court).

But it’s not just that there are a lot of really old cases addressing the “accident” question. The other very interesting fact is that some of these cases look remarkably similar to ones that were decided yesterday. In other words, not only have courts been grappling for 180 years with the coverage question whether injury or damage was caused by an “accident,” but they haven’t figured out the answer after all this time.

“What’s an accident?” cases are usually fact intensive – which gets back to why there are anything but clear cut answers. For this reason, as much as I am fascinated by the issue, they tend not to find a place in Coverage Opinions. They are just too unique and stand-alone. But there is something about Depositors Insurance Company v. Luera-Harris, No. 318269 (Mich. App. Ct. Jan. 13, 2015) that makes it worthwhile.

It is often the case that, when a court finds that bodily injury or property damages was not caused by an accident (occurrence) – especially bodily injury – it is easy to see why. The injury was either intended, or it was substantially certain (or some similar test), based on the insured’s conduct at issue, that it would occur. In Luera-Harris, the court held that bodily injury was not caused by an accident, because it was reasonably foreseeable that it would occur. While lots of cases reach this conclusion, the court’s discussion of the issue may make it even more difficult for policyholders to establish an “accident” because the injury, while not intended, was reasonably foreseeable to occur.

Depositors Insurance Company v. Luera-Harris involved coverage under the following tragic circumstances: “On the night of January 29 to January 30, 2011, [Jordan] Henika and his roommates hosted a party at their East Lansing apartment. Harris, Cochran, and Bossenbery attended the party. Henika and his roommates provided alcohol to the partygoers, including minor Brett Johnson. Harris, Cochran, and Bossenbery left with Johnson. Johnson, who was legally intoxicated, drove the vehicle. Johnson later lost control and the vehicle crashed broadside into a tree. Harris, Cochran, and Bossenbery died in the accident. The Estates later sued Johnson, Henika, and Henika’s roommates for wrongful death.”

At issue was the potential availability of coverage under Henika’s father’s homeowner’s policy. [Put aside the motor vehicle exclusion, which was raised but not at issue before the appeals court.] The trial court in the coverage action held that “Henika should have reasonably foreseen that harm would occur when he provided alcohol to minors and, therefore, there was no ‘accident’ and no ‘occurrence’ as defined in the policy.”

The appeals court took its turn at the issue. It set forth a definition of accident, focusing on, under what circumstances, an intentional act can be an accident. The court stated: “If the harm was either ‘intended by the insured or reasonably should have been expected because of the direct risk of harm intentionally created by the insured’s actions,’ the intentional act cannot be classified an accident. The intentional act at issue in the present case is Henika’s provision of alcohol to minors and the resulting harm is the car crash.”

The court placed much weight on Allstate Ins. Co. v. Morton, 657 N.W.2d 181 (Mich. Ct. App. 2002), which held that “the provision of alcohol to the minors did not constitute an accident within the meaning of the insurance policy because the insured reasonably should have expected that giving minors enough alcohol to allow them to pass out would result in harm. It did not matter, the Court stated, that the specific harm that occurred was another minor’s intentional rape instead of alcohol poisoning.”

Following Morton, the Luera-Harris court held: “The rationale stated in Morton controls the outcome in the present case. In both cases the actual harm was not caused by the provision of the alcohol, but through acts by a minor who consumed the alcohol. And as in Morton, it does not matter if the actual harm was inflicted by a third party (Johnson) so long as the insured (Henika) should have reasonably expected that harm would occur. Similarly, it does not matter that the harm that did occur exceeded the harm that the insured actually expected.”

The court observed that “Depositors Insurance only had to show that Henika provided enough alcohol to the minors for him to reasonably foresee that it might impair their ability to drive. Even if Henika did not provide the minors with enough alcohol to pass out, he provided them with enough alcohol to create a situation where it was foreseeable that a minor who had consumed alcohol would operate a vehicle in a negligent manner. Because Henika’s actions created a direct risk of harm that was reasonably foreseeable, the result at issue here—a vehicular crash—cannot be said to be accidental; accordingly, there was no occurrence within the meaning of the insurance policy.”

Perhaps the outcome here is not surprising based on the low threshold -- reasonably foreseeable or reasonably should have expected that serving a minor an excess amount of alcohol, and then letting him get behind the wheel, would lead to three people being killed. And perhaps the outcome here would have been different, or not, under these facts, if the test had been -- as it is in other states -- that the outcome must have been “substantially certain.”

Serving alcohol to minors, whether a lot or any for that matter, is wholly unacceptable. But even if the decision on coverage here is correct, the court’s observation that “it does not matter that the harm that did occur exceeded the harm that the insured actually expected” seems to set the stage for insurers to argue that many injuries, with the benefit of hindsight of course, were not caused by an accident because they reasonably should have been expected.

 

 


Vol. 4, Iss. 2
February 18, 2015

New York Court Says N-O To Reimbursement Of Defense Costs:
Most Extensive N.Y. Case To Address The Issue

 

I’ve been saying for years that reimbursement of defense costs can be an overrated issue. It is the CATS of coverage issues. First, many states – especially lately -- have rejected an insurer’s right to seek reimbursement of defense costs. Second, even in a state where the right exists, it usually has to be a situation where there was a finding of no duty to defend at all, from the get-go – not one where there was only no duty to defend certain counts or where there was a duty to defend but then a later finding of no duty to indemnify. [This is why the right has more bite in California, where Buss gives insurers more options on this issue.] And even if all of this is satisfied, to make it worthwhile the insured has to be financially able to repay the defense costs. Many are unlikely to be. So while reimbursement of defense costs is not without some applicability, the stars need to be aligned just right for the insurer for it to have a practical impact. But despite all this, the subject gets a lot of attention from coverage commentators. Guilty as charged.

But the Eastern District of New York’s opinion in General Star Indemnity Co. v. Driven Sports, Inc., No. 14-3579 (E.D.N.Y. Jan. 23, 2015) is worthy of mention here. First, it involves New York law, which is, well, New York. Second, the court rejected the insurer’s claim for reimbursement of defense costs, which departs from some other New York cases on the issue.

The opinion is lengthy. At issue is coverage for Driven Sports, a producer and seller of a pre-workout energy supplement called “Craze.” The court’s opinion begins with this neat and tidy and convenient summary: “In 2013, defendant was sued in three separate actions alleging that Craze contains an illegal and potentially dangerous methamphetamine analog, and defendant sought coverage under the Policy. Both parties have moved for summary judgment, asking the Court to declare the extent of plaintiff's obligation to defend the underlying lawsuits. The Court concludes that the underlying lawsuits are excluded from coverage by [the Failure to Conform Exclusion] in the Policy.” The insurer sought “to recoup its expenses in defending the underlying lawsuits, but the Court declines to award recoupment as a remedy, finding that the New York Court of Appeals would find recoupment to be inappropriate under these circumstances.”

Now skipping a ton of ink and getting to the reimbursement of defense costs aspect. The Driven Sports court acknowledged that four New York decisions had permitted reimbursement – three federal District Courts and one Appellate Division. However, the court concluded that none of those cases answered whether, under New York law, recoupment was appropriate, or even authorized, under the situation at hand – where the insured “effectively resisted the idea of recoupment from the very beginning by rejecting plaintiff’s offer of a separate recoupment agreement.” In the absence of any clear guidance from the New York courts, the court was left to predict how the New York Court of Appeals would address the question.

The Driven Sports court concluded that, under the circumstances before it, the New York Court of Appeals would find recoupment to be an inappropriate remedy. It cited just about every reason, given by any court, why. A list follows:

• “New York law generally precludes claims of unjust enrichment where a contract covers the ‘particular subject matter’ at issue.”

• The policy’s supplementary payments provision, where the insurer agrees to pay defense costs, offered an opportunity there for the insurer to “have contracted for a right to seek recoupment, but it did not do so.”

• “As other courts have noted, plaintiff bears the risk of not providing for recoupment in the Policy itself, and [the insurer] is not saved by its later, unilateral reservation of rights.”

• The insured rejected reimbursement, “and, as a matter of equity and good conscience, the Court will not now imply the same agreement into the Policy.”

• To allow reimbursement “would risk eroding the well-established doctrine under New York law of imposing an ‘exceedingly broad’ duty to defend on insurers.”

• “As it operates now, th[e] rule incentivizes an insured to seek coverage, but if insurers can threaten the later collection of costs, an insured’s incentives would change drastically, and he would be faced with a ‘Hobson's choice’ in any close case. In other words, an insured whose claim might be covered could be dissuaded from seeking coverage out of concern that the legal costs would be so prohibitive that the insured could never pay them if a court later disagreed.”

• “[A]awarding recoupment in this case would effectively make the duty to defend coextensive with the duty to indemnify, despite the fact that New York courts have repeatedly held that the duty to defend is broader.”

• “It is also relevant to the Court’s consideration of equity and good conscience that an insurer receives some benefit from undertaking a defense, even if it believes the claims are excluded.”

Courts nationally are generally split on the insurer’s right to seek reimbursement of defense costs – with insurers, in the past few years, losing more of the big cases. While Driven Sports is a federal District Court opinion, it is New York’s most detailed pronouncement to date on the issue.

 


Vol. 4, Iss. 2
February 18, 2015

Construction Defect: Court’s Lesson On Drafting A “Designated Work” Exclusion

 

Liability insurers know that writing contractors can be challenging. Some just don’t. Others do -- but not without using a buffet of manuscript endorsements that are designed to manage the risk by eliminating unwanted exposures. I have written about lots of these endorsements in past issues of Coverage Opinions.

One such endorsement is a so-called “Designated Work” exclusion. It’s a simple enough concept. It provides that no coverage is owed for damages arising out of certain types of work performed by the insured, say, apartment buildings with more than x number of units or buildings over a certain height. The insurer is saying – we’ll insure you, but we just don’t have the risk appetite for certain things. And, it may be case that the insured, when applying for the insurance, stated that it didn’t do that kind of work anyway.

The interpretation of a “Designated Work” exclusion was at issue in Gemini Insurance Co. v. North American Capacity Ins. Co., No. 14-121 (D. Nev. Feb. 6, 2015), involving a demand by one insurer, Gemini, for reimbursement of defense costs from another insurer, North American, for a pedestrian construction defect claim. North American argued that it had no obligation on account of a “Designated Work” exclusion in its policy. The exclusion applied to the insured, Olsen Construction Company’s, “own work,” defined as “(1) new construction of residential units, (2) remodeling or conversion of an existing apartment, or (3) operations conducted by [Olsen] or on [Olsen’s] behalf for residential homeowners associations.”

North American argued that it had no duty to defend Olsen because the pleadings in the underlying case alleged that Olsen performed operations for a homeowner’s association. Therefore, Olsen’s conduct fell squarely within the designated work exclusion. Gemini countered that the exclusion was ambiguous because it did not clearly identify whether it referred only to conduct during the policy period [2005 to 2006], or if it also applied to work performed by Olsen before the policy went into effect. North American’s response was no, no, no: the absence of a time limitation merely indicates that the contracting parties (North American and Olsen) had no intention of including any type of time limitation in the Designated Work Exclusion.

Gemini also argued that the phrase “operations conducted by you or on your behalf for residential homeowner associations” was ambiguous because it was unclear whether it applied to Olsen, given that Olsen contracted with another company, and did not have a direct relationship with the homeowner’s association.

First, the court held that the phrase “conducted by you or on your behalf” was unambiguous as to what work is covered. However, the court also concluded that “the designated work exclusion as a whole is ambiguous with respect to the dates for which it applies, meaning that the Court must interpret the exclusion in the light most favorable to the insured. If, for example, the exclusion only applies to Olsen’s work performed during the policy period [2005 to 2006], then it does not exclude coverage for Olsen’s work between 2002 and 2003, which could have resulted in property damage during the policy period.

[The court then went on to discuss the insurers’ other debate – the applicability of a “Pre-existing Damage” exclusion. This is another of those manuscript endorsements used by insurers to manage their construction defect exposure.]

Whether North American’s “Designated Work” exclusion was limited to conduct during the policy period, or had no time limitation on it, could have probably gone either way. No doubt some courts would have ruled differently. But the take-away is this. Given the possible existence of a continuous or injury-in-fact trigger for construction defects, giving rise to an insurer’s obligation to provide coverage for damage during its policy period, on account of an insured’s prior work, it makes sense for insurers to clarify that any “Designated Work” exclusion is not limited solely to the insured’s work performed during the policy period containing the exclusion. I suspect that that it what an insurer is trying to achieve with such an exclusion.

 
 
Vol. 4, Iss. 2
February 18, 2015
 
 

“Coverage for Dummies” Case Reversed

The 7th annual “Coverage For Dummies,” appearing in the last issue of Coverage Opinions, included Auto Club Property Casualty Ins. Co. v. B.T. (W.D. Ky. June 29, 2014). The court held that no coverage was owed to a dad for this father of the year performance. His 8 year old son was playing with friends and wanted to get some sparklers out of the car. Dad used his keyless remote to open the door but did not follow his son to the car – nor check up on him for the next few hours. It turns out that his son didn’t retrieve just sparklers from the car (as if that would have been OK) but bottle rockets too. You can see where this is going. One of the kids lit a bottle rocket that hit another in the eye. Coverage for dad denied based on the criminal act exclusion. Nobody will confuse this guy for Ward Cleaver.

Well, it turns out that, on the same day that “Dummies” was published (Jan. 12), the Sixth Circuit reversed Auto Club Property Casualty Ins. Co. v. B.T. What are the odds of that? The court didn’t reversed the dumminess aspect, of course. But it did conclude that summary judgment for the insurer, holding that no coverage was owed, was in error. Just thought I’d mention this.