In the Coverage Opinions “Best Of” Christmas Meets Insurance email, in mid-December, I mentioned last year’s New York federal court opinion in Cimato v. State Farm, No. 16-94A (W.D.N.Y. June 29, 2020).  At issue was coverage for a water loss under a homeowner’s policy.  A dispute arose over the contents of the home that had allegedly been damaged.

The opinion stated that, following an EUO, a State Farm investigator visited the insured’s home and photographed its contents, which included certain items that appeared on the insured’s final inventory of losses.  This was a long list of fairly mundane household items, until you got to Final inventory number 828: Christmas Story The Movie Leg Lamp!

That made me chuckle. 

I said I’d send a copy of Insurance Key Issues to the first person who sent me a picture of themselves with their cherished Christmas Story Leg Lamp.  OMGosh.  Someone actually responded! 

Peter J. Durand, Senior Legal Counsel and Senior Vice President of Swiss Re, in Detroit, sent me this picture of himself and his Christmas Story Leg Lamp.  Plus, as an added bonus, he informed me that it came from the gift shop in the house in Cleveland that is represented in the iconic film.  I was happy to send Peter a copy of Insurance Key Issues. 

There was no extra prize because the leg lamp came from the house in Cleveland.  But, I also did not disqualify Peter’s entry because he has a puny night-light version and not the 50" Deluxe Full Size Leg Lamp, regularly priced as $299.99 and now on sale for $219.00.  Really.  Check it out.  The night-light is $14.99.  Next time I’ll be more specific.  

Thanks Peter for having some fun with the Leg Lamp contest! 

It was, and still is, without a doubt, the most significant coverage question ever faced by property-casualty insurers: Do they have an obligation to pay losses, for business interruption, on account of the Covid-19 pandemic?

In late February and into March, as Covid-19 lockdowns began, it became clear to coverage lawyers that this question was at hand -- and the answer was going to be monumental in significance.  The dollars at stake for Covid-19 coverage, some predicted, would make Hurricane Katrina look like loose change under the sofa cushions. 

A keyboard assault, by coverage lawyers, was now underway.  The result was a barrage of articles and law firm alerts, by advocates on both sides, advancing predictable positions on coverage for pandemic-related business losses.  Many who went to law school, because they weren’t good enough in math and chemistry to go to medical school, now turned into microbiologists, arguing whether the presence of Covid-19 scientifically qualified as “direct physical loss of or damage to” the covered property, or some similar policy requirement, to trigger coverage.  In making their points, the authors trotted out obscure cases addressing whether smoke, ammonia fumes, odors and other hard-to-see substances caused property damage. 

Then, some New Jersey legislators, seeing the writing on the wall, that coverage under property policies, for business interruption, was going to be a tough road, introduced a bill that caused insurers to seethe.  The proposed law would, under certain circumstances, mandate coverage for Covd-19 business interruption under property policies.  Several other states followed New Jersey’s lead and introduced similar bills that would provide coverage via legislative presto.  Now some coverage lawyers turned into Con Law professors.  Articles abound arguing whether this insurance-mandated legislation could pass Constitutional muster under the Contracts Clause.

Next up was the inevitable: policyholders filed declaratory judgment actions, seeking a determination that their property policies provided coverage for their Covid-19 business interruption losses.  According to the University of Pennsylvania Law School’s “Covid Litigation Tracker,” at least 1,400+ Covid-19 coverage actions have been filed (and likely more, as these filings, especially in state court, cannot all be tracked).

Now, with complaints and motions to dismiss in hand, courts had their say on the great question.  According to the Penn Law Tracker, about 100 known decisions have been handed down.  Insurers have won the lion’s share of them.  Courts have generally concluded that Covid-19 business interruption losses are not covered, under a property policy, as they were not caused by
“direct physical loss of or damage to” the covered property, or something along those lines.  In addition, the presence of virus exclusions has often precluded insurers’ obligations.           

Policyholders have maintained that the battle is far from over, and, for various reasons, their fortunes will turn in 2021.

But, despite the Covid-19 coverage question being the most important ever faced by P&C insurers, none of the approximately 100 decisions, providing the answer, or concluding that it was premature to do so, qualify as one of the ten most significant coverage decisions of 2020. 

The reason goes back to the selection process discussed in the introduction.  The most important consideration, for selecting a coverage case as one of the year’s ten most significant, is its potential ability to influence other courts nationally.  And none of the Covid-19 coverage decisions, at least so far, have done so.  Perhaps some will emerge at the appellate level.  But, for now, none of the Covid-19 decisions have become a go-to case for courts seeking guidance on the issue. This is likely because the decisions often look to state law for guidance.  In addition, with so many decisions coming all at once, with similar rationales, there has been no need for any one to take on a leading status.       

Even two examples, that policyholders pointed to as important wins, and that may influence other courts, have not come to pass. 

In August and September, three Missouri federal court decisions -- Studio 417, Inc. et al. v. The Cincinnati Insurance Co., K.C. Hopps, Ltd. v. The Cincinnati Ins. Co. and Blue Springs Dental Care, LLC v. Owners Insurance Company -- denied the defendant-insurers’ motions to dismiss.  Coming on the heels of a litany of insurer wins, policyholders touted the Missouri wins as evidence that the tide was turning.  But other courts have not looked to the Missouri-trio as a basis to find in favor of policyholders.  And many have specifically declined to follow them. 

In fact, in December, in Zwillo v. Lexington Insurance Co., even a Missouri federal court specifically declined to follow the Missouri-three, stating: “To the extent this Court’s ruling -- finding the language in the policy plainly and unambiguously does not cover the claims -- conflicts with Studio 417, K.C. Hopps, and Blue Springs Dental Care, this Court respectfully disagrees with those cases.”

The most-touted policyholder win came in October, when a North Carolina state court, in North State Deli v. The Cincinnati Insurance Company, granted the policyholder’s motion for summary judgment, thereby concluding that coverage was owed for Covid-19 .  In other words, it was not simply a case of a court denying an insurer’s motion to dismiss the policyholder’s complaint. 

In general, the court in North State Deli held that the “ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess something in the real, material, or bodily world. . . . “ This is precisely the loss caused by the Government Orders. Plaintiffs were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured. . . .  In ordinary terms, this loss is unambiguously a ‘direct physical loss,’ and the Policies afford coverage.”  Of note, the Cincinnati policy did not contain a virus exclusion, which the court pointed out.  The decision in North State Deli is on appeal.

This victory, like the Missouri trio, caused policyholders to proclaim that brighter skies lay ahead.  However, North State Deli has not materialized, as a case followed by other courts, to find coverage for Covid-19 business interruption losses.    

Thus, despite the Covid-19 coverage question being the most important ever faced by P&C insurers, none of the approximately 100 decisions, addressing the issue, meet the test to qualify as one of the ten most significant coverage decisions of 2020. 

But, having said that, Covid-19 was unquestionably the biggest insurance coverage story of 2020 -- and no doubt will be in 2021.  There are umpteen coverage cases for which rulings will come this year and appeals courts will surely enter the scene.     

That Covid-19 became a monumental insurance coverage story should come as no surprise.  History has shown that, when wide-spread social problems arise, and money is one part of the solution, a place will be set at the table for the insurance industry.  The question will then arise whether insurers are required to pull up a chair, and if so, how many it should occupy. 

This is particularly so when the situation is unique and guidance on the appropriate role of insurers is needed.  Examples include asbestos, the governments’ focus on environmental clean-up, the World Trade Center number of occurrences question and Hurricane Katrina’s unprecedented destruction.         

The pursuit of coverage, for Covid-19 business interruption losses, followed this path.  Almost immediately after it became clear that the virus was going to be not just a massive health crisis, but an economic one, property insurance policies were scrutinized, issues identified, claims made and litigation filed by dissatisfied parties.  The result, as in the other situations to follow this formula – mixed.  That is not unusual given the number of claims, policy variation and involved jurisdictions.   

The other thing more unexciting than a discovery dispute is reading about someone else’s discovery dispute.

But the Washington federal court’s decision in Canyon Estates Condo. Association v. Atain Specialty Ins. Co., No. 18-1761 (W.D. Wash. Jan. 22, 2020) is no snoozer.  The decision is brief -- but has a lot to say. 

The past few years have seen attempts by policyholders, in coverage litigation, to obtain claim file documents from insurers that include communications with their outside coverage counsel.  Needless to say, insurers fight these attempts with vigor, arguing that the documents are undiscoverable, based on attorney-client privilege.  The results have been mixed.   

In Canyon Estates Condo. Association, the court addressed a unique argument by the policyholder in an attempt to obtain unredacted copies of an insurer’s claim file documents: because outside counsel authored draft coverage letters, signed by the insurer, attorney-client privilege was waived. 

Given that insurers often use outside coverage counsel to draft letters, that are then sent by their clients, Canyon Estates Condo. Association is a decision that could prove influential in other cases.  Even if other courts do not follow it, the issue may now be raised by policyholders and need to be addressed as part of a discovery dispute. 

Further, this year’s Top 10 coverage cases includes the Mississippi Supreme Court’s decision in Travelers Property Cas. Co. v. 100 Renaissance, LLC, where the court addressed whether attorney-client privilege is waived when a disclaimer was drafted by the insurer’s in-house counsel and sent from the adjuster. Answer - yes.

In Canyon Estates Condo. Association, a condominium association was seeking unredacted copies of its insurer’s claims file documents and invoices for activities performed by its outside coverage counsel, Michael Hooks.  The insurer maintained that the documents were precluded from discovery on account of attorney-client privilege.

The court set out the rules concerning attorney-client privilege in the context of a coverage dispute.  As a starting point, “there is a presumption of no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process.”

However, the court noted that the presumption can be overcome “by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”

So the question was this – Was Mr. Hooks, as outside coverage counsel, engaged in evaluating or processing the claim OR was he providing the insurer with counsel as to whether or not coverage exists under the law?

The insurer, seemingly prepared for this issue, maintained that it “consciously chose to keep [Michael] Hooks, its outside counsel, separate from the claim investigation, and he did not participate in the investigation or otherwise perform claim handling functions.” 

But the court concluded that such declarations, about Mr. Hooks's role, were “pure amphigory.”  [If you have to look that up, you are not alone.] 

As the court saw it, Hooks “clearly—and arguably, knowingly—engaged in at least some quasi-fiduciary activities.”

A significant aspect of the court’s decision was that Mr. Hooks authored draft letters signed by the insurer and sent to the insured related to coverage and claims processing.  As the court put it: “Assisting an adjustor in writing a denial letter is not a privileged task.” 

What about if the outside counsel engages in what the court believes is claim investigation and also provides advice on whether or not coverage exists under the law.  Here, “waiver of the attorney-client privilege is likely since ‘counsel’s legal analysis and recommendations to the insurer regarding liability generally or coverage in particular will very likely implicate the work performed and information obtained in his or her quasi-fiduciary capacity.” (citation omitted). 

The court concluded that very few of the documents at issue are covered by attorney-client privilege.  In addition, following an in camera review, the court noted that counsel has discoverable information related to the drafting of the letters that is relevant to the claims.

The decision stands as a reminder that attorney-client privilege may be waived when outside counsel is engaged in investigating and evaluating or processing a claim, and not in providing the insurer with counsel whether or not coverage exists under the policy and law.

If that’s the test for maintaining attorney-client privilege, then the decision in Canyon Estates is unquestionably wrong.  There is nothing routine about drafting a denial or reservation of rights letter, which is what the court seems to be suggesting.  The task clearly involves addressing whether there is coverage under the policy.  It requires assessing which policy provisions may apply and identifying the facts to support that decision. 

And there is clearly knowledge of the law required as well when drafting a reservation of rights letter.  Is independent counsel owed?  That is clearly tied to the state’s case law?  Is coverage owed for pre-tender defense costs?  Absolutely based on case law.  Does “any insured” in a policy really mean “any insured,” or is that not so, based on how case law treats the severability of interest clause.  Does the pollution exclusion apply narrowly or broadly based on the state’s case law treatment of that issue?  This list could go on and on and on of legal and case law-dictated issues that must addressed when drafting a denial or reservation of rights letter. 

It is quite a common refrain from courts: if the question of coverage is disputed, a party should file a declaratory judgment action.  But that can often-times be easier said than done.  For various reasons, courts may put up roadblocks to achieving that -- especially when the underlying action is on-going. 

For example, courts may conclude that the coverage issue is not ripe, since it remains to be seen if the insured will be found liable.  Or, if the insurer is not providing a defense, a court may not be favorably disposed to requiring the insured to defend itself in both the underlying action as well as the coverage action.  Sometimes the coverage action is scuttled because there are questions about the same facts being determined in two forums.  And, even when a declaratory judgment action can proceed, it may not be resolved in time to get the answers needed to address coverage in the underlying action.  In general, when a coverage issue cannot be resolved before the underlying action, an insurer may find itself being required to respond to a settlement demand within limits, but not know – despite its efforts -- if coverage is owed for it.  This can be a significant challenge for insurers.

In Choinsky v. Employers Insurance Co., No. 2018AP116 (Wis. Sup. Ct. Feb. 13, 2020), the Wisconsin Supreme Court offered a solution to this vexing issue.  It is likely not without some challenges.  And insureds may find reasons why it is an unfavorable solution.  [I’ve often noted that insureds want to know what’s covered, until an insurer makes an effort to find out.]  But even if not perfect, the method set out by Wisconsin’s big cheese court is at least a defined solution to a problem that could use a few.  With many states lacking a method for resolving this problem, Choinsky has the potential to be influential on other judges nationally.       
    
At issue in Choinsky was coverage for Germantown School District, for a class action by retired employees, challenging the school district’s decision to discontinue group long-term care insurance for current employees, which caused the retired employees to lose their long-term care insurance.

The school district tendered the suit to its insurer, Employers Insurance Company of Wausau.  Employers denied coverage for a defense on the basis that the suit alleged deliberate acts and the policies only covered the insured for negligent acts.

Employers asked the school district whether it agreed with this coverage determination and would withdraw its tender.  If not, Employers stated that it would file a motion in the underlying case to obtain a coverage determination.  The school district would not withdraw the tender.  As promised, Employers filed a motion to intervene in the suit and requested that the court (1) bifurcate the liability and coverage issues and (2) stay the liability lawsuit until coverage could be resolved.

Three weeks later the court held a hearing on the motion.  However, it was not until three months later that the court issued a decision – granting Employers’s motion to intervene and bifurcate, but denying the motion to stay the liability proceedings.     

Here’s where it gets a little complex procedurally.  A week later the insurer filed a separate coverage action seeking a determination that it had no duty to defend or indemnify the school district.  The insurer filed a motion for summary judgment in the coverage case.  It also advised the school district that, because the motion to stay the liability case was denied, the insurer would defend the school district in that action and pay its defense costs retroactive to the date of tender. 

The insurer could not get the coverage issue resolved on summary judgment and the coverage action went to a jury trial.  The jury concluded that the school district decision makers acted negligently.  Based on that, the court concluded that the insurer had a duty to defend.  The school district filed a motion, after the verdict, seeking attorney’s fees.  The insurer appealed. The appeals court dismissed the appeal because the trial court had not yet determined if the insurer owed any additional attorney’s fees. 

Meanwhile, the underlying action was still going on.  That also went to a jury trial and the jury found for the school district. 

Back to attorney’s fees.  The court in the coverage action held that “because the Insurer followed a judicially preferred approach to the coverage dispute, it did not breach its duty to defend; therefore, the School District was not entitled to recover any attorney fees it expended in establishing coverage.”  The school district appealed and the court of appeals affirmed.  The school district sought review by the supreme court and here we are.
 
The Wisconsin Supreme Court affirmed.  In doing so, it concluded that the insurer did not breach the duty to defend. This has much to do with the fact that the insurer was not (or will not be) saddled with defense costs to both defend the underling action and a coverage action. 

The supreme court noted that when insurers and insureds do not agree whether a defense is owed, the insurer has four options.  If it follows any one, it is not at risk of breaching its duty to defend.  The four options are as follows: (1) Defend under a reservation of rights; (2) Defend under a reservation of rights but seek a declaratory judgment on coverage; (3) Enter into a nonwaiver agreement under which the insurer defends the insured but the insured acknowledges that the insurer has the right to contest coverage; and (4) File a motion with the circuit court requesting a bifurcated trial on coverage and liability and a stay of the proceedings on liability until coverage is determined.

When it comes to the fourth option, which is what was employed in Choinsky, if the circuit court stays the liability proceedings, the insurer need not defend, but the insured also does not incur attorney fees litigating liability until a coverage determination is made by the circuit court.

The problem in Choinsky was that the court in the underlying action granted the insurer’s right to intervene to address coverage, but denied the stay motion.  This resulted in the insured needing to defend itself for a period of time on both liability and coverage.

The Wisconsin Supreme Court offered this solution: “We remedy that problem by clarifying the bifurcation/stay procedure :if a circuit court denies bifurcation or a stay of the liability case, in order to protect itself from being found in breach of its duty to defend, the insurer must defend its insured under a reservation of rights so that the insured does not have to pay to defend itself on liability and coverage at the same time.  Additionally, the insurer must reimburse its insured for reasonable attorney fees expended on a liability defense, retroactive to the date of tender.”

As I said, I’m sure people can find fault with the method set out in Choinsky.  But given the significant problem of needing to resolve coverage issues before underlying litigation, it is at least one for courts to consider.

 

I have said this so, so many times.  But given the huge importance of the issue, it is restated here.  If you’ve read this before please forgive me. 

You have just written the greatest reservation of rights letter ever.  If Felix Unger handled claims, this is what his letter would look like.  If there were a hall of fame for reservation of rights letters, you would soon get to see how yours looked in bronze.  Your letter compares the specific allegations in the complaint, to the policy language, and explains, with laser-like precision, why, despite the insured being provided with a defense, no coverage may be owed for any settlement or judgment.  You mail the letter, put a copy in the file and take a deep breath of satisfaction for a job well done.  

But the challenge with reservation of rights letters is not writing them.  It is enforcing them.  Because a reservation of rights letter is written in a sterile environment – at someone’s desk – it can easily spell out, in black and white terms, those claims and damages at issue in the underlying suit for which coverage may not be owed.  The underlying litigation, on the other hand, is likely proceeding in a manner that is anything but as neat and tidy.

It will frequently be the case that the underlying litigation is simply not capable of producing an outcome that makes it possible for the insurer and insured to compare its results, with the reservation of rights letter, and easily decide which claims and damages are covered and which are not.  To the contrary, the underlying litigation may result in a verdict that does not specify the extent to which it represents this or that type of damage or the claims on which the relief is based.  In this situation, often-times referred to as a “general verdict,” the policyholder is likely to argue that, because the basis for the jury’s verdict cannot be determined, it must be presumed that the entirety of the jury award represents covered claims and damages.  Adding to the difficulty for insurers is that it cannot ask appointed defense counsel to seek special jury interrogatories, which would go a long way toward solving this problem.  [And similar problems may come from a settlement.] 

Some courts have accepted the policyholder argument that, if the insurer created the problem of an inability to allocate between covered and uncovered claims, it must therefore bear the consequences.  In other words, if it cannot be determined which portion of a verdict is covered and which is not, then all of the damages will be considered covered.  Or the insurer may be given a difficult burden to prove covered versus uncovered damages.  In these situations, the fact that the insurer issued a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, is no protection against failing to prevent a general verdict and the consequences that it causes.

At the heart of these decisions is the placing of blame on the insurer for being aware that the underlying litigation may result in a verdict that does not enable a determination to be made between covered and uncovered claims and/or damages, yet it took no steps to prevent such outcome.  Indeed, these decisions sometimes speak in very harsh tones -- essentially blaming the insurer for being its own worst enemy. 

One of the most interesting things about this issue is that, despite its importance, there is not an abundance of decisions addressing it.  Not to say there are none.  Not at all.  But I have always found it unusual that there are not more.

This is why it is surprising that, between early-March and mid-May, there were at least three decisions addressing the issue.

Of the three, I believe that the most important is the Eleventh Circuit’s in QBE v. Scrap, Inc., No. 18-13926 (11th Cir. Mar. 13, 2020).  It stands as a superb example of an insurer taking the necessary steps to prevent being saddled with an obligation to provide coverage for a general verdict that may include uncovered claims.  While the insurer was stymied in its efforts, it was still rewarded for them.  As a playbook for insurers, on a hugely important issue, QBE v. Scrap is one of the ten most significant coverage decision of 2020.

The allocation issue in the case arose out of the following scenario.  Scrap, a scrap metal company, was sued for nuisance stemming from its operation of a metal shredding facility.  It was alleged that  Scrap’s shredding operation “create[d] loud noises, offensive odors, fumes, and other emissions of undisclosed content ..., frequent vibrations to these homes, and periodic explosions.”

QBE, Scrap’s general liability insurer, retained counsel and defended Scrap under a reservation of rights.  Here’s the key, as the court put it:

“Numerous times throughout the proceeding, QBE advised Scrap of the availability of and need for special jury instructions and special-interrogatory verdict forms. Additionally, QBE sought leave to intervene on two occasions for the limited purpose of requesting special jury instructions and special-interrogatory verdict forms. The court, however, denied QBE’s motion, stating: ‘QBE has informed [Scrap’s trial counsel] as well as the Defendants’ private counsel that this case requires a special interrogatory verdict form. There will be adequate lawyers at the table to make sure this Court provides a proper verdict form.’”

The coverage issues that concerned QBE were the pollution exclusion and whether damages at issue were for sickness versus annoyance/inconvenience.

A jury found Scrap liable for nuisance damages and awarded $750,000 to the plaintiffs.  QBE filed an action seeking a declaratory judgment that it was not obligated to indemnify Scrap for the judgment.  The District Court found for QBE.  Scrap appealed to the Eleventh Circuit.

The roadmap to the decision is the court’s explanation of who has the burden to prove coverage:

“Under Florida law, the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage provisions of the insurance policy.   An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is therefore generally fatal to its indemnification claim.”

So the burden to prove coverage starts with the insured.  But, the court noted that “the burden of apportioning or allocating between covered and uncovered damages in a general jury verdict may be shifted to the insurer if the insurer did not adequately make known to the insured the availability and advisability of a special verdict.” So, if the insurer does not take steps to achieve such allocation, the burden may shift to the insurer.

QBE took steps.  A lot.  Over the period of a year and a half, QBE wrote to Scrap’s attorneys four times advising Scrap of the need for allocation. “In these letters, QBE told Scrap explicitly that Scrap would have to request a special verdict, differentiating covered damages from uncovered damages, and that if it did not, the failure to seek allocation could result in forfeiture of coverage for all damages.”

QBE’s efforts went further: “QBE also twice attempted to intervene in the underlying suit for the purpose of assisting with the preparation of special-interrogatory verdict forms, on both January 30, 2015, and April 15, 2016. Though Scrap protests at length that QBE’s attempted interventions were procedurally defective, the standard is notice, not successful intervention.  That standard was certainly met here.”  (emphasis added).

The court also noted that, in “the absence of an allocated verdict in the underlying trial, Scrap never provided the district court with a plausible method for separating those damages awarded by the jury that are covered by QBE’s policies from those that are not.”  This, the court stated, left Scrap with an “impossible” burden to overcome.

Scrap made the point that the allocation issue is a trap for the insured: “The coverage issues claimed by [the insurer] exist[] from the start of the case, yet [insurer-]appointed defense counsel conduct[s] no discovery which would . . . allow[] the special verdict form to be usable by the jury. . . . As the case progresse[s], [insurer-]appointed defense counsel, relying on the issue of conflict, ma[k]e[s] no effort to develop a case which would allow the special verdict forms to be used. As a result, the insured had lost the issue of coverage long before the trial court rejected the intervention or the use of the special verdict form. Conversely, [the insurer] prevail[s] on the issue of its alleged coverage exclusions without the risk of a separate declaratory action.”

The Eleventh Circuit was not dismissive of Scrap’s concern.  But it concluded that it was factually inapplicable:  “Far from sitting back and letting Scrap develop its discovery plans in ignorance, QBE warned Scrap for the first time sixteen months before trial began, and reiterated this warning four more times before trial started. Thus, instead of being blindsided by late notice that it had to present a special-verdict form for which it had not prepared, Scrap was given ample time to prepare a strategy to accommodate this need.”

[Takeaway – The insurer should make allocation efforts early and often.] 

The court’s conclusion was clear: “QBE had a duty to inform Scrap of the availability and advisability of a special verdict, lest the burden shift; QBE did so; the burden thus did not shift, but remained on Scrap, which is unable to meet it.”

The most significant line in Scrap is this: “the standard is notice, not successful intervention.”  In other words, the insurer that files an intervention motion may not need to be successful.  Rather, it may simply be the effort by the insurer, to achieve an allocation between covered and uncovered claims, that serves to prevent the allocation burden – and, perhaps one that cannot be meet – from falling on the insurer.  I have been saying this to clients for years.  We may not get our motion to intervene granted.  But, even if denied, it will have served a purpose.

 

The concept of concurrent causation is usually reserved for property policies.  In very general terms, this is where a loss is caused by a combination of things – and coverage is owed so long as one of the causes is covered.  This is why many insurers often attempt to draft around this principle with so-called “anti-concurrent causation” provisions.

But, despite concurrent causation usually existing in the realm of property policies, a concept of it – “efficient proximate cause” -- played an important part of the Washington Supreme Court’s 2017 decision in Xia v. ProBuilders Specialty Insurance Company.  There, the court held that the pollution exclusion did not apply.  The court determined that the efficient proximate cause of injuries was the negligent installation of a hot water heater.  Because this was a covered occurrence, that set in motion a causal chain, that led to discharging toxic levels of carbon monoxide, being an excluded peril, the pollution exclusion was not applicable.  In other words, the pollution exclusion did not apply because two or more perils combined in sequence to cause a loss – one covered and one not -- and a covered peril was the predominant or efficient cause of the loss.  I included Xia as one of that year’s ten most significant coverage decisions.

This year, concurrent causation again played an important part in a state high court’s decision concluding that liability coverage was owed.  Like Xia before it, the North Dakota Supreme Court’s decision, in North Star Mutual Insurance v. Ackerman, No. 20190135 (N.D. Mar. 25, 2020), demonstrates that, with the right facts, concurrent causation can open the door to liability coverage that otherwise seems closed. 

At issue in Ackerman was coverage, under a commercial general liability policy, for injury caused in a motor vehicle accident.  Specifically, Jayme Ackerman, of Ackerman Homes, was driving on an interstate when a wheelbarrow fell out of his pickup truck and landed on the road.  Another driver came upon the wheelbarrow, lost control of his vehicle and went through the median, striking Kyle Lantz, who received severe injuries.

North Star Mutual argued that no coverage was owed for Lantz’s injuries, under the CGL policy, based on exclusions for use of motor vehicles and loading and unloading of equipment.  Lantz acknowledged that the policy contained a motor vehicle exclusion, “but argued there were also covered non-vehicle related negligent acts and the concurrent cause doctrine applies to provide coverage.”

North Dakota’s top court concluded that, despite a policy exclusion for use of a vehicle, coverage was still owed.  The court agreed that the accident also had a non-vehicle (i.e., non-excluded) cause: “The wheelbarrow also was left on the road for some time before the accident occurred, and Ackerman did not remove it or warn other drivers of its presence. These were independent, nonvehicle-related, acts that did not arise out of the use of the automobile. The exclusion for injuries arising out of the use of an automobile does not apply to these acts.”

Now, faced with both vehicle and non-vehicle based causes for the accident, the court turned to the concurrent causation doctrine to conclude that coverage was owed: “The concurrent cause rule . . . takes the approach that coverage should be allowed whenever two or more causes do appreciably contribute to the loss, and at least one of the causes is an included risk under the policy. Under the concurrent cause doctrine the GCL policy provides coverage in this case. The failure to remove the wheelbarrow from the road and the failure to warn were independent acts that allegedly were a cause of the injury. The injury potentially arose just as much from failure to remove the wheelbarrow and warn other drivers, which are covered risks, as it arose from the transportation of the wheelbarrow.”

The exoneration of someone wrongfully convicted of a serious crime has been a frequent news story for many years.  The statistics are staggering.  According to the National Registry of Exonerations, a joint project of the University of California Irvine and the law schools at Michigan and Michigan State, over 2,700 people have been exonerated since 1989.

Individuals win their freedom – often after decades behind bars -- for various reasons: DNA testing proving innocence, discovery of prosecutorial misconduct, false/coerced confessions, witness recantation, discrediting so-called “junk science” used to convict and others.

Not surprisingly, once freed, exonerees sometimes bring civil suits, generally alleging violation of their civil rights and tort claims, seeking damages from those they believe responsible for their wrongful conviction.  Defendants usually include police departments and prosecutors.

These are serious cases with potentially significant awards.  And when the defendants are in small towns, it stands to reason that their ability to pay a judgment or settlement, especially a large one, is tied to the extent of their liability insurance – usually commercial general liability or law enforcement liability or sometimes both types of policies.

So it comes as no surprise that a proliferation of lawsuits by exonerees, seeking damages for their wrongful convictions, has led to an abundance of litigation addressing coverage for such claims.

While these coverage actions can involve various issues, the one most frequently litigated is trigger of coverage.  Again, no surprise.  If the objective is to secure as much money as possible for wrongful conviction claims, then insureds, or underlying plaintiffs, attempt to secure coverage under as many policy years as possible.

But, for the most part, insureds have not fared well on that front.  Wiley’s Benjamin Eggert, in a superb white paper published last year on the subject of coverage for wrongful convictions, drew this conclusion: “Across a spectrum of extraordinary allegations in wrongful conviction lawsuits, courts routinely hold that the trigger of coverage is when the claimant’s rights were first violated, which usually is the start of the criminal process against the claimant.”  “Wrongful Conviction 2020: The Rising Tide of Insurance Trigger Litigation,” p. 13, published at wiley.law.  [“Eggert Paper”].  More specifically, Mr. Eggert notes that, between 2010 and 2019, more than 50 decisions have addressed the trigger issue “[a]nd nearly all of them adopted some variation of the view that the policy in effect at the initiation of the prosecution triggered coverage.”  Eggert Paper at 14.  

The impact is obvious.  If trigger of coverage is when the criminal process against the claimant first began, then only one policy year will be implicated.  What’s more, since it is the policy year at the beginning of the process, it may have lower limits compared to policies purchased by the municipal defendant in later years.  As a result, the amount of insurance dollars available, to satisfy wrongful conviction claims, is likely far less than what’s sought.

Of course, adoption of an injury-in-fact or continuous trigger, for wrongful conviction claims, would go a long way to changing this outcome.  It is well-known what the adoption of those coverage triggers did for bringing insurance dollars to the table for asbestos and hazardous waste claims.              

But, as Mr. Eggert notes: “Courts uniformly have rejected attempts to argue that a continuous or other theory of multiple trigger applies in the context of a wrongful conviction action, even where state law has applied such triggers in situations such as latent or progressive injury cases.”  Eggert Paper at 19.

All of this background is to explain why I chose the Sixth Circuit’s decision, in St. Paul Guardian Insurance Company v. City of Newport, No. 1905948 (6th Cir. Mar. 30, 2020), as one of 2020’s ten most significance coverage cases.  The court in City of Newport adopted an injury-in-fact trigger–concluding that multiple polices could be obligated to provide coverage for wrongful conviction. 

Admittedly, the decision does not involve commercial general liability policies, which are often at issue in malicious prosecution coverage cases.  However, it may give other courts an entree, to adopting an injury-in-fact trigger, in an effort to increase the amount of money available for wrongful conviction claims.  Given that many states have not addressed trigger of coverage for wrongful conviction, the decision has an opportunity to be influential on other courts.  A court writing on a blank slate may be persuaded to take the same route.

At issue in City of Newport: On the strength of DNA evidence, William Virgil was released from prison after serving 28 years for murder.  He was granted a new trial.  The charges were subsequently dismissed.  Virgil sued the City of Newport, Kentucky and various police officers for, among other things, malicious prosecution. 

Virgil had been convicted in 1988 and was released from prison in 2015.  St. Paul insured Newport under three, one-year law enforcement liability policies, issued from July 2007 to July 2010.  Thus, St. Paul was on the risk while Virgil was incarcerated.  St. Paul filed an action seeking a declaratory judgment that it had no duty to defend or indemnify Newport or its officers.  

The operative language of the policies is as follows:

We’ll pay amounts any protected person is legally required to pay as damages for covered injury or damage that:

• results from law enforcement activities or operations by or for you;

• happens while this agreement is in effect; and

• is caused by a wrongful act that is committed while conducting law enforcement operations.

“Injury or damage” is defined as “bodily injury, personal injury, or property damage.”  “Bodily injury” means “any harm to the health of other persons.”  “Personal injury” means any “injury, other than bodily injury, caused by any of the following wrongful acts[, including. . . [m]alicious prosecution.”

The district court granted St. Paul’s motion for summary judgment, agreeing with the insurer that the personal injury complained of happened decades prior to the policy periods.

The Sixth Circuit reversed.  At the core of the court’s decision was its interpretation of the provision in the insuring agreement that Virgil’s injuries must have “happened while” the policies were in effect.  And the court had little trouble concluding that they did. 

In doing so, the court rejected St. Paul’s argument that Virgil’s injuries happened when he was “criminally charged or bound over for trial.”  St. Paul pointed to what it characterized as the “majority rule” – that malicious prosecution claims trigger coverage under policies in effect only at the initiation of the prosecution.

The flaw in St. Paul’s argument, the court concluded, was that its policies “feature an ‘injury-based trigger of coverage, not an act-based trigger.’”

The court explained that “Virgil did not allege a malicious prosecution injury; he raised, among others, a malicious prosecution claim. The injuries alleged in his complaint are the various harms that were caused by or flowed from that wrongful act.” (emphasis added).

Virgil alleged that his injuries were spending “more than 28 years incarcerated for crimes he did not commit, resulting in ‘emotional pain and suffering’ and ‘loss of a normal life,’ depriving him of ‘nearly a decade of life experiences.’”  The court agreed that these injuries “happened while” the St. Paul policies were in effect (while Virgil was incarcerated).

The question will likely be asked whether, given the particular policy language at issue, is City of Newport really a departure from the majority rule – that malicious prosecution claims trigger coverage under policies in effect only at the initiation of the prosecution.

The policies at issue in City of Newport were not commercial general liability, but, rather, Law Enforcement Liability, with coverage triggered for injuries that “happened while” the policies were in effect.  As the City of Newport court noted, this is an injury-based trigger of coverage and not an act-based trigger. 

However, commercial general liability policies, which are often at issue in malicious prosecution claims, typically employ an act-based trigger, providing coverage for damages because of a “personal and advertising injury” offense, which includes malicious prosecution, committed during the policy period.
 
Even with this potential limiting factor, City of Newport stands in such a marked contrast to the body of case law, holding that only the policy in effect at the initiation of the prosecution is triggered, that I included it as one of 2020’s ten most significance coverage cases.  Not to mention, as noted above, many states have yet to address this issue.

 

In Nash St. LLC v. Main Street America Assurance Company, No. SC20389 (Conn. Sept. 9, 2020), the Supreme Court of Connecticut addressed the standard for determining an insurer’s duty to defend.  That hardly sounds like the type of decision that would warrant inclusion as one of the year’s ten most significant coverage cases.  Every state has addressed its standard for determining an insurer’s duty to defend.  Generally, it is limited to considering the four corners of the complaint and four corners of the policy (“four corners” or “eight corners,” whichever you prefer) or also allowing for extrinsic evidence.  And it seems quite unlikely that a state, that has long used one method, would all of a sudden switch to another.  So if the principal consideration, for selecting a coverage case as one of the year’s ten most significant, is that it has the ability to influence other courts nationally, Nash St. seems a very unlikely candidate.  

But Nash St. was nonetheless selected as one of 2020’s top ten coverage cases.  The court expanded what can be considered when determining whether an insurer has a duty to defend.  But, it did so in a manner that enables courts to maintain that they are not departing from their long-established standard – four/eight corners or extrinsic evidence.  Thus, courts can change their duty to defend rule, without acknowledging that they are doing so.  Therein lies the significance of Nash St. LLC v. Main Street America Assurance Company.     

In Nash St., the Connecticut Supreme Court adopted what I would call a “twelve corners” duty to defend rule.  Under this rule, the duty to defend is determined, in some cases, based on consideration of the four corners of the complaint, the four corners of the policy and the four corners of the law library. 

[I am aware that Connecticut also allows for consideration of extrinsic evidence for purposes of determining duty to defend. But, for starters, it is “eight corners,” as you may never need to get to a consideration of extrinsic evidence.}

At issue in Nash St. was the determination of an insurer’s duty to defend a construction defect action.  The underlying action involved an insured that was hired to lift a house so that concrete work could be done on the foundation.  You can see where this is going.  The house collapsed while it was being lifted.   

The lynchpin coverage issue was the potential applicability of the following CGL exclusions:

(j)(5): property damage to “[t]hat particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the ‘property damage’ arises out of those operations . . . .”

(j)(6): property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work was incorrectly performed on it.”

A dispute arose -- one that is not unusual when it comes to the scope of exclusions (j)(5) and (j)(6).  How broad is the term “that particular part?”

[The exclusions at issue were actually (k)(5) and (k)(6).  But I will call them (j)(5) and (j)(6) since that’s what they are universally known as.  When they are used in court quotes I’ll keep them as (k)(5) and (k)(6).] 

The competing arguments were of the type usually seen in such disputes:

The insured argued “that ‘that particular part’ of the property on which New Beginnings and/or its subcontractor were working was ‘the sitegrading and foundation work underneath the house . . . [and that] New Beginnings [and/or its subcontractor were] not performing any renovation or other work on the house itself.’ Thus, the [insured] contended, it did not seek to recover for the damage to the work being done underneath the house—that work would be excluded under k (5) and (6). Rather, the [insured] sought to recover for the damage to the house, including renovation work that had allegedly been completed a year before the collapse.”  This is the narrow interpretation of exclusions (j)(5) and (j)(6).

The insurer argued “that ‘that particular part’ of the property on which the subcontractor was performing operations was the whole house because the whole house was being lifted. It further argued that the possibility that the house might collapse while being raised was a foreseeable risk in undertaking those operations. The [insurer] reasoned that all damage that occurs to a house under these circumstances is a ‘business risk’ that falls squarely within exclusions k (5) and (6).”  This is the broad interpretation of exclusions (j)(5) and (j)(6).

How to resolve this became a key issue for purposes of determining whether the insurer was obligated to defend.

The trial court concluded that exclusions (j)(5) and (j)(6) applied and no duty to defend was owed. 

The Connecticut Supreme Court reversed, based on a conclusion that there was “legal uncertainty” surrounding the interpretation of exclusions (j)(5) and (j)(6).

Specifically, there was no relevant Connecticut authority addressing how to interpret exclusions (j)(5) and (j)(6) – broadly or narrowly.  Yet, courts nationally have interpreted exclusions (j)(5) and (j)(6) broadly and narrowly and some concluding that the language is ambiguous.  The Nash court provided much discussion of cases, from all over the country, that showed these competing interpretations.  Based on this, the court stated that such “uncertainty as to how a court might interpret the policy gives rise to the duty to defend.”

The Nash court further explained its decision: “Faced with a lack of any Connecticut appellate authority on point and with numerous state supreme and federal appellate court cases that have adopted interpretations of exclusions k (5) and (6) that are consistent with Connecticut law and would favor the plaintiff, the defendant was presented with a legal uncertainty with regard to its duty to defend.  Because such an uncertainty works in favor of providing a defense to an insured, exclusions k (5) and (6) did not relieve the defendant of its duty to defend New Beginnings.”

Despite this conclusion, the Nash court was quick to point out – in a footnote – a limitation on its decision: “We do not suggest that the absence of a controlling decision is, in and of itself, sufficient to give rise to the duty to defend. There must also be sufficient reason to conclude that the court could construe the policy language in favor of coverage. As the Second Circuit explained, ‘[t]here are, of course, cases in which the policy is so clear that there is no uncertainty in fact or law, and hence no duty to defend. . . . Under some circumstances, the allegations contained in the complaint against the insured will by themselves eliminate all potential doubt and relieve the insurer of any duty to defend. [When], for example, a complaint alleges an intentional tort, and the insurance contract provides coverage only for harms caused by negligence, there would be no uncertainty as to the applicability of the policy exclusion, and hence, no duty to defend the particular [action] brought.”

Here’s my take-away on Nash.  When there is no controlling appellate case law in the jurisdiction over an issue relevant to duty to defend, and the court turns to case law nationally to see if there “legal uncertainty,” there is a reasonable chance that it will find it to exist.  Given the huge body of coverage case law nationally, and that courts in different states often interpret coverage issues based on competing schools of thought, the stage is set for a potential finding of “legal uncertainty.”  The Nash court did not address just how diverse the case law nationally needs to be for it to rise to the level of “legal uncertainty” to trigger a duty to defend.  This decision is likely going to add to disputes over an insurer’s duty to defend.         

So, in some cases, Connecticut now employs a “twelve corners” duty to defend rule.  Under this rule, the duty to defend is determined based on consideration of the four corners of the complaint, the four corners of the policy and the four corners of the law library.

[I avoided the opportunity here to plug Insurance Key Issues as a resource to help in addressing whether there is diverse case law nationally, on numerous issues, to determine if there is “legal uncertainty.”]

As discussed above, this year’s Top Ten list includes the Washington federal court’s decision in Canyon Estates Condo. Association v. Atain Specialty Ins. Co.  There the court concluded that, when outside counsel assists an adjustor, in writing a denial letter, it is not a privileged task.  As a result, there was no attorney-client privilege and an insured was entitled to obtain unredacted copies of its insurer’s claims file documents and invoices for activities performed by its outside coverage counsel.       

As I discussed above, Canyon Estates stands as a reminder that attorney-client privilege may be waived when outside counsel is engaged in investigating and evaluating or processing a claim, and not in providing the insurer with counsel whether or not coverage exists under the policy and law.

As I also discussed above, if that’s the test for maintaining attorney-client privilege, then the decision in Canyon Estates is unquestionably wrong.  There is nothing routine about drafting a denial or reservation of rights letter, which is what the court seems to be suggesting.  The task clearly involves addressing whether there is coverage under the policy.  And that is often tied to legal and case law-dictated issues that must be considered when drafting a coverage letter.

A similar issue arose this year in Travelers Property Cas. Co. v. 100 Renaissance, LLC, No. 2019-IA-586-SCT (Miss. Oct. 29, 2020). Here, the Mississippi Supreme Court addressed the issue when the disclaimer was drafted by the insurer’s in-house counsel and sent from the adjuster.  Just as in Canyon Estates, the court concluded that, on account of this method, attorney-client privilege had been waived.         

Do Canyon Estates and 100 Renaissance portend a new trend – policyholders asserting that a ghost-written letter entitles them to claims discovery that insurers usually forcefully maintain is protected by attorney-client privilege?

The story in 100 Renaissance started out seemingly simply enough.  An unidentified driver struck a flagpole owned by 100 Renaissance and caused $2,000 and change in damages.  100 Renaissance filed a claim with Travelers seeking uninsured motorist coverage.  Travelers denied coverage because the flagpole was not a covered auto.

Counsel for 100 Renaissance sent a letter to the adjuster, disputing the denial letter.  Counsel maintained that, despite what the Travelers policy may say, there is a Mississippi statute – MCA 83-11-101(2) (“Mississippi UIM Statute”) -- that mandates certain uninsured motorist coverage.  Counsel maintained that, on the basis of the Mississippi UIM Statute, coverage for the damaged flagpole was owed. 

The adjuster, who is not a lawyer, sought advice from a Travelers in-house counsel.  Following this request for assistance, the adjuster again denied the claim on the basis that the flagpole is not a covered auto. 

Coverage/bad faith litigation ensued and the adjuster’s deposition was taken.  The court set out a very lengthy excerpt from the deposition, mainly focusing on what the adjuster knew about the operation of the Mississippi UIM Statute.  The court’s conclusion: virtually nothing. 

The transcript included this exchange:

Q:  Just looking at the statute, the plain language of the statute right here, okay, [Section] 83-11-101(2), you looked at before. Is there coverage under that statute, under the plain reading of that statute?

Q: In your opinion.

A: I don’t know. I’m not an attorney. I don’t know anything about statutes. That’s what we have General Counsel for. I deal with policy language, what’s in the policy.      

Travelers chose to pay for the damage to the flagpole.  But 100 Renaissance continued with its claim for bad faith and sought production of emails between the adjuster and in-house counsel as well as a deposition of in-house counsel.  Following an in camera review, the court ordered production of the emails as well as production of in-house counsel for a deposition.  Travelers field a petition for interlocutory appeal which was granted.

The Mississippi high court concluded that Travelers had waived attorney-client privilege.  In a nutshell, its decision was based on the following, which had much to do with the fact that the second denial letter, written after in-house counsel’s involvement, was signed by the adjuster. 

As the court put it: “Generally, it may be expected that the person who signs a letter has personal knowledge of the matters set forth in the letter.”

And, as the court noted, the adjuster lacked the necessary personal knowledge: “Travelers sent the denial letter to Renaissance in an effort to explain its arguable and legitimate basis to deny the claim. The letter was signed by [the adjuster]; but based on her deposition testimony, it clearly was prepared by someone other than [the adjuster], most likely [in-house counsel]. If so, [in-house counsel] did not act as legal counsel and give advice to [the adjuster] to include in the denial letter. Instead, the denial letter contained [in-house counsel’s] reasons to deny the claim. [The adjuster’s] signature was simply an effort to hide the fact that [in-house counsel], not [the adjuster], had the personal knowledge of Travelers’ reasons to deny the claim and to use the attorney-client privilege as a sword to prevent Renaissance from discovering the reasons from the person who had personal knowledge of the basis to deny the claim.”

Further, the court explained that “if the claims handler relied substantially, if not wholly, on in-house counsel to prepare her denial letter, the reasoning of in-house counsel should be discoverable.” (emphasis in original).

A dissenting Justice, and one joining, saw the decision as an overreach, concluding that the majority “appears to impose a requirement that in order to preserve the privilege, a claims handler must be able to explain legal arguments at her deposition—the same legal issues for which she sought advice in the first place. I can find no authority to support this proposition, and I fear it is an unreasonable standard that will have deleterious and chilling effects on the exercise of the attorney-client relationship. [A]n insurance company should be free to seek legal advice in cases where coverage is unclear without fearing that the communications necessary to obtain that advice will later become available to an insured who is dissatisfied with a decision to deny coverage.”

Last month the Supreme Court of Washington spoke: A bicyclist is a “pedestrian.”  As a result, coverage was owed under an automobile policy.

Many reading this do not handle claims under auto policies.  And while the question whether a bicyclist is a “pedestrian” comes up now and then, a case addressing the issue is certainly not common enough to warrant a nod as one of the tem most significant of the year.

McLaughlin v. Travelers Insurance Company, No. 97652-0 (Wash. Dec. 10, 2020) was chosen, as a top ten case, for this reason: It offers very important lessons for insurers, not to mention that the lessons apply to all lines of insurance.

Lesson one.  Insurance coverage litigation is unpredictable.  Really unpredictable.  Two lower courts concluded that a bicyclist is not a “pedestrian.”  This seems incontrovertible.  Yet, six Justices (6!) of the Washington Supreme Court concluded otherwise.  There are no sure things in insurance coverage litigation.  It is not death and taxes. 

Second, McLaughlin is a reminder that the rules can differ, between insurers and policyholders, in coverage litigation.  In general, insurers are usually obligated to prove what a term means.  Policyholders, however, can often win by simply proving that a term has more than one reasonable meaning.  If so, the term is generally construed in their favor.  As the Supreme Court noted in McLaughlin, the term “pedestrian” has several different meanings.

In McLaughlin, the Washington high court addressed coverage under the following circumstances.  Todd McLaughlin was injured after his bicycle crashed into an open parked car door in Seattle.  McLaughlin, a transplant from California, sought MedPay coverage (California’s version of PIP coverage) under his automobile policy, issued by Travelers.  The policy provided coverage for up to $5,000 worth of medical expenses incurred by the insured, who was defined, in relevant part, as “a pedestrian when struck by[] a motor vehicle”.  The term “pedestrian” was not defined. Travelers denied coverage based upon Washington and California vehicle codes which defined “pedestrian” to exclude bicyclists.

McLaughlin filed suit, claiming breach of contract.  The trial court ruled that Travelers was not in breach because “an ordinary and common meaning of pedestrian does not include bicyclist.”  The Court of Appeals affirmed the trial court’s decision, relying on the dictionary definition of pedestrian and the definition of “pedestrian” contained within Washington’s vehicle code.

The Supreme Court of Washington reversed, finding that McLaughlin qualified as a “pedestrian” under the terms of the Travelers’ policy.  The court determined that Washington’s motor vehicle statutes were inapplicable, and instead relied upon Washington’s casualty insurance statute, RCW 42.22.005. 

Under RCW 42.22.005, a pedestrian is defined as “a natural person not occupying a motor vehicle,” which is defined in RCW 46.04.320 as “every vehicle which is self-propelled.”  The court found that the application of this definition also comported with “Washington’s strong public policy in favor of full compensation of medical benefits for victims of road accidents.”

A three justice dissent had this to say:

"The majority relies in part on the very litigation itself to find ambiguity, noting that the “vigorous debate in this case over the meaning of ‘pedestrian’ demonstrates that the term is susceptible to more than one reasonable interpretation.” Majority at 11. This interpretive principle that litigation implies ambiguity would result in the end of unambiguous contract terms. The clear, unambiguous dictionary definition of “pedestrian” is sufficient to resolve this case."

While the case has some quirks tied to choice of law, the take away is this: The court noted that, even if RCW 48.22.005’s definition of “pedestrian” was inapplicable, the term “pedestrian” was clearly ambiguous, as the term had several different meanings under various statutes, and therefore must be construed against Travelers.  

I went back and forth on whether to include the Ninth Circuit’s decision, in Scottsdale Insurance Co. v. Certain Underwriters at Lloyds, London, No. 19-55502 (9th Cir. Dec. 18, 2020), as one of the year’s ten most significant coverage decisions.  The case involves a unique issue.  That’s a factor that generally favors a decision making the annual list.  But is the issue too unique?  In other words -- the coverage scenario at hand may not arise very often. That’s often a factor that keeps a decision off the annual coverage hit parade.

I decided to include Scottsdale v. Lloyds for a couple of reasons. First, the case involves a dispute between a primary and excess insurer.  I have always believed that such cases are important.  Second, the court addressed, and distinguished, this year’s decision in Axis Reinsurance Co. v. Northrop Grumman Corp., No. 19-55135 (9th Cir. Sept. 14, 2020), another excess case that received a lot of attention, including from myself. Third, while the specific facts of Scottsdale v. Lloyds may be unique, there is language in the opinion that may give it wider applicability.

[In general, the court in Axis Reinsurance Co. v. Northrop Grumman Corp. held that excess insurers may not contest the soundness of underlying insurers’ payment decisions.  While the case was certainly a win for policyholders, my take is that it has narrow applicability.  It seems to be limited to insureds that have layered insurance programs, with multiple claims, where the insurers in a tower may not agree with the coverage decisions made by insurers, in lower towers, in prior claims.  Because of this disagreement, the higher layer insurers may believe that their policy was prematurely triggered.  Importantly, the court in Northrop Grumman noted that its rule did not apply where there was a dispute between insurers on a specific claim.]

At issue in the brief opinion of Scottsdale v. Lloyds was a dispute between Scottsdale, an excess insurer, and Lloyd’s, a primary insurer, over a settlement of a significant legal malpractice claim. The court refers to it as the “SFA Settlement.” 

The court noted that the SFA settlement addressed two types of claims: “(1) claims against a former Dickstein [Shapiro] partner for malpractice; and (2) claims against Underwriters [Lloyd’s] for bad faith and failing to defend against the malpractice claim. Although the settlement did not allocate between the claims, the Underwriters did, agreeing that approximately $11.74 million would be paid out of the primary policy, $4.50 million would be paid out of the excess policy, and $1.26 million would be paid by the Underwriters as extra-contractual liability.”

Scottsdale brought an action challenging this allocation and seeking a determination that the settlement did not erode the underlying limits. The District Court concluded that “Scottsdale has no independent right to veto a reasonable settlement decision made by the primary insurer.”  The Ninth Circuit disagreed.

As the appeals court saw it, the allocation “appeared to be the product of collusion.” The problem for the appeals court was that Lloyd’s [Underwriters] may have eroded their policy limits based on the payments allocated to settle the bad faith and failure-to-defend claims.

However, as the court noted, “nothing in the insurance policy gives Underwriters the authority to do this.” Rather, the policy provided that Underwriters will “pay on behalf of the Assured, Damages and Claims Expenses which the Assured shall become legally obligated to pay because of any Claim or Claims. . . arising out of any act, error or omission of the Assured.”

Underwriters, the court stated, are not the “Assured,” and the bad faith and failure to defend claims are not claims “arising out of any act, error or omission of the Assured[.]”

Therefore, the court concluded that “any payment to settle the bad faith or failure-to-defend claims should not have been paid out of the policy limits, but rather, as ECO [extra-contractual].”

The court rejected Lloyd’s reliance on this year’s much-discussed decision in Axis Reinsurance Co. v. Northrop Grumman Corp., which Lloyd’s argued stood for the proposition that Scottsdale cannot challenge Lloyd’s payments.  However, the court in Scottsdale v. Lloyds drew a distinction between that case and the matter at hand.

While language in Northrop Grumman “appears to support Underwriters’ and the district court’s conclusion, context is key. In that case, the excess insurer was arguing that the claim against the insured was not a covered loss. Whereas here, Scottsdale is arguing that a claim against the insurer is not a covered loss. This difference limits the AXIS [Northrop Grumman] court’s primary justification for its rule — i.e., protecting the insured’s objectively reasonable expectations.”

Thus, the Scottsdale v. Lloyds court remanded the case to the district court for a determination of the extent to which the SFA settlement erodes the policy limits.  Presumably, this means a determination of how much of the settlement is for the malpractice claim, which erodes the Lloyd’s limits, versus the bad faith and failure-to-defend claims, which do not.

Indeed, the situation here is a little unique – an underlying insurer’s settlement involves both a claim covered under the policy as well as a claim for bad faith and failure to defend.  But it is not so unique. 

The possible takeaways from Scottsdale v. Lloyds, warranting its inclusion as one of the year’s ten most significant coverage cases: Northrop Grumman does not stand for a general proposition that an excess insurer cannot challenge a lower-tier insurer’s coverage decision. Second, bad faith and failure to defend settlements are borne solely by the insurer that committed the wrongful conduct.  Thus, they do not erode the limits of the responsible insurer’s policy.  Third, and perhaps most importantly, presumably excess insurers can challenge other decisions by lower-tier insurers, that do not interfere with coverage provided to the insured.   

Carnes Funeral Home v. Allstate Ins. Co., No. 20-780 (S.D. Tex. Dec. 23, 2020) seems out of place on the annual Top 10 list.  It is an unpublished decision from a federal trial court.  While it is obviously meaningful to the litigants, it looks pretty unimportant in the grand scheme of coverage jurisprudence.  But I choose Carnes anyway because it offers a valuable lesson for insurers.  It involves an issue that comes up often and demonstrates a trend seen in other cases.  Thus, the case was chosen not for its own sake, but as a representation of an issue that warrants attention.

Carnes v. Allstate is one of several cases – this year and for a long time – that shows the challenges that insurers have faced in determining whether injury or damage was caused by a “professional service.”  The issue usually arises in determining whether the insuring agreement, of a professional liability policy, has been satisfied, as well as whether a professional services exclusion, in a commercial general liability policy, is applicable. 

The number of disputes and amount of case law addressing this issue is remarkable.  By my count, in 2020 alone, there were at least 20 decisions that addressed whether conduct as issue, for purposes of determining coverage, involved the performance of a “professional service.”

Insurers have it in their hands to correct this situation – or at least make a good effort – but many don’t, despite all of the evidence that they should.  Instead, they continue with disputes and coverage litigation over the meaning of “professional services.”  Carnes is one such case.  I could have chosen several other decisions from this year to demonstrate this same point.  But I chose Carnes because it is interesting and I believe the last one decided in 2020.      

Carnes is an unusual and particularly sad case.  Confronting sad cases is de rigueur for those involved with liability coverage.  I tell my Temple Law students, on the first day of class, to get ready to read a lot of sad cases.  I ask them why that’s so.  Their response: stare at their laptops and avoid making eye contact with me.  After some prodding and discussion, they realize that the answer is quite obvious: By definition, liability insurance claims only arise when things go wrong -- and sometimes awfully so.  In other words, when things go as planned, when there is no tragedy, nobody needs to make an insurance claim.

In Carnes, the court addressed coverage for a situation that went horribly wrong.          

In January 2018, Laura Lee Jones passed away. Her daughter, Kristin Parras, contacted Carnes Funeral Home to transport her mother’s body from Harris County Institute of Forensic Sciences to the funeral home to be cremated.  Of note, in the funeral business, there is a term for this – “removal.”  I’ll use the court’s verbatim description of what happened next:

“On January 19, 2018, Carnes sent two licensed funeral directors to HCIFS, and they placed the Decedent in a special vehicle—a ‘removal vehicle’—that is allegedly designed with multiple roll up doors on each side and removable trays and tables for loading bodies.  Carnes was picking up eight bodies at HCIFS, including the Decedent. According to the underlying petition, when Carnes was traveling back to the funeral home, it ‘carelessly allowed the body of Ms. Jones to fall out of the vehicle on Old Spanish Trail in Houston, Texas’ and Carnes ‘failed to realize the body of Ms. Jones left the vehicle and continued on leaving the body behind.’ This allegedly happened because the licensed funeral home directors failed to use a checklist when placing the Decedent in the removal vehicle and thus did not notice that they failed to set the ‘stop’ on the gurney and did not close the roll up door. The Decedent was found in a ditch on the side of the road by good Samaritans. The good Samaritans contacted authorities, who eventually notified Carnes, which retrieved the body.  According to Parras, the Executive Director of Carnes said that it appeared ‘a door was not properly secured, which allowed the decedent to come out.”

Parras filed suit against Carnes, asserting claims for violations of the Texas Deceptive Trade Practices Act and negligence.  She alleged that, on account of Carnes’s actions, she has suffered mental anguish and will suffer additional mental anguish in the future.

Allstate undertook Carnes’s defense, under a reservation of rights, under a Commercial General Liability Policy with a Funeral Directors Liability Coverage Endorsement.  Carnes filed a coverage action.

The Funeral Directors Liability Coverage Endorsement is essentially a professional liability policy.  In pertinent part, it provides coverage for sums that the insured becomes legally obligated to pay as damages because of the insured’s “wrongful acts,” which is defined as a “negligent act, error or omission in the rendering of professional services as a funeral director or embalmer.”

The parties disputed whether the mental anguish, sustained by Ms. Parras, arose out of Carnes’s rendering of professional services as a funeral director.

As Allstate saw it, it did not.  Allstate maintained that, under Texas law “‘professional services’ are ‘more than ordinary tasks, and instead [the phrase] refers to activities that are particular to a specialized vocation.’ Allstate argues that the alleged harmful conduct here, allowing the body to fall out of a moving vehicle because Carnes failed to properly secure the door, cannot be a ‘professional service’ because it did not involve specialized knowledge, labor, or skill, and it was not a mental or intellectual activity. Additionally, driving the body to the funeral home is, according to Allstate, an ordinary task and not a ‘professional service.’”

Of course Carnes saw it differently, arguing that Allstate could have defined “professional services” in the policy and it also could have specifically excluded “removal services” from the Funeral Directors coverage. Carnes also pointed to a Virginia federal court case in which a funeral director policy endorsement specifically included removal of bodies as a professional service.

 Carnes argued that the body could only be released to a funeral director.  Allstate, as the court saw it, was arguing that what Carnes did was akin to putting a box in a station wagon and shutting the back door before driving away.

The court sided with Carnes, holding that the mental anguish, sustained by Ms. Parras, arose out of Carnes’s rendering of professional services as a funeral director.  The court explained its reasoning as follows:

“Here, ‘professional services’ is not defined, but it is modified by ‘of a funeral home director.’ While some courts seem to struggle with determining what types of professional services the term is meant to describe in a generic context, here the Policy makes clear the professional services at issue are the type of services that funeral home directors would be specifically trained to do. The allegations in the underlying petition indicate that there was a specific checklist that Carnes was supposed to follow while securing the decedent’s body in a specially equipped vehicle. This is the type of knowledge and skill only a professional funeral home director would have, much like going through a pre-flight checklist for an airline is the type of skill only a professional pilot would have. The court finds that ensuring the decedent was properly secured in a specially equipped removal vehicle before the decedent was transported is a ‘professional service of a funeral home director.’”

Of note, the court stated that the term “professional services” was not defined.  This is a common reason why disputes arise over whether injury or damage was caused by a “professional service.”  However, the term “professional service” was modified by “of a funeral home director.”  But even that’s not necessarily a solution.  It still get back to the question – what is a “professional service” “of a funeral home director.”

The court noted that in Bohreer v. Erie Ins. Group (E.D. Va. 2007), the policy specifically stated that the insurer would pay damages because of bodily injury or property damage “arising out of the rendering or failure to render any professional services as a funeral director, including the . . . embalming, handling, disposition, burial, disinterment, eye enucleation, or removal of a body . . .”

“Removal” is obviously something that funeral homes do on a very regular basis. People don’t conveniently die at the funeral home.  If Allstate believed that “removal services” are not “professional services,” but, essentially, loading a box into a car and driving away – the court’s characterization, but it sounds accurate – then it could have excluded it from the definition.  “Removal services” are not some obscure aspect of a funeral home that resulted in a claim that nobody could have seen coming.     

The lack of a definition of “professional services” sometime causes disputes when insurers argue that the claim at issue does not involve “profession services,” but, rather, the administrative functions of being a professional, such a lawyer sending bills to clients or a medical provider billing Medicare for services.

Defining “professional services,” whether for purposes of the insuring agreement, of a professional liability policy, or whether a professional services exclusion, in a commercial general liability policy, is applicable, will not end all disputes over the issue.  But it will surely curtail them.  If often times does not go well for the insurer when a court can say that a disputed term is not defined in the policy.