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Vol. 11 - Issue 5

October 15, 2022


From The “Coverage Opinions Blasts” Archives


In case you missed them, here are a few articles that were sent to subscribers as Coverage Opinions “Blasts” last month:


Insurer’s Deficient ROR Turns Win Into Possible Loss

Between the work that I do for insurer clients, and writing about this and that coverage case, I have a few favorite issues.  How could you not?  At the top of the list is the effectiveness, or not, of reservation of rights letters.  I have followed these judicial decisions very closely for many years, not to mention having done a “50 Item ROR Checklist” seminar/webinar dozens of times for insurers.

The issue is so important as ROR letters apply across the board.  In other words, they are relevant to duty to defend cases regardless of the type of liability policy at issue or facts of the claim. 

So I took particular note of last week’s decision in Penn National Mutual Casualty Company v. Beach Mart, Inc., No. 14-08 (E.D. Pa. Sept. 30, 2022).  The court was critical of the manner in which the insurer’s ROR was drafted.  While it did not lead to a waiver of the insurer’s defenses – I suspect that it would have in some states -- the court left open the possibility that the ROR violated North Carolina’s “Unfair Claim Settlement Practices” statute, which gives rise to a private cause of action under the state’s Unfair and Deceptive Trade Practices Act.  Many states have statutes that looks like North Carolina’s.

At issue in Penn National v. Beach Mart was coverage for a counterclaim filed against the insured, Beach Mart, for trademark infringement-related claims.  Penn National agreed to defend Beach Mart. 

[As an aside, there was a hubbub about who defense counsel would be and whether the counsel chosen by Penn National was qualified to handle an intellectual property claim.  This is not relevant to the ROR issue, but it’s an interesting issue, as the court concluded that counsel may not have been qualified for this type of case, and, therefore, it may be a breach of the duty to defend.]

For reasons not relevant here, the court concluded that at some point Penn National no longer had a duty to defend.  However, Beach Mart argued that the insurer did, in fact, have a duty to defend, on the basis that it waived its coverage defenses by sending a reservation of rights letter that did not “fairly inform” Beach Mart of the coverage issues that were being reserved.

In support, Beach Mart cited what I call the “big three” – Harleysville v. Heritage Communities (S.C. 2017); Advantage Buildings v. Mid-Continent (Mo. Ct. App. 2014); and Hoover v. Maxum (Ga. 2012) -- which are the cases most commonly cited by insureds to argue that coverage defenses are waived because the ROR did not “fairly inform” the insured of the coverage issues being reserved.  [The big three have all been “Top 10” coverage cases of the year in my annual coverage hit parade; once in a while I get those right.]

The Beach Mart court declined to follow any of these three cases on the basis that they are not North Carolina law and the federal court was not going to do so as a matter of first impression.

So while the court concluded that Penn National did not waive its coverage defenses, that was not the end of it.  The court went on to hold that the ROR letter, based on the manner in which it was drafted, may have violated North Carolina’s “Unfair Claim Settlement Practices” statute, which gives rise to a private cause of action under the state’s Unfair and Deceptive Trade Practices Act.    

Specifically, Beach Mart argued that the insurer violated, among other sections, 58-63-15(11)(a) of the N.C. “Unfair Claim Settlement Practices” statute, on the basis that the reservation of rights letters “misrepresent[] pertinent facts or insurance policy provisions relating to coverages at issue.”

The court concluded that, “construed in the light most favorable to defendant [the insured], such a misrepresentation may be inferred from certain language in the reservation of rights letters.”

As for what that possible misrepresentation in the ROR may be, the court explained it as follows:

“In particular, while these letters communicate clearly a reservation of rights sufficient to overcome defendant’s waiver argument, addressed previously, those that include excerpts from the policies omit reference to the breach of contract exclusion of the umbrella policy, and they include other exclusions that are unrelated to the L&L counterclaims.

“None of the letters include discussion of plaintiff’s position as the various provisions [sic], nor do they explain how the allegations in L&L’s counterclaims might create coverage issues.  Thus, it is reasonable to infer in this respect that they ‘[m]isrepresent[] pertinent facts or insurance policy provisions relating to coverages at issue.’”

Thus, the insurer’s motion for summary judgment on this issue was denied.

When courts conclude that an ROR letter is ineffective, it is usually for the reasons cited by the Beach Mart court -- the letter is cut and pasted [the court described it that way in another part of the opinion], it cites provisions unrelated to the claim and does not “fairly inform” the insured how the allegations in the complaint might create coverage issues.  In other words, the letter may set out facts and policy provisions, but does not marry the two and specifically explain how the cited policy provisions, based on the facts at hand, may in fact serve to preclude coverage.    

Beach Mart is an interesting and unique decision as these cases generally involve efforts by insureds to argue that an ineffective ROR leads to a waiver of coverage defenses.  While Penn National beat back the waiver argument – and it may not have, if the court had been willing to consider Heritage Communities, Advantage Buildings and/or Hoover – the decision gives insureds a second bite at the apple.       

A Trend: Insurers Losing “Professional Services” Exclusion Cases

I’ve been following a trend over the past couple of years: insurers losing cases where they assert that no coverage is owed, under a general liability policy, on account of a “professional services” exclusion.  The insurer asserts that the injury or damage was caused by the insurer’s professional skill – and the argument sure looks strong -- but the court disagrees and treats it as a general liability exposure.  As discussed below, earlier this summer another court handed an insurer a loss on the issue.         

I’ll be discussing this trend at the 16th annual White and Williams Coverage College on October 13th – attend in person in Philadelphia or join remotely.  So no need to fret if you are in the South Pole.  I will discuss why courts have been ruling against insurers on the “professional services” exclusion.  I will do so by examining cases where the insurer lost and explaining why.  Then, by looking at cases where insurers have succeeded in enforcing their “professional services” exclusion, the program will address ways that insurers can make changes to their policies to achieve their desired intent regarding professionals and CGL policies.  

For more information about Coverage College and to register, go here. 


CLE and CE is offered for a host of jurisdictions.  [But I’m not so sure for the South Pole people.] 

There is no cost to attend Coverage College except for attorneys in private practice and non-sponsor vendors for whom tuition is $249.

Now, back to that case from earlier this summer where the court held that a “professional services” exclusion did not apply to a claim for property damage caused by an insured engaging in conduct that certainly looks professional to me.

In Stonegate Ins. Co. v. Smith, No. 1-21-0931 (Ill. Ct. App. June 22, 2022), the Appellate Court of Illinois addressed coverage for John Smith, a carpenter by trade, who was performing plumbing work at a townhouse.  The court described Smith’s work this way: “Smith attempted to remove the old copper fittings from the shower valve. He did this by heating the copper fittings with a torch, thereby melting the lead that fused the fitting and the valve together, which, according to Smith, would allow the fitting to slip off. However, as Smith was using the torch to heat the fittings, the fiberglass insulation behind the bathroom wall caught fire. That fire spread upward to the neighboring unit, causing substantial damage to that unit.”  Smith was not paid for his work.  He was replacing a shower valve as a favor for a friend.

A subrogation action was brought against Smith by property insurers that paid for damage caused by the fire.  Smith sought coverage under his homeowner’s policy for the damage he caused.  His insurer denied coverage, asserting that the “professional services” exclusion applied.  [While the case arises under a homeowner’s policy, the issue is exactly the same under a “professional services” exclusion contained in a CGL policy.]

In determining whether the “professional services” exclusion applied – the term was not defined in the policy -- the court stated that “‘professional services’ encompass any business activity conducted by the insured that involves specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature.”

The court held that the “professional services” exclusion did not apply:

“Stonegate [the insurer] ignores the established standard and fails to assert that the activity at hand is predominantly mental or intellectual. Nor could it make such an assertion. It would defy common sense to contend that using a flame to heat pipes is a predominantly mental or intellectual endeavor. To be clear, we do not hold that every type of work that could broadly be categorized as plumbing is per se outside the scope of ‘professional services’; rather, we take the narrower position that the particular activity of heating pipes with a torch is neither predominantly mental nor intellectual and, therefore, not a ‘professional service.’ In the case at bar, Smith was not a plumber and was to receive no money for his work, and as a result, the ‘professional services’ exclusion does not apply here.”

I am struggling to see how using a torch to melt the lead that fused a fitting and valve together is not a “professional service.”  Yes, it is a physical/manual act.  But surely it takes experience and intellect to do so safely.  This isn’t exactly using a snake to clean the hair out of the shower drain.

Indeed, by definition, if what Smith did were so easy, he would not have allowed the fiberglass insulation behind the bathroom wall to catch fire.  As you are reading this, I bet you are saying to yourself – gee, I know I would not have done this in my bathroom.

For more on this coverage issue, and numerus more, please join me and my W&W colleagues on October 13th for the firm’s Coverage College.  

Pollution Exclusion: The Chapter Is Full! [Last Holdout Makes A Noisy Entrance]

Chapter 15 of the 5th edition of Insurance Key Issues – Absolute Pollution Exclusion – provides case law addressing the issue in 49 states and the District of Columbia.  As of last month, the final holdout to be devoid of pollution exclusion case law – New Mexico – is no more.  And while it took a long time to get there, the Land of Enchantment made a noisy entrance.      

In an incredibly long opinion – 60 printed Lexis pages – the New Mexico district court held in Chisholm’s Village Plaza, LLC v. Travelers, No. 20-920 (N.M.D.C. Aug. 16, 2022) that the absolute pollution exclusion did not serve to preclude coverage for a CERCLA suit alleging that land and groundwater were contaminated by historic dry cleaning operations.   When the pollution exclusion does not preclude coverage to those facts, you know something unusual is going on.

Given the extent of the court’s analysis, I could spend pages explaining this decision.  But here’s the bottom line.  The court adopted the Indiana approach to the interpretation of the pollution exclusion.  Which is to say that it adopted the strictest standard in the country for the applicability of the pollution exclusion. 

Before getting to what the Indiana approach means, it is useful to see the two other approaches that the court considered and declined to adopt.  These are the two methods that generally apply to the entire pollution exclusion landscape nationally.  But neither approach was considered adequate for the New Mexico court.  

First, the Chisholm’s Village court rejected the “literal approach” to the applicability of the pollution exclusion.  Under this approach, because the pollution exclusion is defined broadly, the exclusion applies when a substance is acting in any manner as an irritant or contaminant.  This leads to a broad applicability of the exclusion.

The court also rejected the “situational approach” to the applicability of the pollution exclusion.  Here, the court generally limits the pollution exclusion to situations involving “traditional environmental pollution.”  There is little doubt that the contamination of land and groundwater, by historic dry cleaning operations, is “traditional environmental pollution.” 

But the New Mexico federal court noted that, while the “situational approach” provides “more coverage and greater protections for the insured,” it declined to adopt it, explaining that it is “still problematic because the concept of what is a traditional environmental contaminant may vary over time and has no inherent defining characteristics, which leaves courts in the awkward and inefficient position of making case-by-case determinations as to the application of the pollution exclusion.”

After rejecting the literal and situation approaches, the court settled upon the approach that has been adopted by the Indiana Supreme Court: the insurer must specify the substances that come within the pollution exclusion.   

This approach grows out of the Supreme Court of Indiana’s decision in Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), holding that the pollution exclusion did not preclude coverage for claims for damages caused by the discharge of petroleum from an underground storage tank at a gas station.  As the Kiger court put it, “[S]ince the term ‘pollutant’ does not obviously include gasoline and, accordingly, is ambiguous, we once again must construe the language against the insurer who drafted it.”
To see how challenging it can be for the pollution exclusion to apply under this specificity of pollutants test, the New Mexico federal court quoted the following from the Indiana federal court’s 2015 decision in St. Paul v. City of Kokomo: “The City argued, and Judge Magnus-Stinson agreed, that, ‘even though it is undisputed that silver and selenium are types of inorganic contaminants, an ordinary policyholder of average intelligence would not know that from the 2011-2013 Policies.’  Consequently, Judge Magnus-Stinson concluded that the third set of policies ‘is not sufficiently specific such that Travelers has no duty to defend the City as a matter of law for testing for the substances silver and selenium’ and denied Travelers Indemnity’s request for summary judgment on the duty to defend.”) (emphasis added).

A review of Indiana case law on the pollution exclusion demonstrates the challenges that insurers have had in applying it under Indiana law, even to substances that are no doubt traditional environmental pollution.  Such a review also shows the efforts by insurers to try to draft a pollution exclusion that meets Indiana’s specificity of pollutants requirement.

Chisholm’s Village is the first word in New Mexico on the pollution exclusion, but probably not the last. 


ISO’s Flood Exclusion Amendments And Hurricane Ian Claims; Wind-Water Disputes

It seems inevitable that disputes over coverage for property damage caused by Hurricane Ian will arise.  The take-up rate for flood insurance policies is too low, the water is too much and the stakes are too high. 

And then throw this into the mix:  The Washington Post recently reported that, according to Florida’s insurance regulator: “In the last half of the 2010s, Florida accounted for about 8% of all homeowners’ claims in the U.S. but almost 80% of all homeowners’ lawsuits against insurers in the U.S.”     

Since wind is generally covered under a homeowner’s policy, and flood is not, this would seemingly create an incentive for those affected by Ian to argue, when feasible, that their property damage, despite appearing to have been caused by flood, was also caused by wind.      

Below are links to two articles that I published on the White and Williams website that look at ways in which policyholders may try to navigate around the flood exclusion  -- one legally and one factually -- and insurers’ counter-arguments that preclude such efforts.  







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