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Coverage Opinions
Effective Date: September 30, 2015
Vol. 4, Iss. 9
Click The Title Of The Article To Read It.

Declarations: The Coverage Opinions Interview With Former United States Senator Jon Kyl
From Insurance Defense Lawyer To Time Magazine’s List Of The 100 Most Influential People In The World;
Telling A Senate Whip A Political Joke

Randy Spencer’s Open Mic
SkyMall And Insurance Coverage

General Liability Insurance Coverage – Key Issues in Every State
Biggest Discount Ever

The Hardest Legal Issue I’ve Ever Faced

Oh Minnie – What Could Have Been

Of Pizza And Definitions

Keep Calm: The T-Shirt I’d Love To See

Letter To The Editor: Bill Barker, Coverage Lawyer And Scholar,
Says I Got It Wrong About Babcock & Wilcox

The Goofiest Coverage Case I Have Ever Seen

Hole-ly Cow: Must, Must Read Coverage Case

This One I Don’t Get: “Physical Abuse” Exclusion Applies To A Shooting

Montrose Endorsement Did Not Exclude Coverage

How Broad Can The Duty To Defend Be? Really Broad

A Lesson In Policy Drafting: Don’t Forget The Headings

Tapas: Small Dishes Of Insurance Coverage News And Notes
· A Win For Insurers: Nevada Supreme Court Adopts “Cumis” Rule
· Supreme Court Addresses Really, Really Late Notice: Like, After Settlement

Back Issues:

Vol. 4, Iss. 9
September 30, 2015


SkyMall And Insurance Coverage

Randy Spencer will be performing at New York City’s Gotham Comedy Club on October 5th at 7 PM as part of a New Talent Showcase. Gotham, one of the most prestigious clubs in America, is located on 23rd Street between 7th and 8th Avenues. Drop me a note and I’ll be happy to get you free tix.
I’ve read the SkyMall catalogue located in the airplane seat pocket in front of me. In fact, lots of times. And so have you. It’s an offering of odd things you never knew existed and now realize you absolutely can’t live without -- but ultimately never purchase. This must be true because, sadly, SkyMall’s parent company, Xhibit Corp., filed for bankruptcy earlier this year. I guess not enough people needed a vacuum cleaner specifically for bugs, a paw washer for dogs, a blue tooth cooking thermometer or a dog crate that doubles as an end table. Yes, all of these are actual SkyMall products. And list of consumer curiosities goes on and on and on. SkyMall had been filling seat pockets for 25 years. Thankfully, all of your unmet needs can still be satisfied at SkyMall’s website.

According to Xhibit’s CFO, as reported by USA Today, the reasons for the company’s financial woes are the increased use of electronic devices on planes and the availability of internet access. On account of these things, so says the CFO, fewer people are browsing the SkyMall in-flight catalog.

I’m sure all of that is true. But there is another reason why SkyMall failed. And it’s the most important one – the catalogue just didn’t offer enough insurance-related coverage items. Surely no coverage professional would have been able to resist purchasing any of these must-have items.

• Digital clock that adds “at the address of the insured” when 12:01 A.M. is displayed

• Life size inflatable doll of Progressive’s Flo

• Leather bound and gold leafed copy of General Liability Insurance Coverage – Key Issues in Every State

• Bird cage constructed from the six duplicate copies of the reservation of rights letter contained in every claim file

• Draperies displaying the text of ISO’s Commercial General Liability Form

• Quill pen containing a feather from the actual Aflac duck (only two available)

• Hank Greenberg Chia Pet

• Insurance Ouija Board for adjusters to make coverage determinations after death

• Bumper sticker that says: My other auto is mobile equipment

• Randy Spencer pillow cases

That’s my time. I’m Randy Spencer. Contact Randy Spencer at





Vol. 4, Iss. 9
September 30, 2015

The Hardest Legal Issue I’ve Ever Faced


I’ve been a lawyer for 24 years. That’s fewer than many, but still long enough to have seen my share of complex legal issues. I recently came across one that challenged me more than any I’ve ever faced.

I purchased a self-serve fountain Diet Coke at a fast food restaurant near my work building. I took it to my office and drank it. I then left the building for a meeting – an hour after purchasing the Diet Coke. I was interested in another Diet Coke. Here’s the issue: Did I still have refill rights in the soda?

While it had only been an hour since my purchase, I had left the restaurant and traveled about a block away. Were my refill rights extinguished the minute I exited the restaurant or, given how recent the purchase (indeed, the ice in the cup hadn’t even all melted), could I still walk back in and visit the fountain soda machine as if I’d never left?

I know. It’s an absolutely fascinating question. I have been posing it to many people and the answers have gone both ways. [Best answer – time stamp the cups and refill rights last for a certain period.]




Vol. 4, Iss. 9
September 30, 2015

Oh Minnie – What Could Have Been



I recently had a chance meeting with Minnie Mouse.

Minnie blew me a kiss (that part’s real) and then whispered in my ear that Mickey was out of town. I replied to Minnie that I was flattered -- but we couldn’t be together because ISO’s vermin exclusion precluded it. Oh what could have been.




Vol. 4, Iss. 9
September 30, 2015

Of Pizza And Definitions



As you know, when it comes to insurance coverage, definitions are everything. Many words in an insurance policy are defined. And when they are not, courts often turn to dictionaries for help in search of their meaning.

So, as one attuned to definitions, this sign, on the register at New York Pizza Suprema, my favorite pizza place (8th Avenue and 31st Street – one minute from Penn Station if you make the light at 8th), caught my eye and made me chuckle.

Incidentally, New York Pizza Suprema was featured in a front page Wall Street Journal story in 2011, as the only pizza place to receive a perfect score from a pizza blogger who sampled a slice -- over a two and a half year period -- at all 362 “slice joints” in Manhattan. Look it up. It’s a great story.




Vol. 4, Iss. 9
September 30, 2015

Keep Calm: The T-Shirt I’d Love To See


You’ve seen those t-shirts that say “Keep Calm and Carry On” or some other take-off of the phrase. To be honest, I’ve never really understand the whole Keep Calm thing. So I looked it up – Wikipedia of course. Here is what the all-knowing website says about it: “Keep Calm and Carry On was a motivational poster produced by the British government in 1939 in preparation for the Second World War. The poster was intended to raise the morale of the British public, threatened with widely predicted mass air attacks on major cities. Although 2.45 million copies were printed, and although the Blitz did in fact take place, the poster was hardly ever publicly displayed and was little known until a copy was rediscovered in 2000. It has since been re-issued by a number of private companies, and has been used as the decorative theme for a range of products.”

However, many of the “Keep Calm” take-offs that I’ve seen on t-shirts, or displayed on the internet, while no doubt meaningful to their creators, will seemingly not serve to keep anyone calm, such as Keep Calm and Take Photos, Keep Calm and Look Like Barbie and Keep Calm and Grow a Mustache.

But here is a Keep Calm t-shirt that really does serve a purpose:


Vol. 4, Iss. 9
September 30, 2015

Letter To The Editor:
Bill Barker, Coverage Lawyer And Scholar, Says I Got It Wrong About Babcock & Wilcox


In the August 26th issue of Coverage Opinions I wrote that, despite the fact that the insurer in The Babcock & Wilcox Company v. American Nuclear Insurers (Pa. July 21, 2015) lost the case, the Pennsylvania Supreme Court’s decision “will go down as a case that provided significant benefits for insurers as a whole.”

I received the following Letter to the Editor from long-time insurance coverage lawyer and scholar Bill Barker of Dentons US, LLP disagreeing with my conclusion:

To the Editor:

I write in response to your commentary (and the included comments of Justice Stanley Feldman) on Babcock & Wilcox v. American Nuclear Insurers. You treat this as a victory for insurers because it preserves some of an insurer’s rights: the right to contest coverage and the right to challenge the reasonableness of the insured's settlement. But those are no gifts to insurers: an insurer that performs its duty to defend is never obliged under the contract to pay for a noncovered loss and is never obliged to pay for more than the insured is liable for. Moreover, the rule adopted in Babcock & Wilcox strips the insurer of another valuable right reserved in the contract: the right to exercise its own judgment about the reasonable settlement value of the claim against the insured (subject to liability if an unreasonable judgment subjects the insured to an excess judgment). Loss of that right is hardly a victory, except in the sense that insurers are supposed to be grateful that even more rights were not taken away.

Justice Feldman suggests that loss of the insurer’s rights might be justified on the ground that it has committed an anticipatory breach by ‘erroneously refus[ing] to acknowledge its duty to indemnify.’ But a reservation of rights is not an anticipatory breach. It presupposes that the suit asserts both (1) claims which may be covered (and which the insurer would bound to defend and indemnify) and (2) noncovered claims (which it must defend but is not obliged to indemnify). A reservation of rights simply alerts the insured to the limits which are or may be imposed by the insurance policy on the duty to indemnify. It does not refuse anything, but merely notes where indemnification may be questionable. That allows the insured to take such questions into account in deciding whether to relinquish control of the defense and how extensively to engage with defense counsel regarding the defense. A reservation is a way to preserve the rights of all parties to the contract, not in any sense a repudiation.

Justice Feldman argues that ‘there is no policy language that gives the insurer the simultaneous right to refuse to acknowledge the duty to indemnify while at the same time retaining control of the defense.’ But he certainly agrees that the insurer has a duty to defend all claims in any suit that alleges any covered claim. The right to defend is coextensive with the duty to defend, so the insurer does have a right to defend (and therefore to control the defense of) any suit alleging both covered and noncovered claims. And there is no language that conditions that right on acknowledging a duty to indemnify noncovered claims.

You suggest that the insured must have some way of protecting against the risk of liability for the noncovered claims. And there is such a way. The contractual settlement restrictions do not absolutely forbid the insured to settle, but simply require that any settlement not consented to by the insurer be at the insured’s own expense. The insured is thus free to settle any noncovered claims by purchasing a covenant not to execute, leaving the insurer to defend the entire suit and, if a judgment results, to litigate the extent of coverage for that settlement. The insurer has no obligation to contribute to the settlement of noncovered claims, so it is appropriate to require that any such settlement be made solely at the insured’s expense.

In the end, American Nuclear Insurers waived all coverage defenses except for the settlement restrictions, so the court was able to treat the case as one where there was no coverage issue. But that was not the situation at the time the settlement occurred. And, if there really were no coverage issue, there is no reason why the insured ought not be required to simply await the judgment and (if the insurer’s settlement decision was imprudent) insist that the insurer pay any excess. (See WILLIAM T. BARKER & RONALD D. KENT, INSURANCE BAD FAITH LITIGATION, SECOND EDITION § 4.02[2][b]) Admittedly, that is a minority rule. But even the majority rule divests the insurer’s right to control settlement only if it refused a settlement that, had an excess judgment resulted, the refusal would have subjected the insurer to liability. And the latter rule (what in Pennsylvania is the Cowden test) was all that American Nuclear Insurers sought. By rejecting that rule, the court frees insureds to settle for an amount that the insurer could properly regard as excessive.

The result is to inflate settlement values, at the insurer’s expense. The inflation is limited in cases, like Babcock & Wilcox, where the insured actually pays cash for the settlement. But there is still room in determining reasonableness to inflate the value of the covered claims and correspondingly diminish the value of the noncovered claims. Insurers believe that courts are inclined to favor settlements that clear dockets and compensate injured parties and are not overly concerned with what is covered and what is not. Whether or not insurers are right about that, they value highly the right to make their own judgments, instead of being subjected to a court's post-settlement evaluation of reasonableness. The value of that right enters into the determination of the premium, and its is wrong for a court to deprive insurers of that right in cases where they are fully performing the duty to defend.

In closing, I note that you put aside the question of settlements made not in cash but for an assignment of rights. But few insureds have the funds to settle in cash, so almost all settlements that will seek to take advantage of the Babcock & Wilcox rule will involve assignments of rights. In such cases, the insured has no reason to resist inflation of the settlement amount, so the only limit on the plaintiff is how much counsel thinks might get past a reasonableness review. The predictable result would be substantial inflation of settlement amounts, inflation that insurers believe will not be adequately prevented by reasonableness review.

In no sense was the result in Babcock & Wilcox a victory for insurers.


William T. Barker
Dentons US LLP




Vol. 4, Iss. 9
September 30, 2015

The Goofiest Coverage Case I Have Ever Seen



Some coverage decisions, addressing certain issues, never cease to amaze me. In fact, the more I see them the more my amazement grows. Acuity v. Reed & Associates, No. 15-2149 (W.D. Tenn. Aug. 19, 2015) is such a case. Get ready to be amazed.

Reed & Associates involves coverage under the following circumstances. The McKees filed suit against Reed & Associates seeking damages for injuries allegedly sustained on account of mold infestation of a house rented from Reed. The McKees asserted claims for certain statutory violations. Reed tendered its defense to Acuity, its insurer. Acuity agreed to defend under a reservation of rights and filed an action seeking a declaratory judgment that its policy did not provide coverage.

At the outset the court observed that the McKees alleged “bodily injury” as a result of the mold infestation. At issue was whether the policy’s “Fungi or Bacteria Exclusion” applied to exclude coverage

The exclusion is as follows:


“Bodily injury or property which would not have occurred, in whole or in part, but for the actual alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any fungi or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.


This exclusion does not apply to any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.”

The court noted, and rightly so, that “[a]t first glance, the mold exclusion appears to do away with coverage for claims of bodily injury stemming from mold exposure.” Nonetheless, the court could not ignore “the ‘exception’ to the mold exclusion, which provides that the exclusion does not apply to preclude coverage for bodily injury suffered as a result of ‘any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.’”

The court pointed out that the underlying complaint alleged bodily injury as a result of a mold infestation affecting the water in the home and stated: “Other federal courts have construed the same language—‘fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption’—and held that water constitutes a ‘good’ or ‘product.’”

In particular, the Reed court cited to a decision holding that “water in a hotel hot tub from which a bather allegedly contracted Legionnaires’ disease was found to be ‘a good or product intended for bodily consumption’ under the same Consumption Exception at issue here. (citation omitted). . . . [B]athing water in a hotel hot tub is a good[.] The term ‘good’ plainly means ‘something that has economic utility or satisfies an economic want.’” Further “‘consumption’ is ‘the utilization of economic goods in the satisfaction of wants,’ and the claimant hotel guests consumed the good—water—when using the spa tub and shower. If water in a spa tub and a shower is considered a good intended for consumption, it follows that water in a rented house, some of which will be ingested by drinking and bathing, is intended for consumption.”

[Incidentally, the Legionnaire’s bacteria was first isolated in 1976 at the Bellevue-Stratford Hotel in Philadelphia. It’s an incredible and tragic story that’s worth reading about. The former Bellevue (now a Hyatt) is just down the street from my office and I eat lunch in the food court there fairly regularly. The original Bellevue-Stratford sign hangs on the wall. They seemed to have solved the problem.]

Relying on these decisions, the Reed court held that the exception to the mold exclusion -- fungi or bacteria contained in a good or product intended for bodily consumption -- applied to provide coverage.

Come on. Look, I have no problem admitting when an insurer loses a case that it should lose. My writing record over the years makes that crystal clear. But this Cirque du Soleil-like reasoning is ludicrous. There is no doubt that the exception in the mold exclusion, for fungi or bacteria contained in a good or product intended for bodily consumption, is meant to apply to food items, such as mushrooms.

The drafters of the mold exclusion have only themselves to blame for this result. The mold exclusion didn’t need a mushroom exception. No court would have applied the exclusion to a case involving bad mushrooms. And how often do bad mushroom cases actually arise? But, by adding such a provision, the exclusion created an opening that policyholders have been successfully walking through.


Vol. 4, Iss. 9
September 30, 2015

Hole-ly Cow: Must, Must Read Coverage Case


I’m a big fan of cases involving disputes over the prizes awarded to golfers who make a hole-in-one. You know how this works. A golf tournament, such as a corporate outing or charity fundraiser, will designate one hole where any participant who gets a hole-in-one will win a big prize, such as a car or large sum of money. There is a great chance that nobody will get a hole-in-one. But, just in case, the prize will often be insured. In other words, the sponsor pays a few hundred dollars to an insurance company, and on the off chance that someone actually gets a hole-in-one, the prize will be paid by the insurer.

But, just like many weekend golfers’ swings, sometimes it doesn’t always go as planned, and coverage litigation ensues. These cases don’t arise too often, but when they do they are, not surprising, usually interesting. I looked at hole-in-one prize cases in depth in the June 5, 2013 issue of Coverage Opinions, where I also interviewed Mark Gilmartin, co-owner and President of Reno-based Hole In One International and Odds On Promotions, a company that arranges insurance for the prizes awarded in hole-in-one contests, as well as lots of other interesting contests used for promotional purposes.

A Washington federal court recently had a hole-in-one coverage case before it in Servco Pacific Insurance v. AXIS Insurance, No. C15-0563 (W.D. Wash. Sept. 4, 2015). The court’s decision is absolutely fascinating – and with a rationale that could extend well-beyond cases that arise on the links. It is like no other coverage case I’ve seen. And it offers a valuable lesson for insurers.

Servco is a brief and simple case and I’ll give myself a gimme and describe it using some generous verbatim text from the opinion.

“On September 8, 2014, the Everett Golf and Country Club hosted the Lynwood Rotary Golf Tournament. As a charitable donation to the Lynwood Rotary, Servco purchased an insurance policy covering four hole-in-one prizes that could be earned at the tournament. If a golfer made a hole-in-one at the designated ‘Target Hole,’ he or she would win a new Acura car valued at $30,000. . . Servco paid Axis a premium of $638.”

Regarding witnesses, the Policy stated: “The Insured shall provide responsible, non-playing adults (over the age of 18) as witnesses on the Target Hole at all times during the tournament. If the Prize Value is equal to or less than $25,000, only one (1) witness is required by this policy. If the Prize Value is greater than $25,000, two (2) witnesses are required by this policy.”

The policy stated that the hole yardage could not be less than 130 yards for men and 110 yards for women.

“Servco’s application indicated that the Target Hole was Hole 15, with a minimum yardage of 150 yards for men and 140 yards for women. On the day of the tournament, participant Gigi Jacobsen made a hole-in-one on Hole 15.”

“It was later discovered that the Club had mistakenly set the women’s tee box at 112 yards. In addition, due to a misunderstanding, only one witness was designated at the Target Hole. As a result, Axis denied Servco’s claim under the Policy. Ms. Jacobsen did not receive her prize for sinking the hole-in-one.”

As is wont to happen in situations like this, coverage litigation ensued: “The sole dispute is whether Servco is entitled to coverage under the Policy for the value of the prize owed to Ms. Jacobsen.”

Axis’s case looks like a strong one, right? Its argument was not higher math: The insurer denied “coverage based on two perceived failings by Servco. First, Ms. Jacobsen scored a hole-in-one from 112—not 140—yards. Second, only one witness—not two—was present when Ms. Jacobsen did so.”

The Washington federal court saw it differently. It is worth reading the court’s entire analysis:

“Hole-in-one insurance reflects th[e] principle [that] the more expensive the prize and the easier the shot, the greater the risk in providing the insurance. Thus, to properly compensate Axis for the risk it assumed, Servco paid a premium ‘based on the yardage of the hole, number of Attempts, and the Prize Value.’ The Policy included another safeguard for Axis: the limitation that no yardage could be less than 130 yards for men and 110 yards for women. The Policy also required Servco to provide an additional witness in the event that Axis was liable for a prize that exceeded $25,000 in value.

In other words, Servco and Axis agreed to allocate to Axis the liability for a hole-in-one prize, in exchange for a premium from Servco that addressed the amount of risk Axis assumed. Servco, by way of the Club, then placed the tee block at a closer distance than the premium addressed and provided only one witness where the prize exceeded $25,000. Although these deviations impacted the risk assumed by Axis, they are not inconsistent with the parties’ intent in entering this agreement. The Policy was based on a sliding calculation of risk: Axis demanded a premium from Servco that corresponded with various distances and prize values. According to Axis itself, ‘Servco would have been charged a higher premium to insure a Target Hole with a distance of 112 yards instead of 140 yards.’ And, 112 yards is within the limits of yardage that Axis indicated it would insure. Axis also indicated that it would insure a prize valued at $25,000, provided that one witness was present. Thus, the Court finds that reformation is appropriate so that the terms of the Policy reflect the intent of the parties to provide protection to Servco for a price that acknowledges the risk Axis assumed. See Denaxas v. Sandstone Court of Bellevue, L.L.C., 148 Wash.2d 654, 63 P.3d 125, 132 (Wash.2003) (‘Reformation is an equitable remedy employed to bring a writing that is materially at variance with the parties’ agreement into conformity with that agreement.’).

Due to the presence of only witness at the Target Hole, Axis’s liability under the Policy shall not exceed $25,000. This amount shall be offset by the value of a premium to insure a Target Hole of 112 yards—the reasonable amount of which shall be determined by the parties—less the premium already paid by Servco.”

Essentially, the court gave Servco a mulligan. A policy requirement was not satisfied and the insured did not do what it promised in the application. But, instead of concluding that, on account of these breaches, coverage was not owed, the policy was reformed to provide coverage based on the things that Servco got right. And Servco just pays some extra premium to compensate for the things it got wrong.

The implications of this ruling, and the slippery slope, are easy to see. All insurance is an allocation of risk in exchange for a premium. Under the Servco court’s rationale, anytime a policy requirement is not satisfied, or an insured does not comply with something it says in its application, the policy can simply be adjusted to provide coverage that reflects the bits and pieces that were satisfied, and the insured simply pays additional premium for the additional risk imposed on the insurer. But if an insured can fix its mistake, by paying some extra premium after the fact, then only the insurer was taking a true risk in the transaction. That’s just not how insurance works.

The case was wrongly decided. That the court’s entire legal support for its decision was a case involving a dispute over the square footage in a lease speaks volumes on that point. If this were truly how insurance operated I would have expected to see at least one insurance-related case cited by the court for support. I can’t imagine that this case won’t be appealed once the premium offset issue is determined. But the case should stand as a lesson to insurers that, no matter how strong their arguments, nothing can prevent a where-there’s-a-will-there’s-a-way decision.




Vol. 4, Iss. 9
September 30, 2015

This One I Don’t Get: “Physical Abuse” Exclusion Applies To A Shooting


Just because I represent insurers doesn’t mean that I agree with every decision that an insurer wins. And just because an insurer takes a position in a case doesn’t mean that it’s one that I would have recommended to a client. If I were that narrow-minded, or acted that reflexively, I wouldn’t be much of a lawyer. Miglino v. Universal Property & Casualty Company, No. 4D13-4161 (Fla. Ct. App. Aug. 19, 2015) falls into both of these categories.

Miglino goes like this. Harvey Stein lent a gun to his sister, Cheryl Hepner, who used the gun to shoot her son-in-law, Salvatore Miglino. Miglino and Hepner’s daughter were in the midst of divorce proceedings at the time. Miglino filed suit against Stein and Hepner. Universal P&C initially defended Stein under a reservation of rights, but then filed a declaratory judgment action seeking a determination that it had no duty to defend or indemnify.

At issue was the applicability of an exclusion (k) for damages “[a]rising out of sexual molestation, corporal punishment or physical or mental abuse.” The policy did not define “physical abuse.”

The trial court found in favor of Universal that the exclusion applied. An appeal ensued, with Miglino pursuing the coverage. Miglino argued “that the trial court erred in determining that exclusion k. applies to exclude coverage because the shooting does not fit within the dictionary or case law definitions of physical abuse, and therefore, the insurance policy exclusion does not apply to the shooting. He specifically likens the definition of physical and mental abuse to torture or actions meant to humiliate or demean. We must disagree, as the plain meaning of the words ‘physical abuse’ includes an instance such as the subject shooting.”

With no definition of “physical abuse” in the policy, the court turned to dictionaries, noting that Black’s Law defines “physical,” in pertinent part, as “[r]elating or pertaining to the body, as distinguished from the mind or soul or the emotions. And Black’s defines “abuse” as “[p]hysical or mental maltreatment, often resulting in mental, emotional, sexual, or physical injury,” and “[t]o injure (a person) physically or mentally.” A non-legal dictionary defined abuse as: “[t]o hurt or injure by maltreatment.”

Using these definitions as guidance, the court held: “The plain meaning of ‘physical abuse’ encompasses the intentional shooting of Miglino by the sister. Such an act clearly constitutes ‘physical ... maltreatment’ ‘physical injury,’ and ‘hurt or injur[y] by maltreatment.’”

Miglino argued that the exclusion did not apply because there was no torture, torment, humiliation, or degradation present in the sister’s act of shooting him. However, looking at other decisions addressing a “physical abuse” exclusion, the court noted that none of them held that “these elements were necessary for the acts in question to rise to the level of physical abuse or for the policy exclusion to apply.”

Ask yourself -- would you have felt strongly enough that a shooting is “physical abuse” to recommend to an insurer that it file a Declaratory Judgment action?




Vol. 4, Iss. 9
September 30, 2015

Montrose Endorsement Did Not Exclude Coverage


In general, insurers have had mixed results when it comes to enforcing the Montrose (known loss) endorsement in construction defect coverage cases. Some courts have interpreted them narrowly and applied a strict “sameness” (my term) test between the “property damage” that existed pre-policy inception date, and that which took place during the policy period, for which coverage is now being sought. In other words, it is the specific “property damage” itself that must be known by the insured prior to the policy period. Further, that an insured knew, before policy inception, that something was amiss, and caused some property damage, is not necessarily going to qualify as “known loss,” ala Montrose, for all property damage. [To be clear, the Montrose Endorsement isn’t actually an “endorsement” anymore, having been added to the CGL policy’s insuring agreement eons ago, but the name has stuck.]

Of course, this may not bother ISO, the inventor of the Montrose Endorsement, as it noted when drafting it that its concerns were particularly relevant in “those cases involving continuous or progressively deteriorating injury or damage.” See “Introduction of Various New and Revised Commercial General Liability Endorsements,” ISO Commercial General Liability Forms Filing GL-99-O99FO, at 3. The Montrose decision unquestionably involved traditional continuous or progressively deteriorating injury or damage.

The Ninth Circuit recently held in Ameron International v. Greenwich Insurance Co., No. 13-55838 (9th Cir. Sept. 9, 2015) that the Montrose Endorsement did not preclude coverage (at least not yet) for a claim that, while not exactly construction defect, resembled it.

Ameron supplied paint that was affixed to various facilities in a natural gas production project in Nova Scotia. Ameron was sued for paint failure, which allegedly caused corrosion of underlying steel structure and pipelines. Ameron sought defense costs under the terms of a general liability policy issued by American Home Assurance.

American Home argued that coverage was not owed on account of the policy’s “known damages provision” (which looks like a Montrose Endorsement) which precludes coverage for property damage that the insured “knew ... had occurred, in whole or in part [before the policy incepted].”

The court agreed with American Home that Ameron knew about corrosion to the underlying steel at the offshore facilities before the inception of the policy. However, there was more to it than that: “We must also ask: did the Ameron parties know about corrosion to the underlying steel at the onshore facilities and the pipelines? We hold that there is an issue of fact on this question. Although American Home Assurance has presented some evidence that the Ameron parties had pre-policy knowledge of corrosion and damage to the underlying steel at the onshore facilities and pipelines, none of this evidence is “conclusive[].” Additionally, several key Ameron employees testified that they did not have knowledge of corrosion or other damage to the underlying steel at the onshore facilities until after the policy’s inception. This testimony alone creates an issue of fact about the Ameron parties’ knowledge.” (emphasis added).

This is not an unusual decision in a Montrose Endorsement case. This is another example of a court applying a strict “sameness” test between the “property damage” that existed pre-policy inception date, and that which took place during the policy period, for which coverage is now being sought.

Likewise, this “sameness” issue is also relevant to the aspect of the Montrose Endorsement that involves a “continuation, change, or resumption” of property damage. Specifically, the Montrose Endorsement states that if an insured knew, prior to the policy period, that the “property damage” occurred, then any continuation, change or resumption of such “property damage” during or after the policy period will be deemed to have been known before the policy period.

However, here too the court saw fact issues: “American Home Assurance argues that ‘continuation, change, or resumption’ refers to the same type or same cause of damage, regardless of how widespread or physically separated that damage is. Under this definition, American Home Assurance argues that the later corrosion at the onshore facilities and pipelines qualifies as a ‘continuation, change, or resumption’ of the offshore property damage because the same paint continued to fail in the same ways giving rise to the same type of damage. However, even assuming that American Home’s interpretation of the policy is correct, there are issues of fact as to whether the corrosion at the various locations shared a common cause. Given these issues of fact, there remains the ‘possibility’ that the corrosion at the onshore facilities and pipelines is not a continuation, change, or resumption of the known damage at the offshore facilities and thus is within the policy’s coverage.”

This is what the future of “known loss” is going to look like. This is why I put the Montrose decision (Cal. 1995) on my February 5, 2015 list of the ten most significant insurance coverage cases of all time, describing it this way:

Montrose led to the so-called “Montrose Endorsement,” the insurance industry’s response to its dissatisfaction with the Supreme Court of California’s decision that a party was permitted to purchase a liability insurance policy to cover property damage that the insured knew existed at the time of the purchase, so long as the insured’s “liability” for such property damage was still contingent and not a certainty. In 1999, ISO introduced an endorsement, which came to be known as the “Montrose Endorsement,” [followed by incorporation of this language into the October 2001 edition of its CGL form (CG 00 01)], that amended the policy’s insuring agreement by stating that, prior to the policy period, no insured knew that the “bodily injury” or “property damage” had occurred, in whole or in part. Until the Montrose Endorsement, there had never been a “known loss” provision in a standard CGL policy. The Montrose Endorsement has begun, and will continue, to shape and reshape “known loss,” which is at the heart of the granddaddy of liability concepts -- fortuity. [Montrose is also well-known for its continuous trigger aspects – but that’s not the reason for its qualification as one of the ten most significant liability coverage cases of all time.]




Vol. 4, Iss. 9
September 30, 2015

How Broad Can The Duty To Defend Be? Really Broad


We all know that the duty to defend is broad. But just how broad? You’ll see. Bear with me here. This is worth reading – but it takes a lot of set up to get there.

Zhaoyun Xia v. Probuilders Specialty Insurance Co., No. 71951-3-I (Wash. Ct. App. Aug. 24, 2015) involved coverage under a general liability policy, for claims brought by Zhaoyun Xia, against a builder, for carbon monoxide injuries that she sustained in her home. It was determined that the exhaust vent of the water heater was never connected to an exterior vent.

The case addresses a multitude of coverage issues. Here I focus on the following Townhouse Exclusion, which the trial court held applied to preclude a duty to defend:

“Property damage or bodily injury within the products-completed operations hazard arising from, related to or in any way connected with your work or your work product which is, is part of or is incorporated into or upon a ...townhouse project, or to personal injury or advertising injury arising or resulting from your operations performed upon, at or for a ...townhouse project.”

The duty to defend standard was described by the court, in part, as follows:

“The duty to defend is generally determined from the ‘eight corners’ of the insurance contract and the underlying complaint. There are two exceptions to this rule and both favor the insured. First, if it is not clear from the face of the complaint but coverage could exist, the insurer must investigate and give the insured the benefit of the doubt. Second, if allegations in the complaint conflict with facts known to the insurer or if the allegations are ambiguous, facts outside the complaint may be considered. But ‘extrinsic facts’ may only be used to trigger the duty to defend; the insurer may not rely on such facts to deny its defense duty.”

As the court rightly noted, the issue before it was whether Xia’s home was part of a “townhouse project.” The policy did not define the term “townhouse project.”

With no definition of “townhouse” in the policy, the court turned to dictionaries. “The Merriam–Webster Online Dictionary defines ‘townhome’ or ‘town house’ as: ‘[A] house that has two or three levels and that is attached to a similar house by a shared wall.” And Black’s Law Dictionary defines ‘townhouse’ or ‘townhome’ as: ‘A dwelling unit having usu[ally] two or three stories and often connected to a similar structure by a common wall and (particularly in a planned-unit development) sharing and owning in common the surrounding grounds.”

ProBuilders argued that Xia’s home constituted a “townhouse” within the meaning of the exclusion. Further, Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. Xia disagreed, “asserting that she owns a ‘zero lot line’ home and that it does not fall within the ordinary meaning of the policy exclusion for townhouse. She further asserts that to the extent the term is ambiguous, this ambiguity imposed on ProBuilders the duty to defend.”

The court agreed with Xia: “These definitions explain that the plain meaning of a townhouse is a structure that has either a ‘shared’ or a ‘common’ wall with adjacent units. Looking to Xia’s complaint on its face, it is not clear whether her home falls within the plain meaning of this definition. Whether Xia’s home had shared or common walls is the determinative question for purposes of applying this exclusion. Accordingly, because coverage was not clear from examining the face of the complaint but might have existed, ProBuilders had a duty to investigate the claim and give the insured the benefit of the doubt.”

The court also turned to underwriting, stating that “[p]resumably, when underwriting the policy it issued in this case, ProBuilders either knew or should have known of the physical characteristics of the units in this development. In either event, at minimum, the insurer had a duty to investigate to verify whether the home had shared or common walls in order to apply the townhouse exclusion. There is no evidence in this record to show that it did so.”

The court was also persuaded that “the allegations in Xia’s complaint conflicted with facts either known or that should have been known to ProBuilders. Specifically, ProBuilders knew that Xia’s home was marketed as a “zero lot line” home. A zero lot line townhouse must have ‘independent structural walls.’ Specifically, an air gap must exist between the structural walls of the units.”

Held: “In sum, on examining the ‘eight corners’ of Xia’s amended complaint and the policy, it was unclear whether the townhouse exclusion applied. Because of the uncertainty, the proper course of action for ProBuilders was to investigate and defend under a reservation of rights and commence a declaratory judgment action to obtain a court ruling on the applicability of the exclusion. ProBuilders was not entitled to make this judgment on its own, leaving its insured to undertake its defense at its own expense.”

If ProBuilders knew that Xia’s home was marketed as a “zero lot line” home, then it’s hard to quarrel with the decision based on the duty to defend standard at issue. But what’s troubling is that the court seemed willing to find a duty to defend even without this fact. Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. Nonetheless, the court noted that, based on the face of the complaint, it was not clear whether Xia’s home had shared or common walls.

There are exceptions to the duty to defend eight corners rule -- one being that if it is not clear from the face of the complaint that coverage could exist, the insurer must investigate and give the insured the benefit of the doubt. However, here it was clear from the face of the complaint that the townhouse exclusion applied. Xia consistently referred to her house as a “town home” or “town house” in her original and amended complaints. The court’s decision here seems to impose an obligation on the insurer to take nothing in a complaint at face value when determining if a duty to defend exists.




Vol. 4, Iss. 9
September 30, 2015

A Lesson In Policy Drafting: Don’t Forget The Headings


When it comes to policy drafting the provisions get all the glory. And that’s not surprising. But Burlington Insurance Co. v. Eden Cryogenics, LLC, No. 14-66 (S.D. Ohio Sept. 1, 2015) demonstrates that headings in the policy also can’t be overlooked. Here an insurer did that and paid the price.

At issue in Eden Cryogenics was coverage for an intellectual property claim involving technical products about which I have zero comprehension. But none is required to understand the coverage issues. Eden sought coverage from Burlington Insurance. Burlington denied coverage based on, among other reasons, an Intellectual Property exclusion (via endorsement). The underlying action went to trial and Eden was found liable by a jury. Coverage litigation ensued. There were several issues in play, but only the IP exclusion is addressed here.

The Intellectual Property exclusion in Burlington’s policy was very broad. In fact, Eden surely knew that, based on its language, it was game over. After all, Eden argued that the exclusion did not apply on account of language in the exclusion’s heading. The IP exclusion (endorsement) had the following heading:

This endorsement modifies insurance provided under the following:

The competing arguments went like this.

The Defendant-insured argued that “[t]he first capitalized line identifies the entire contract (Commercial General Liability Coverage Part), while the second identifies a subsection to Coverage A. This should be read as a header and a sub-header, Defendants assert, such that the modification only applies to the narrower identified subheading (Product/Completed Operations Liability Coverage Part). Therefore, Defendants reason, the IP Endorsement does not apply to Coverage B for ‘Personal and Advertising Injury Liability’—the coverage applicable to Defendants in this case.”

Burlington countered that “the two lines should be read in conjunction with one another, instead of the second line being read as a sub-header that modifies the header. In that case, Burlington argues, the IP Endorsement modifies the entire contract and takes care to also explicitly modify the subpart to Coverage A.”

The court was not persuaded by Burlington’s argument, using the following example of a contract term:

The following rule applies on:



As the court analogized it, Burlington’s argument was that the rule applied on both Saturday and Sunday. But this, the court concluded, would render Sunday superfluous, as Weekend Days is inclusive of Sunday.

The court found in favor of Eden, not necessarily because it’s interpretation was correct, but because it was “not persuaded that the only reasonable reading of a contract would render language superfluous. Given the stringent standard of law directing interpretation of ambiguity in favor of the insured, the Court finds in favor of the Defendants that reading the IP Endorsement to only modify the Product/Completed Operations Liability Coverage Part is at least a reasonable interpretation of the contract language.”

The court also rejected Burlington’s argument that, because the Listing of Forms and Endorsements in the policy listed the IP Endorsement under the heading “Commercial General Liability Policy,” it was “indicative of its applicability to the entire Commercial General Liability Coverage Part—in other words the entire Policy.” However, the court responded that “many exclusions and endorsements that explicitly apply to only specific parts of the Policy (for example, the “Med Pay” Exclusion to Coverage C) are listed under the same heading.”

There is little doubt that Burlington intended for the IP exclusion to apply to the entire CGL policy. And I suspect that the policyholder knew that too. But simply on account of a few unnecessary words added to the header of an endorsement, an exclusion, surely otherwise applicable, was lost.



Vol. 4, Iss. 9
September 30, 2015

A Win For Insurers: Nevada Supreme Court Adopts “Cumis” Rule
Answering a Certified Question from a Nevada District Court, the Supreme Court of Nevada held as follows in State Farm v. Hansen, No. 64484 (Nev. Sept. 24, 2015): “Nevada law requires an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and the insured. Nevada recognizes that the insurer and the insured are dual clients of insurer-appointed counsel. When the insured and the insurer have opposing legal interests, Nevada law requires insurers to fulfill their contractual duty to defend their insureds by allowing insureds to select their own independent counsel and paying for such representation. We further conclude that an insurer is only obligated to provide independent counsel when the insured’s and the insurer’s legal interests actually conflict. A reservation of rights letter does not create a per se conflict of interest.”

In reaching this decision the Nevada Supreme Court made abundantly clear that it was following California’s “Cumis” Rule, discussing the decision at length and referring to it as “appropriate for Nevada” and “most compatible with Nevada law.”

But “Cumis” is generally considered a pro-policyholder decision. So a win for insurers? Really? Yes. The reality is that the rule from Cumis — if an insured can prove that a reservation of rights creates a conflict, and that’s a big if, then it is entitled to independent counsel — is already the majority rule nationally. So in that sense insurers didn’t suffer a big defeat. But by adopting the majority rule in the way that it did — with so many references to Cumis — the Nevada High Court has opened the door to a strong insurer argument that independent counsel may be paid no more than the insurer’s panel counsel. After all, that is a specific aspect of the codified Cumis rule. And the ability to pay independent counsel (sometimes asking for $500/hr. and up) the same rates as panel counsel is no small advantage for insurers. Lastly, the Nevada High Court could have held that a reservation of rights creates a per se conflict, thereby automatically entitling the insured to independent counsel, but it didn’t.

Supreme Court Addresses Really, Really Late Notice: Like, After Settlement
An insured settled a case and then gave notice to its insurer. As you may expect, the Supreme Court of Nebraska in Rent-A-Roofer, Inc. v. Farm Bureau Property & Casualty Ins. Co., No. S-14-895 (Neb. Sept. 11, 2015) did not deliver good news to the insured. On one hand, the court held that the insurer was still obligated to prove that it was prejudiced by the insured’s breach of the policy’s voluntary payments provision. But after that it went downhill fast for the insured. Addressing such proof of prejudice, the Supreme Court of Nebraska held: “We conclude that prejudice may be shown as a matter of law where the insured’s settlement deprived the insurer of the opportunity to protect its interests in litigation or participate in the litigation and settlement discussions. In this case, at the time the insured entered into an enforceable settlement agreement, it was too late for Farm Bureau to act to protect its interests. There was nothing left for Farm Bureau to do but issue a check. An insurer cannot fail in defending a suit that it has no knowledge of. In this case, we conclude that this complete denial of Farm Bureau’s opportunity to engage in the defense, take part in the settlement discussions, or consent to the settlement agreement was prejudicial as a matter of law to Farm Bureau and find that Farm Bureau is not liable for defense costs.”