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Vol.10 - Issue 3

April 28, 2021

This is one of those times when there are so many cases worthwhile of discussion that I am forced to present many in “Tapas style.”  It would take too long to do full-blown case write-ups of all of them.  So I’ll keep these brief and just focus on what matters in the decision.  If the issue is of interest to you, well, it’s easy enough to find the full case and get the rest of the story.

Reminder: CGL Policy Does NOT Provide Coverage For Damages “For Bodily Injury or Property Damage”

I’ve said this a lot.  Despite it frequently being talked about that a commercial general liability policy provides coverage for damages for “bodily injury” or “property damage,” it does not.  A CGL policy, rather, provides coverage for damages because of “bodily injury” or “property damage.”  There can be a difference between “for” and “because of” when it comes to CGL coverage.  This was on display in McDonald’s Corp., et al. v. Austin Mutual Ins. Co., No. 20-05057 (N.D. Ill. Feb. 22, 2021), a case addressing CGL coverage for a Covid-19 claim.

McDonalds and franchisees sought CGL coverage for a suit by employees for public nuisance and negligence in the decision of McDonald’s to remain open during the COVID-19 pandemic without enhanced health and safety standards.  In summary, “[t]he Massey plaintiffs specifically seek a mandatory injunction requiring Plaintiffs to, among other things: (1) provide their employees with adequate personal protective equipment; (2) preclude the reuse of face masks; (3) supply hand sanitizer; (4) require that customers wear face masks; (5) monitor employee COVID-19 infections; and (6) provide Plaintiffs' employees with accurate information about COVID-19.”  Three of the plaintiffs had contracted Covid-19 or experienced symptoms.

The court concluded that a defense was owed – and the decision had a lot to do with the words “because of” in the insuring agreement.  The relief sought, such as providing personal protective equipment, precluding the reuse of face masks and supplying hand sanitizer, was not “for” bodily injury.”  However, while the court noted that its argument may not “wow anyone with its brilliance” – and based on a low standard for establishing a duty to defend -- such relief is “because of” “bodily injury.”

The court stated: “The Policies do not say ‘proximately because of” —they merely say ‘because of,’ so simple ‘but for causation is enough. As applied here, Plaintiffs have adequately alleged ‘but for’ causation because ‘but for’ the Massey plaintiffs’ actual contraction of COVID-19, the Plaintiffs would not have to incur ‘damages’ to comply with a mandatory injunction.”  

Federal Appeals Court Addresses When The Duty To Defend Ends [And Addresses ALI Restatement of Liability Insurance]

Generally speaking, many courts state that an insurer’s duty to defend ceases once there are no longer any potentially covered claims at issue in the underlying litigation. Sometimes this gives rise to issues with how to apply such rule.

In Westminster Am. Ins. Co. v. Spruce 1530, No. 20-2470 (3rd Cir. March 18, 2021), the Third Circuit Court of Appeals addressed the issue. The insured, Spruce 1530, had sought a determination that, despite there being no covered claim remaining in the litigation – a claim for malicious prosecution had been dismissed -- an insurer’s duty to defend existed through the conclusion of litigation. The policyholder advocated that the court should adopt this rule, just as the Hawaii Supreme Court did in its 1992 decision in Commerce & Industry Ins. Co. v. Bank of Hawaii. The insured also pointed to the ALI’s Restatement of Liability Insurance as support for this rule.

But the Third Circuit declined, instead sticking with the rule that the lack of any potentially covered claims terminates the duty to defend. The appeals court observed that “in the nearly thirty years since Bank of Hawaii’s decision, we are aware of no cases where a Pennsylvania court has adopted Spruce’s favored approach. Pennsylvania’s decades of silence ring louder than voices from other jurisdictions and treatises.”

Coverage Counsel Must Provide Legal Advice And Not Handle Claims - Or Insurer Risks Attorney-Client Privilege 

I addressed this issue in the 2020 Top 10 Cases of the Year article. When an insurer hires outside coverage counsel, and counsel acts to handle a claim, and not provide legal advice on whether coverage is owed, the insurer risks waiving attorney-client privilege.  A North Carolina federal court provided a reminder about this in United States Tobacco Coop. v. Certain Underwriters at Lloyd’s, No. 19-430 (E.D.N.C. Apr. 9, 2021).

The decision is long and resolves many discovery disputes.  Let’s just say it didn’t go well for the insurer.  This was foreshadowed by the opinion’s opining sentences: “If someone unfamiliar with federal litigation were to review the Defendant Insurers’ conduct here, they would be left with the distinct impression that compliance with the Federal Rules was optional. Or, at best, they would conclude that there was no penalty for disregarding them.  But that is not the case.”

On the issue of attorney-client privilege, the court stated:        

“Determining the applicability of the privilege is particularly challenging in the context of insurance companies. When attorneys act in a claims handling capacity, the attorney-client privilege does not attach to communications with those attorneys and the insured or its agents. The mere fact that an attorney participates in an investigation will not shroud communications in privilege where they occur in an insurer’s normal course of business. Instead, for insurance matters, the attorney-client privilege attaches when an attorney performs acts for an insurer in his processional [sic] capacity an[d] in anticipation of litigation.

The Supreme Court of North Carolina has not opined on this issue, but it is reasonable to believe it would reach a similar result. North Carolina’s test for the attorney-client privilege requires that the communication relate to a matter about which the attorney is being professionally consulted and that the communication relates to the giving or seeking of legal advice. Generally, claims handling and insurance adjusting do not fall within these categories.”

Federal Court Allows Complaint To Be Filed Against Insurer’s Agent Or Claims Handler For Bad Faith 

I can’t say a lot about Microbilt Corp. v. Certain Underwriters at Lloyds, No. 20-12734 (D.N.J. March 31, 2021).  That’s because there isn’t a lot to say.  In a brief opinion, the court allowed an insurer to file an amended complaint against CFC Underwriting Limited for bad faith in connection with delayed payments for defense costs.  The insured had sought to file the amended complaint after Lloyds and CFC made a motion to dismiss the claims against CFC, in the original complaint, on the basis that CFC was not a party to the insurance policy.  So the insured now sought to add clams against CFC as “Underwriters’ agent or claims handler.”

The standard for a court to allow the filing of an amended complaint is not high, as the court pointed out.  The insured cleared the hurdle.  In doing so, the court concluded – against arguments to the contrary -- that claims for breach of contract and negligence, against a party that is not a party to an insurance policy, are not futile. 

The court explained its reasoning: “In Pickett v. Lloyds, the New Jersey Supreme Court held that Peerless, the insurance company’s agent, was liable to the insured in contract for lack of good faith and fair dealing outside of its agency relationship with Lloyd’s for its role in the claims handling delay that caused consequential damages to the policyholder. The court found that Peerless’ conduct contributed to the delay that led to the consequential damage. Similarly, here, in its proposed amended complaint, Plaintiff alleges that CFC’s conduct contributed to or caused Plaintiff’s damages. The Pickett case shows that although an agent such as CFC may not have been a party to the contract, it can still be liable for breach of contract and/or tort.” (internal citations omitted).

It’s still early, but Microbilt has gotten past the courthouse metal detector with a bad faith claim against an insurer’s “agent or claims handler”-- for delays in paying defense costs.                 

This Argument For Coverage Had No Chance – But The Lawyer Gets An “A” For Effort  

Stephanie Chamberlain, while intoxicated, crashed her car into a vehicle driven by Pedro Chang, causing him serious injury. Chang sued Chamberlain.  Chamberlain did not have auto insurance.  But she did have a homeowner’s policy.  Not surprisingly, Foremost, the insurer, denied coverage for the Chang suit on the basis of the homeowner’s policy’s exclusion for, in general, bodily injury arising out of the use of a vehicle.

Putting aside some procedural issues and a settlement, the court in Foremost Ins. Co. v. Chang, No. 18-718 (W.D. Ky. March 19, 2021) addressed the applicability of the motor vehicle exclusion to a claim by Chamerlain for causing injury while driving a vehicle.  The court concluded that the exclusion was, get ready, applicable, as there was a “causal connection” between Chamberlain’s use of her vehicle and Chang’s injuries.

To his credit, with his back to the wall, Chang’s counsel make a novel argument.  It was rejected, but gets a high mark in the category of a lawyer doing his or her best when dealt a bad hand: “Chang does not question the causal connection between Chamberlain’s use of her car and his injury. Instead, Chang argues that Chamberlain’s failure to buy auto insurance was both negligence per se and the proximate cause of Chang’s injuries. But even accepting Chang’s proposition, his argument still fails for the same reason the parents’ argument in Hugenberg failed—that is, even repackaging the alleged negligence in a manner that distances the claim from the use of the motor vehicle, the repackaged claim nevertheless is ‘causally connected’ to the automobile crash. ‘If not for [Chamberlain] losing control of the car and injuring [Chang], there could be no claim for [negligence or negligence per se in failing to procure auto insurance] against [Chamberlain] because [Chang] would have suffered no injury, an essential element of the tort.’ Hugenberg, 249 S.W.3d at 187. The whole reason Chamberlain’s lack of automobile insurance affects Chang is that she crashed her car into Chang, injuring him.”

Another Court Affirms The Principle That An Insurer Being Wrong Is Not Bad Faith  

Despite some policyholder counsel needing to breathe into a paper bag when asserting that an insurer commits bad faith because its coverage determination is wrong, the law does not support such wishful thinking.  When insurers commit bad faith, it usually has to do with the manner in which a claim was handled, such as deficiencies in the investigation or failure to settle.  Just getting the decision on coverage wrong rarely meets the high standard needed to clear the relevant state’s bad faith hurdle.  I’ve said this a lot in these pages over the years and now I can say it again. 

In My Choice Software v. Travelers, No. 19-680 (C.D. Calif. March 17, 2021) the federal court addressed whether Travelers, which the Ninth Circuit had earlier concluded reached an erroneous decision to deny coverage based on an intellectual property exclusion, committed bad faith in doing so.  The court concluded that the insurer did not, despite its observation that “none of the factual scenarios in any of the cases that Travelers claims support its ‘objectively reasonable’ decision to decline coverage are on all fours with the present case. This is likely why the Ninth Circuit declined to find the cases applicable.”

However, the court concluded that it was still not bad faith: “[C]ontrary to MyChoice’s assertions that Travelers engaged in bad faith by deliberately misleading the Court by making unsupported analogies to case law, Travelers was merely taking a reasonable but, ultimately misguided, position in a matter of first impression. Accordingly, the Court finds that Travelers’s decision to decline coverage was not unreasonable as a matter of law.” Further, “the mere fact that there was not case law directly on all fours with Travelers’s position does not render the decision to decline coverage unreasonable.”

Oregon Federal Court Upholds China Forum Selection Clause

Thanks to the Oregon federal court’s decision in JPaulJones, LLC v. Zurich General Ins. Co. China, No. 20-1767 (D. Ore. Apr. 9, 2021), a putative additional insured, located in Austin, may be headed to China to litigate a coverage action. JPaulJones, LLC, a vacuum cleaner designer, hired TEK Electrical Co. to manufacture JPaulJones’s vacuums at a factory in China.  TEK was insured under a general liability policy issued by Zurich General Ins. Co. (China) and JPaulJones was an additional insured.     

Something happened – it’s not clear – and claims were filed against JPaulJones in several U.S. states.  JPaulJones sought a defense under the Zurich-China policy issued to TEK. Zurich disclaimed coverage, for certain claims, on the basis of some sort of time of occurrence issue (also not clear).  JPaulJones filed a coverage action, that got to Oregon federal court, and Zurich-China argued that, based on a forum selection clause in the policy, such litigation must be brought in China. Not surprisingly, JPaulJones objected to this, arguing that it “would effectively render the purported coverage illusory,” as it “would create an insurmountable challenge for most insureds.”

In a somewhat lengthy opinion, addressing several issues and citing lots of law, the court held that the litigation was to be shipped to China – or at least it wasn’t going to stay in Oregon.

There’s a lot that I could say about how the court reached its decision, but it is well beyond the scope here.  If you are dealing with a forum selection issue, the opinion is most certainly worthwhile reading.

Georgia Federal Court Holds That Pollution Exclusion Does Not Apply To Construction Dust

In an opinion significantly longer than it needed to be, a Georgia District Court held in Lang v. FCCI Ins. Co., No. 19-3902 (N.D. Ga. March 30, 2021), that the pollution exclusion precluded coverage, under a commercial general liability policy issued to a construction company, for a claim that dust, from its work, caused a nearby resident to sustain breathing problems.

The court explained its decision as follows: “Looking only to the plain language of the pollution exclusion clause at issue, and reading the policy ‘as a layman would,’ the Court concludes that dust is a ‘pollutant’ under the ‘broad definition contained in [FCCI’s] policy.’ The Georgia Supreme Court did not define the terms ‘irritant" or contaminant’ in either Reed or Smith. Other courts have suggested that an ‘irritant’ is ‘anything that annoys’ and that a contaminant is ‘something that makes impure or unsuitable by contact or mixture with something unclean, bad, etc.’ A review of dictionary definitions lends similar results. . . .Under any of these constructions, ‘a cloud of dust,’ even absent toxicity or other impurities, is a substance that was an ‘irritant’ and a ‘contaminant’ to Mr. Love and his respiratory system.”

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