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Coverage Opinions
Effective Date: January 12, 2023
Vol. 12 - Issue 1
 
   
 
 
 
 
 

Introduction: Insurance Coverage "Top 10" Takes Different Tack

Ace American Insurance Co. v. Rite Aid Corp. (Delaware Supreme Court)
First State Has First State High Court To Address Coverage For Municipality Opioid Suits

Progressive Direct Insurance Company v. Pope (Oklahoma Supreme Court)
Are Treble Damages Punitive Damages For Purposes Of Insurability Question?

Monroe Guaranty Insurance Company v. BITCO General Insurance Company (Texas Supreme Court)
At Long Last, The Duty To Defend And Extrinsic Evidence Question Is Answered
Guest Authors: Lee Shidlofsky and Doug Skelley, Shidlofsky Law, Austin, Texas

Miss. Farm Bureau Cas. Co. v. Powell (Mississippi Supreme Court)
Court Demonstrates #1 Policy Drafting Rule For Insurers

Ebert v. Illinois Casualty Company (Indiana Supreme Court)
For Policyholders: Supreme Court's Sobering Interpretation Of The Liquor Liability Exclusion

Vermont Mutual Ins. Co. v. Poirier (Supreme Judicial Court of Massachusetts)
High Court Addresses Coverage For Prevailing Party Attorney's Fees

Daniels v. Gallatin County (Montana Supreme Court)
Big Sky's The Limit For Policyholders Seeking Coverage For Claims With Statutory Caps

Robinson v. Thomas (Kentucky Supreme Court)
Court's Analysis Of Exclusion, Before Insuring Agreement, Leads To Reversal

California Legislature Adopts Statute To Help Prevent Bad Faith Set-Ups

Penn National Mutual Casualty Company v. Beach Mart, Inc. (E.D.N.C.)
Court Finds A Novel Way To Address A Deficient Reservation Of Rights Letter


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Vol. 12 - Issue 1

January 12, 2023

 

Ace American Insurance Co. v. Rite Aid Corp., 270 A.3d 239 (Del. 2022)

First State Has First State High Court To Address Coverage For Municipality Opioid Suits

 

While the extent of human suffering that has been created by the opioid epidemic cannot be overstated, there is also a huge monetary component of the situation that cannot be -- and has not been -- ignored.  History shows that, in the face of wide-spread social problems, attempts are often made to place certain financial burdens at the feet of the insurance industry.  The nation’s opioid crisis is such a situation. 

In addition to claims brought by individual opioid users, countless suits have been filed by governmental entities, against companies in the pharmaceutical supply chain, seeking to recover for the economic costs placed on these municipalities to address the public health crisis.

To be clear, the governmental entities are not seeking to recover amounts expended to provide opioid-related health care to specific individuals.  Rather, their claims against the companies are more general, involving such things as increased law enforcement costs, judicial and prison expenditures, medical expenses and substance abuse programs.  A handful of courts have addressed the availability of commercial general liability coverage, for these defendant companies, for such social services costs.  The results have been mixed.

Just a few days into the new year, the first state supreme court addressed the issue.  The Delaware high court, in Ace American Insurance Co. v. Rite Aid Corp., held that government-borne social services costs, to respond to the effects of opioids, were not covered under a commercial general liability policy.

Nine months later, the Supreme Court of Ohio, in Acuity v. Masters Pharmaceutical, Inc., reached the same conclusion.  But I chose Rite Aid, over Masters Pharmaceutical, as one of the year’s ten most significant coverage decisions, on the basis that Rite Aid came first and was favorably cited several times by the Masters Pharmaceutical court.  Thus, Rite Aid immediately showed its ability to influence another court nationally, which is the most important reason for a coverage case being one of the year’s top 10. 

Given the extent of opioid municipality litigation, and the resulting coverage stakes, Rite Aid, being the first top court to address the issue – and likely to be examined by just about all subsequent courts – was an easy decision as one of the year’s ten most significant.

At issue before the court was the availability of coverage for Rite Aid for suits filed against it by Summit and Cuyahoga Counties in Ohio.  With the court noting that over a thousand suits have been filed against companies in the pharmaceutical supply chain – the subject of an MDL -- these were considered bellwether suits.

Concluding that the Cuyahoga County suit is representative of others, the court described the complaint as follows:  

“[I]t seeks ‘economic damages’ as a ‘direct and proximate result’ of Rite Aid’s failure to ‘effectively prevent diversion’ and ‘monitor, report, and prevent suspicious orders’ of opioids.  Cuyahoga alleges that Rite Aid’s conduct also ‘fell far short of legal requirements’ and ‘contributed significantly to the opioid crisis by enabling, and failing to prevent, the diversion of opioids’ for illegal and non-prescription use.  Cuyahoga claims the opioid crisis ‘saddled [it] with an enormous economic burden,’ with ‘several departments [incurring] direct and specific response costs that total tens of millions of dollars[,]’ including costs in the areas of medical treatment and criminal justice.”

The court noted that, to plead around the Ohio Product Liability Act, for which claims would be time-barred, the complaints do not seek personal injury damages “for or on behalf of individuals who suffered or died from the allegedly abusive prescription dispensing practices.”

The specific coverage issue arose under an ACE policy that provided liability coverage.  [The court used Chubb to refer to ACE.] While the policy language does not track ISO’s commercial general liability insuring agreement, this is of no significance concerning the decision’s potential influence. 

The ACE Policy provided coverage for sums that the insured becomes legally obligated to pay as damages because of “personal injury” or “property damage,” with damages because of “personal injury” including damages claimed by any person or organization for care, loss of services or death resulting at any time from the “personal injury.”  The term “personal injury” was defined to include “bodily injury.”  As you would expect, the “personal injury” must be caused by an “occurrence” and such injury must occur during the policy period.

Chubb denied coverage and Rite Aid filed an action seeking, among other things, a declaration of Chubb’s duty to pay or reimburse defense costs.  The principal issue was whether the opioid lawsuits, brought by the municipalities, sought damages “because of ‘personal injury,’” defined to include “bodily injury.”  The trial court found in favor of Rite Aid.  The Delaware Supreme Court reversed.

It is not difficult to see how a dispute can arise here.  The ACE policy provides coverage for damages “because of ‘personal injury’” and the municipalities sought coverage for costs connected to individuals who sustained bodily injuries on account of using opioids.  Even the supreme court agreed with the trial court that “the Counties’ economic losses—including for ‘medical care’—were arguably linked to care for Ohio residents affected by the opioid epidemic.”  Essentially, policyholders make a looks like a duck and quacks like a duck argument

Nonetheless, the court held that “under the 2015 Policy, damages for bodily injury are covered losses only when asserted by 1) the person injured, 2) a person recovering on behalf of the person injured, or 3) people or organizations that treated the person injured or deceased, who demonstrate the existence of and cause of the injuries. The Counties expressly disclaimed all personal injury damages in the Track One Lawsuits and, as they say, their claims are ‘not based on’ the injuries of others.  Thus, Chubb has no duty to defend those suits.”

The court further expressed its unwillingness to adopt the duck argument by stating that “the existence of injury—untethered to the claims—does not transform the allegations into claims for damages ‘because of’ personal injury.  The complaint must do more than relate to a personal injury—it must seek to recover for the personal injury or seek damages derivative of the personal injury.”  [This explanation is likely to arise in cases in other contexts addressing coverage for damages “because of bodily injury.”]

The court also rejected the argument that coverage was owed because the policy included “damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘personal injury.’”  This, the court held, means damages for providing care to an individual, such as the following: “If the Counties ran public hospitals and sued Rite Aid on behalf of these hospitals to recover their actual, demonstrated costs of treating bodily injuries caused by opioid overprescription, the 2015 Policy would most likely be triggered.  But the Counties’ alleged damages do not depend on proof of bodily injuries.”

 


 

 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Progressive Direct Insurance Company v. Pope, 507 P.3d 688 (Ok. 2022)

Are Treble Damages Punitive Damages For Purposes Of Insurability Question?

 

By my count, punitive damages, in some way, shape or form, are insurable in 38 states.  You know the usual drill in cases involving the issue – courts address whether public policy precludes the insurability of punitive damages on the basis that a wrongdoer should not be permitted to pass-off his or her punishment to an insurer.  Courts in some states say yes. Courts in other states say no: if the policy does not specifically preclude coverage for punitive damages, then freedom of contract controls.  There are also various nuances on the issue, such as punitive damages being insurable for vicarious but not direct liability or coverage being allowed for punitive damages based on grossly negligent but not more serious conduct.  Other permutations abound. 

Of course, the question can also be avoided if a liability policy – as is sometimes the case -- contains an express exclusion for punitive damages.  Such exclusions are routinely upheld.

That’s where the Oklahoma Supreme Court’s decision in Progressive Direct Insurance Company v. Pope comes in, addressing a punitive damages coverage issue with little case law nationally: does an exclusion for punitive damages preclude coverage for an insured’s liability for treble damages?

With so little law on the issue nationally, not to mention offering a policy drafting lesson for insurers, Progressive v. Pope was an easy choice for inclusion as one of the year’s ten most significant coverage decisions.  

The case stems from an Oklahoma statute that prohibits a driver from leaving the scene of a motor vehicle accident involving property damage.  The act is a misdemeanor, subject to imprisonment of up to one year in jail and a $500 fine.  In addition, in a civil action, the violator shall be subject to liability for three times the value of the damage caused.

At issue was the availability of coverage for such treble damages under a Progressive auto policy.  The policy contained an exclusion for “punitive or exemplary damages.”  A dispute arose whether the exclusion applied to treble damages under the statute.

The competing arguments are not surprising.  The insurer argued, among other things, that the treble damages under the statute are punitive in nature and Oklahoma public policy disfavors coverage for punitive damages.  The injured party’s arguments included such things as the policy contains no provision addressing punitive damages and the multiplying of damages is not per se punitive.

The supreme court, after looking at several sources for guidance, concluded that the treble damages awarded under the statute were punitive and came within the ambit of the exclusion:

“Generally, a statutory multiplier for damages has a punitive nature when damages are meant to punish ‘the wrongdoer’ and to act as a deterrent to others.  One cause of action may not be used to claim both common-law punitive damages and statutory punitive damages when the statutorily-authorized damages are designed to supplant the common-law punitive damages for that cause of action.  The nature of the wrongful conduct sufficient to support an award of statutory punitive damages is not necessarily synonymous with wrongful conduct to support an award of common-law punitive damages. ***

“Considering the well-known history of statutorily multiplied damages in the context of a combined punitive and deterrent purpose, our discussion of the Legislature’s purpose for 47 O.S. § 10-103 in 1987 [the statute at issue], and construction of this statute as part of the insurance policy, we conclude the statutory treble damages in 47 O.S.2011, § 10-103 are for the purpose of controlling conduct of drivers and are punitive in nature. We conclude the treble damages in 47 O.S.2011, § 10-103 are punitive for the purpose of the exclusion in the policy.”

Besides the guidance that Progressive v. Pope may offer to other courts facing this issue, the policy drafting lesson for insurers is quite apparent.  If insurers believe that treble damages – or any multiplier – are punitive in nature and intended to be excluded by a punitive damages exclusion, they should say so in the exclusion.  Plenty of punitive damages exclusions do just that.  But lots do not.  


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Monroe Guaranty Insurance Company v. BITCO General Insurance Company, 640 S.W.3d 195 (Tex. 2022)

At Long Last, The Duty To Defend And Extrinsic Evidence Question Is Answered

 

As I mentioned in the introduction, the Texas Supreme Court’s decision in Monroe Guaranty Insurance Company v. BITCO General Insurance Company is a classic not-a-top-10 case. It involves the rules for determining an insurer’s duty to defend – “eight corners” vs. extrinsic evidence.  Pretty much every other state in the country has a large body of case law for courts to turn to when addressing such issue.  So there is no reason whatsoever why any other courts would look to Monroe when addressing the test for determining an insurer’s duty to defend. 

Nonetheless, I included it here because Texas has a significant amount of coverage litigation, application of duty to defend rules arise with great frequency and are relevant to all manner of liability policies and, most importantly, the duty to defend issue in Texas has long wanted for high court clarification.  The debate whether Texas law allows for the consideration of extrinsic evidence, for determining an insurer’s duty to defend, has been raging in Texas for a long time.  And not just between lawyers.  Courts too.  For Texas lawyers, clarification was desperately needed.  To demonstrate this, in less than a year, Monroe has already had a significant impact on numerous Texas coverage decisions.    

When Monroe was handed down, I didn’t address the case myself in Coverage Opinions.  Instead, I turned to the lawyers from Shidlofsky Law Firm, in Austin, and published its lengthy and detailed blog post discussing it.  I have long maintained that Shidlofsky Law Firm is the premier policyholder-side firm in Texas.  And they had been living with this issue for years.  Why would I try to write my own summary?

After deciding to include Monroe in the 2022 list of ten most significant coverage decisions, I went back to the firm and asked Lee Shidlofsky and Doug Skelley to prepare another summary of the decision.  What follows is Lee and Doug’s brief summary of Monroe.  For a much fuller discussion of the case, you can check out the firm’s original blog post.  Then, following the summary, they discuss the impact that Monroe has already had in just the ten months since it was decided.  
 

Find The Gap: Texas High Court Addresses Extrinsic Evidence And An Insurer’s Duty To Defend

Lee Shidlofsky and Doug Skelley
Shidlofsky Law Firm
Austin, Texas

The debate in Texas on whether it is a “true” “eight corners” state—i.e., one that limits insurers, insureds, and courts alike to the allegations within a pleading to determine an insurer’s duty to defend—has been a long and winding road. It has seen waypoints in state appellate courts, federal district courts, the U.S. Court of Appeals for the Fifth Circuit, and, of course, the Supreme Court of Texas. On that journey, there have been guesses and prognostications, and there has even been recognition by the Supreme Court of Texas itself of exceptions to the “eight corners” rule.

Recently, Texas’s high court has been faced with cases in which the existence of an exception—or not—has been crucial to any ultimate determination of the duty to defend. Ultimately, on February 11, 2022, the court answered the question squarely in Monroe Guaranty Insurance Co. v. BITCO General Insurance Co., adopting the so-called “Monroe Exception” to the longstanding “eight corners” rule. Therein, the Court agreed that, while the “eight corners” rule remains the “go to” test for determining the duty to defend, when a pleading leaves a “gap” making it impossible to determine whether a duty to defend exists, extrinsic evidence can be utilized if the evidence (1) goes solely to the issue of coverage and does not overlap with the merits of liability, (2) does not contradict facts alleged in the pleading, and (3) conclusively establishes the coverage fact to be proved.

While the excitement of finally having an answer was palpable in Texas, application of the exception itself has been quiet yet still important. In Monroe, the court ruled that the extrinsic evidence before it—a stipulation between insurers as to the timing of a key event—overlapped with the merits of liability and, therefore, did not pass the new test. And, on the same day, the same court also found extrinsic evidence inadmissible in Pharr-San Juan-Alamo Independent School District v. Texas Political Subdivisions Property/Casualty Joint Self Insurance Fund because there was no “gap” in the pleadings to be filled by extrinsic evidence.

Since February 2022, fifteen other Texas decisions cited to Monroe. One was not an insurance case at all. Of the remaining fourteen decisions, five courts allowed the consideration of extrinsic evidence (one without objection by the parties), and the remainder noted that there was not extrinsic evidence at issue, or the extrinsic evidence did not meet the strict standards of Monroe.

For those courts that determined that the strict standards were not met, the reasoning generally was that no “gap” existed in the pleadings that needed to be filled by extrinsic evidence. That decision was reached by federal district courts in Everest National Insurance Co. v. Megasand Enterprises, Inc., Allied Property & Casualty Insurance Co. v. Armadillo Distribution Enterprises, Inc., and Certain Underwriters at Lloyd’s, London v. Keystone Development, LLC. A single court ruled that the evidence at issue conflicted with the merits of the underlying liability lawsuit in Knife River Corp.-South v. Zurich American Insurance Co.

In the four that addressed extrinsic evidence substantively and allowed the evidence to be considered, one did so in the context of a claims-made policy and in determination of whether a claim was “first made” during the policy (Drawbridge Energy US Ventures, LLC v. Federal Insurance Co.), one did so to determine whether a party was an insured (Benites v. Western World Insurance Co.), one did so for purposes of determining the identification of a truck at issue (Progressive Commercial Casualty Insurance Co. v. Xpress Transport Logistics, LLC), and one did so in order to establish whether the accident at issue occurred in the “coverage territory” of the policy (National Liability & Fire Insurance Co. v. Turimex, LLC).

Interestingly, in Monroe, the Supreme Court of Texas eschewed any notion that the consideration of extrinsic evidence should be limited to “fundamental” issues of coverage like insured status or whether the property at issue was insured. Yet, in practice, at least so far, that is exactly the types of cases in which extrinsic evidence actually has been allowed. Only time will tell whether that will continue to be the case, but one thing remains certain—the duty to defend is governed in most cases by the “eight corners” rule in Texas.

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Miss. Farm Bureau Cas. Co. v. Powell, 336 So. 3d 1079 (Miss. 2022)

Court Demonstrates #1 Policy Drafting Rule For Insurers
 

Farm Bureau Cas. Co. v. Powell is not your typical Top 10 coverage case.  The issue before the Supreme Court of Mississippi is so unique that the decision is highly unlikely – probably never - to influence any other court nationally.  Despite that, I couldn’t help but include it here.   

I do a lot of policy drafting in my practice.  And when I read coverage cases, I always take note of instances where the insurer lost because of a flaw in its policy language.  I don’t mean that the insurer lost because the court did not apply its intended meaning of the language.  Sure, getting that right is one aspect of drafting policy language.  Rather, I’m talking about situations where it was the manner in which the language was drafted that was the cause of the insurer’s downfall. 

Having looked for lessons in policy drafting from so many decisions, my cardinal rule for insurers, when putting pen to paper on new policy language, is this: keep it simple.  Less is more.  This makes sense when you consider that, in a coverage dispute, the policyholder can often succeed by establishing that the relevant policy language has more than one reasonable meaning.  In other words, establish ambiguity.  So, if their objective is to prove that words can mean more than one thing, putting more words on the paper simply creates more opportunities for policyholders to make their ambiguity argument.

The Mississippi Supreme Court’s decision in Farm Bureau Cas. Co. v. Powell is a superb example of an insurer that didn’t follow the less is more rule. The insurer added two unnecessary words to its policy -- and they were the cause of its downfall.  Given how dramatic this example is, of such an important lesson for insurers, I decided to list Powell as a Top 10 case, despite it failing the traditional test for inclusion, namely, having the ability to influence other courts nationally. 
   
The facts are remarkable. Talk about the proverbial accident waiting to happen.  Anthony Powell owned a pickup truck. He also owned a trailer that was hitched to the pickup truck. A scaffolding was installed on top of the trailer to be used in the installation of trusses for a pole barn.

Trent Craft was on the scaffolding to do the installation work. When he was finished at one spot, Powell would drive the truck to the next installation. While doing so, Craft remained on the scaffolding. You can see where this is going. Another employee, also working on the scaffolding, jumped off the scaffolding onto the bed of the trailer. He was seemingly climbing down. This caused the pickup truck to rock. Craft fell from the scaffolding and suffered a serious injury to an eye socket.

According to Craft, the fall would not have occurred if Powell had choked the tires of the truck and trailer. Craft sued Powell. Powell was insured under an automobile policy issued by Farm Bureau. The insurer filed suit, seeking a determination that it had no duty to defend or indemnify Powell.
 
Putting aside how it got there, at issue before the Mississippi high court was whether an “auto accident” had occurred. The policy provided coverage, in relevant part, for “bodily injury” for which the insured becomes legally obligated to pay because of an auto accident and arising out of the ownership, maintenance, or use of any ‘covered auto’ including loading and unloading thereof.”  (italics added).

Farm Bureau argued that no coverage was owed because the “bodily injury” was not because of an auto accident, a term not defined in the policy.

The court disagreed:
 
“Farm Bureau tells us the policy provisions at issue, which require an injury ‘because of an auto accident’ . . . require a direct causal connection to an automobile accident. In other words, the policy requires an auto accident. We agree. Farm Bureau asks this Court to modify the contract to define ‘auto accident’ as ‘a situation in which an automobile, being used as a means of transportation, is involved in some type of collision or near collision with another vehicle, object, or person.’ The language ‘being used as a means of transportation’ is not found in the policy. Farm Bureau asks the court to give birth to a undefined phrase after choosing not to define the same words and phrases in the policy. In the case sub judice, we politely decline their invitation to modify or alter the contract. Creating definitions to terms not specifically found in the contract is not the solution to resolving the dispute.”
 
Thus, we reject the plea to define ‘auto accident’ for the following reasons: (1) Farm Bureau chose not to define the phrase ‘auto accident’ in the policy, (2) other courts have determined that the phrase ‘auto accident’ is an ambiguous term, and (3) to interpret the contract in a manner Farm Bureau requests is equivalent to rewriting the contract. Ultimately, the answer to today’s case of whether Powell and Craft have insurance coverage lies within the insuring agreement.” 

Here’s where the insurer’s policy language did it no favor.  The insuring agreement of the auto policy provided as follows: “We will pay damages for bodily injury or property damage for which any insured becomes legally responsible because of an auto accident and arising out of the ownership, maintenance, or use of any covered auto including loading and unloading thereof.”  (emphasis added).

Most auto policies provide coverage for bodily injury or property damage arising out of the ownership, maintenance or use of a covered auto.  If this had been the applicable language, the insurer still may have lost.  There is a substantial body of case law that addresses what is ownership, maintenance or use of an auto – both for purposes of an auto policy’s insuring agreement and a commercial general liability policy’s auto exclusion.  The issue would have been whether that requirement had been satisfied.

But Farm Bureau added “auto accident” – importantly, an undefined term -- to its insuring agreement.  This was intended to narrow the scope of coverage.  But, in fact, it broadened it.  The court defined “accident” as “a sudden event that is not planned or intended and that causes damage or injury.”  It then noted that the word “auto” was clearly defined in the policy.  So, its next conclusion was not surprising: “When combining the policy definitions of ‘auto’ and ‘covered auto’ with the ordinary meaning of accident with the facts presented here, an accident occurred involving a covered auto.   This sudden, unintended event caused serious injury on a trailer connected to a covered auto.” 

As a concurring justice put it: “Let's be honest, this is not what ordinary people would call an auto accident.”  Nonetheless, he agreed with the decision.

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Ebert v. Illinois Casualty Company, 188 N.E.3d 858 (Ind. 2022)

For Policyholders: Supreme Court’s Sobering Interpretation Of The Liquor Liability Exclusion

 

For a long time, the Liquor Liability Exclusion contained in ISO’s commercial general liability policy applied to “bodily injury” or “property damage” for which any insured may be held liable by reason of:  (1) Causing or contributing to the intoxication of any person; (2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or (3) Any statute, ordinance, or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

In its most recent edition – 2013 – the policy drafters amended the Liquor Liability Exclusion to add that it “applies even if the claims against any insured allege negligence or other wrongdoing in: (a) The supervision, hiring, employment, training, or monitoring of others by that insured; or (b) Providing or failing to provide transportation with respect to any person that may be under the influence of alcohol.”

Despite the expansive, and now more expansive, Liquor Liability Exclusion, it is not surprising that policyholders, armed with a broad duty to defend standard, try to thread a needle and find something – anything -- in the complaint that falls outside of its provisions and triggers a defense. 

That’s what was at issue before the Indiana Supreme Court in Ebert v. Illinois Casualty Company.  Granted, a policyholder attempting to navigate around the Liquor Liability Exclusion by dissecting the allegations in a complaint is hardly a novel scenario.  For this reason, I went back and forth on whether to include Ebert in this year’s annual coverage best-of.  Does it have what it takes to influence other courts nationally?  In the end, I included it because the issue has not been addressed by every state, Ebert is a supreme court decision – of which they are not an abundance -- and the claim involves the 2013 edition of the Liquor Liability Exclusion, for which there are fewer decisions. 

I also selected the decision because the court adopted the specific argument that insurers’ traditionally make when it comes to the Liquor Liability Exclusion.  Despite the umpteen reasons alleged in the complaint how the plaintiffs were injured – and there may be a lot; and some not within the specific terms of the exclusion – they could not have been injured but for the insured serving alcohol to a patron.     

Ebert examined whether a Liquor Liability Exclusion, contained in a commercial general liability policy issued to Big Daddy’s Show Club, precluded a defense to the club for claims alleging that a patron, William Spencer, was served alcohol, drove away and then collided with another vehicle, causing bodily injury to its occupants, the Eberts.

The Eberts filed suit against Big Daddy’s and others.  As the specific claims asserted against Big Daddy’s are the crux of the case, I set out the court’s description of them in full.  The Eberts claimed that “Big Daddy’s violated Indiana’s Dram Shop Act, Indiana Code section 7.1-5-10-15.5, by serving alcohol to Spence when it knew, or should have known, of his inebriation.  The Eberts also claimed the Parks defendants [which included Big Daddy’s]: (a) continued to serve Spence alcohol when they knew, or should have known, he was inebriated and impaired; (b) allowed Spence to drive his vehicle from Big Daddy’s when they knew, or should have known, he was inebriated and impaired; (c) failed to notify law enforcement that Spence left Big Daddy’s and operated his vehicle in an inebriated state; and (d) failed to obtain alternative transportation for Spence to prevent him from operating his vehicle.”

Big Daddy’s was insured under a commercial general liability policy and liquor liability policy issued by Illinois Casualty.  The insurer maintained that only the liquor liability policy was potentially applicable and filed an action seeking a determination that, on account of the Liquor Liability Exclusion, it did not owe a defense or indemnity to Big Daddy’s under the commercial general liability policy.

Putting aside the specifics, the trial court found in favor of Illinois Casualty and the Court of Appeals reversed.  The Indiana Supreme Court agreed to take the case.  The court first concluded that the Liquor Liability Exclusion was clear and unambiguous.  In reaching this decision, the court was unfazed by the fact that the exclusion is broad in scope and rejected the argument that it “cannot be twisted and contorted to include every possible allegation that could occur at a bar.”  

Next, the high court turned to whether the claims asserted against Big Daddy’s were precluded by the terms of the exclusion, which is the ISO 2013 version set out at the top.

The court, adopting the efficient and proximate cause analysis, concluded that the exclusion applied to all of the claims asserted by the Eberts against Big Daddy’s. 

First, the court made quick work of the claims that were expressly excluded by the Liquor Liability Exclusion, namely, that Big Daddy’s violated Indiana’s Dram Shop Act by continuing to serve Spence alcohol when it knew, or should have known, he was inebriated and continued to serve Spence alcohol and failed to obtain alternative transportation for him when they knew, or should have known, of his inebriation and impairment.

Then the court addressed Big Daddy’s argument that certain claims did not fall within the terms of the Liquor Liability Exclusion.  Specifically, the claims that the defendants were negligent in allowing Spence to leave Big Daddy’s in his vehicle and failing to call police.

However, even if these allegations are not specifically within the terms of the Liquor Liability Exclusion, the court concluded that they “are so inextricably intertwined with the underlying negligence, and could not have resulted in injury but for Spence’s driving while intoxicated after Big Daddy’s served him alcohol.  Plainly, the Eberts essentially claim the Parks defendants were negligent for failing to intervene. But we cannot ignore the circumstance necessitating intervention in the first place: the service of alcohol to an intoxicated Spence. Therefore, like the trial court, we find that Spence’s intoxication was the efficient and predominant cause of the Eberts’ injuries.”  (emphasis added).

 

 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Vermont Mutual Ins. Co. v. Poirier, 189 N.E.3d 306 (Mass. 2022)

Top Court Addresses Coverage For Prevailing Party Attorney’s Fees

 

It is a general principle of our civil litigation system that, when it comes to one party’s obligation to pay another’s attorney’s fees, the so-called American rule applies.  This means that the loser is not obligated to pay the attorney’s fees incurred by the prevailing party.  Of course, like all general principles, there are exceptions.  See Alaska.  The most commons exceptions nationally are where attorney’s fees are authorized by a contact between the litigating parties.  Another calls for the loser to pay the winning side’s attorney’s fees when such obligation is statutorily proscribed.  This is often seen in laws authorizing suits for violation of civil rights, intellectual property rights and consumer protection.

Whether an insured’s obligation to pay an award of attorney’s fees is covered under a commercial general liability policy is a question with mixed results.  That was the question before the Supreme Judicial Court of Massachusetts in Vermont Mutual Insurance Company v. Poirier.  While some courts around the country have addressed the issue, plenty of states have not spoken on it. 

With Poirier coming from a state high court, not to mention the statute authorizing attorney’s fees being more popular than Tom Brady, the decision was an easy one for including it as one of the year’s ten most significant coverage decisions.  Not to mention that the issue was also the subject of a revision to ISO’s 2007 commercial general liability form.  However, very few courts have addressed that revision.  Poirier did.  The decision has the makings of one that courts nationally turn to for guidance when addressing the availability of CGL coverage for prevailing party attorney’s fees.

The facts giving rise to the coverage issue are simple.  Paul and Jane Poirier operated a Servpro cleaning business.  In 1999 [I’m not sure how this case goes back so far], Douglas and Phyllis Maston hired the Poiriers’ company to clean up a sewage spill in their basement.  Although the Servpro workers warned Phyllis to stay out of the basement while they applied cleaning products, they did not warn her that, until the disinfectants dried, being in the basement could be dangerous.  Phyllis continued cleaning the basement and developed respiratory problems, which her doctors determined were caused by her exposure to the cleaning products used by Servpro.

The Mastons sued the Poiriers for breach of contract, negligence and violations of Massachusetts’s statute G. L. c. 93A based on breaches of the warranty of merchantability and the warranty of fitness for a particular purpose.

A trial judge awarded damages to Phyllis for her injuries as well as concluding that Servpro violated section 93A.  Vermont Mutual, the Poiriers’ liability insurer, paid the Mastons nearly $700,000 for their damages.  However, the insurer refused to pay approximately $250,000 in attorney’s fees and costs that the court awarded on account of its determination that Servpro violated section 93A. 

Vermont Mutual commenced an action seeking a determination that it had no obligation to pay the attorney’s fees and costs.  The trial court concluded that coverage for the attorney’s fees was owed as they qualified as “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury.’”

Vermont Mutual appealed and the dispute reached the Supreme Judicial Court of Massachusetts.  The state’s top court reversed. 

The court set out the dispute as one clearly involving the interpretation of policy language:

“There is no disagreement that the attorney’s fees are ‘sums that the [Poiriers became] legally obligated to pay.’  Likewise, there is no dispute that the attorney’s fees themselves are not ‘bodily injury,’ either under the definition in the policy or according to the plain meaning of the term. . . . The disagreement stems from the words connecting the two — whether the insureds were liable for the attorney’s fees “as damages because of” Phyllis’s bodily injury.” (emphasis in original).

To decide, the court turned to where you would expect: the text of section 93A, which outlaws “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”

The statute’s private right of action section provides that one establishing a violation shall “in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorney’s fees and costs incurred in connection with said action.”

Based on the aforementioned language of the statute, and other provisions, the court concluded that attorney’s fees are “a separate form of relief distinct from the award of damages.”  Applying this statutory conclusion to the policy language, the court held that coverage for the attorney’s fees awarded against the Poiriers was precluded:

“Consequently, even under G. L. c. 93A, damages and attorney’s fees for pursuing the c. 93A action are decoupled and treated differently.  They serve two different purposes — damages are to compensate for the injury, and awards of attorney’s fees are to deter misconduct and recognize the public benefit of bringing the misconduct to light. ***

“We therefore conclude that the insurance policy provision covering damages caused by bodily injury does not cover the award of attorney’s fees under G. L. c. 93A.  Damages and attorney’s fees are conceptually different, and are so recognized under that chapter. The insurance contract here only provides for the recovery of ‘damages.’  Therefore, attorney’s fees awarded pursuant to G. L. c. 93A are not recoverable as damages under the insurance contract.”

The court also rejected the Poiriers’s argument that coverage was owed because the Supplementary Payments section of the policy includes “[a]ll costs taxed against the insured.”  However, “costs,” the court concluded, do not include attorney’s fees as the policy language applies to “costs ‘taxed’ against the insured in the suit, conveying the narrower, technical meaning of court-related or nominal costs recoverable as a matter of course to prevailing parties, governed under Massachusetts law.”    

Interestingly, it was pointed out that a subsequent version of ISO’s standard commercial general liability policy amended the Supplementary Payments section to state that costs “do not include attorneys’ fees or attorneys’ expenses taxed against the insured.”  This, however, did not create coverage under a policy lacking such language.  “Absence of an express exclusion,” the court concluded “does not operate to create coverage, even if other policies contain an express exclusion.” 

It is not difficult to see Poirier becoming a go-to case for insurers seeking to preclude coverage for statutory-based attorney’s fees that its insured is ordered to pay to a prevailing party.  It will be especially useful if, as with section 93A, the statute treats damages and attorney’s fees differently.

Of note, as addressed by the Poirier court, the Supplementary Payments section was amended in the 2007 edition of ISO’s standard commercial general liability policy.  The policy was changed to state that Supplementary Payments include “all court costs taxed against the insured in the ‘suit.’  However, these payments do not include attorneys’ fees or attorneys’ expenses taxed against the insured.”  (italicized text added).

ISO describes the change as follows in its October 24, 2006 filing circular addressing various revisions to the 2007 CGL form (LI-GL-2006-255): “The intent of the provision is to provide coverage for court costs taxed against the insured and not to provide coverage for the plaintiff’s attorneys’ fees or expenses taxed against the insured.  Currently, the Insuring Agreement Section of the CGL coverage form provides coverage for these plaintiff’s attorneys’ fees or expenses, only indirectly as the attorney is paid out of the damages collected by the plaintiff.”  ISO states that the change has “no impact on coverage.”  (emphasis in original).

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Daniels v. Gallatin County, 513 P.3d 514 (Mont. 2022)

Big Sky’s The Limit For Policyholders Seeking Coverage For Claims With Statutory Caps

 

This was a whopper out of Helena.  In Daniels v. Gallatin County, the Montana Supreme Court addressed the appropriate limit of liability for a claim against a county: $750,000, the statutory cap of a municipality’s liability or $6.5 million, the combined limit of the primary and excess policies issued to the county.  The Montana high court ruled in favor of the much bigger number. 

For insurers that issue liability policies to municipalities that are subject to statutory caps, they need to take a close – very close -- look at this decision, the applicable statutes and their policy language and consider if they should take any steps to avoid paying potentially multiples more than intended.

The decision also provides a wider-reaching lesson for all insurers.  In ruling against the insurer, the court observed that insurers’ policies “are prepared by skilled lawyers retained by the insurance companies, who through years of study and practice have become expert upon insurance law, and are fully capable of drawing a contract which will restrict the scope of liability of the company with such clearness that the policy will be free from ambiguity, require no construction, but construe itself.”         

The insurer’s policy language was in fact clear enough.  But, with a standard like that… 

Sarah Daniels was seriously injured when a snowplow, operated by an employee of Gallatin County, collided with her vehicle.  The county admitted liability.  Atlantic Specialty paid $750,000 to Sarah’s conservator.  As far as the insurer was concerned, that was the extent of its liability, as Montana Code Section 2-9-108 states in relevant part as follows:

(1) The state, a county, municipality, taxing district, or any other political subdivision of the state is not liable in tort action for damages suffered as a result of an act or omission of an officer, agent, or employee of that entity in excess of $750,000 for each claim and $1.5 million for each occurrence.
. . .
(3) An insurer is not liable for excess damages unless the insurer specifically agrees by written endorsement to provide coverage to the governmental agency involved in amounts in excess of a limitation stated in this section, in which case the insurer may not claim the benefits of the limitation specifically waived.

But that wasn’t the end of it.  Sarah’s conservator filed suit against the county and the insurer.  In a bench trial, the court awarded Sarah $12.4 million in damages.  Atlantic Specialty insured the county under an auto policy with a $1.5 million limit and a $5 million excess policy.

Putting aside the lower court’s handling of the claim, the Montana high court was faced with determining the extent of the insurer’s remaining liability.  Its choices: nothing, as the insurer had already paid $750,000, being the maximum liability of a municipality, or $5,750,000, the remaining limit under the policies.

As far as Atlantic Specialty was concerned, since its policy was silent on the statutory cap, it did not waive it.  In other words, under the statute, “an insurer is not liable for excess damages unless the insurer specifically agrees by written endorsement to provide [such] coverage.”  And the policyat issue contained no separately attached document waiving the endorsement.

But the Montana high court was not convinced.  The question was not whether the statute was specifically referenced in the policy, but, rather, the insurer’s intent, based on the policy language.

The court examined various policy provisions to support its decision and discussed what an endorsement means.  The court gave particular weight to the following: “Second and as noted by the District Court, it is undisputed the Policy provides coverage for the auto in question and the occurrence itself. The scope of coverage provision defines the scope of the Policy’s coverage and has no language limiting the amount of coverage provided under the Policy. ASIC’s corporate representative conceded coverage provisions ‘typically are not drafted to incorporate specific statutory limitations’ and when ASIC has specifically limited coverage to a statutory cap in other states, ASIC has done so by amending the provision pertaining to the limits of liability, not the scope-of-coverage provision.”

But when all was said and done, the court’s decision came down to these observations: 

“ASIC agreed to sell this Policy with full knowledge of the laws in Montana that limit certain liabilities. See Mont. Auto Fin. Corp. v. British & Fed. Underwriters, 72 Mont. 69, 75, 232 P. 198, 200 (1924) (‘The policies are prepared by skilled lawyers retained by the insurance companies, who through years of study and practice have become expert upon insurance law, and are fully capable of drawing a contract which will restrict the scope of liability of the company with such clearness that the policy will be free from ambiguity, require no construction, but construe itself.’). Knowing this, ASIC did not exclude coverage over $750,000 for the type of injuries covered by § 2-9-108(1), MCA, but agreed ‘to provide the insurance as stated in this policy’ in excess of the statutory cap.”

To reiterate, the statute provided: “An insurer is not liable for excess damages unless the insurer specifically agrees by written endorsement to provide coverage to the governmental agency involved in amounts in excess of a limitation stated in this section.”  But the count still found, with no such endorsement, that the insurer specifically agreed to provide coverage in excess of $750,000. 

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Robinson v. Thomas, 2022 Ky. Unpub. LEXIS 37 (Ky. Aug. 18, 2022)

Court’s Analysis Of Exclusion, Before Insuring Agreement, Leads To Reversal

 

It is the axiomatic formula for determining if a claim is covered: is the policy’s insuring agreement satisfied?  If so, do any exclusions apply?  If yes, do any exceptions to the exclusions apply? 

However, these steps are sometimes overlooked.  It generally happens when it is believed that coverage will rise or fall based on the applicability of an exclusion.  With the exclusion being the key issue, the analysis initially starts there -- with no consideration given to whether the insuring agreement has been satisfied in the first instance.

On one hand, perhaps I’m being too pedantic.  It may be so obvious that the insuring agreement applies – say, that “bodily injury” was caused by an “occurrence” -- that it’s not even worth the trouble to address this mere formality. Also, if the exclusion applies, what difference does it make if the insuring agreement were first satisfied.  Of course, if an exclusion does not apply,  the impact of that would not be felt if the insuring agreement is not satisfied. 

The Kentucky Supreme Court’s decision in Robinson v. Thomas is the only one that I have seen where lower courts’ failure to follow these steps led to their reversal.  The courts skipped over the applicability of the insuring agreement, instead, jumping right to an exclusion, and this led to their undoing.  Perhaps there are other cases like this, but certainly not many, and especially from a state high court.  Robinson was chosen for selection here not because of the specific coverage issue, but, rather, because of its uniqueness and this fundamental coverage issue applies to all liability policies.

My take-away of the high court’s decision -- If the insuring agreement had been analyzed before a “violation of any statute” exclusion, the exclusion would have been analyzed within the context of the insuring agreement.  In such case, it may not have been interpreted in a manner that so easily led the lower courts to conclude that it was applicable.

Over two decades ago, two-year old Brianna was enrolled at Room to Grow pre-school and evidence of sexual abuse was discovered.  Following an investigation, it was determined that the abuse did not occur at the pre-school.  Ultimately, Brianna’s father, Dr. Thomas Robinson, was indicted for sexual abuse and acquitted by a jury.

Many years later, Brianna’s mother, Lisa Robinson, sued Room to Grow and its owner, John Thomas, alleging various acts of negligence related to its failure to prevent the assault by a pre-school employee.  Room to Grow was dismissed. 

At issue before the Kentucky Supreme Court was the availability of coverage for Thomas, under a commercial general liability policy issued by Monroe Guaranty Insurance Company.  The standard terms of the CGL policy were unremarkable.  However, the policy also contained a “Home Child Day Care/Day Care Professional Liability” endorsement that provided coverage specific to the operation of a preschool.  The endorsement amended the definition of “occurrence” to include “any act or omission arising out of the rendering of or failure to render professional service as a day care.”  The endorsement excluded coverage for any “bodily injury” arising out of “violation of any statute, or government rule or regulation.”

The trial court and appeals court both concluded that no coverage was owed based on the applicability of the “violation of any statute” exclusion.  However, in reaching their decisions, the Supreme Court noted that neither lower court first addressed whether the claimed injuries resulted from an “occurrence.” 

“CGL coverage analysis,” the supreme court explained “is a three-step process: (1) was the event covered under the policy as an ‘occurrence?’ If so, (2) are there any explicit policy exclusions for the damage that occurred? If not, (3) are there any exclusions to those policy exclusions, such as PCOH coverage?”

By going straight to the “violation of any statute” exclusion, the supreme court stated that the trial court “put the proverbial cart before the horse by determining Brianna’s claims are subject to the particular exclusionary language of the endorsement without ever discerning whether coverage should exist in the first instance. ‘[E]xclusion clauses do not grant coverage; rather, they subtract from it.’”  For this reason, the supreme court reversed and remanded.

What’s really going on here?  After all, the appeals court had no trouble concluding that the “violation of any statute” exclusion applied, stating “It is unthinkable penetration of the vagina of a two-year-old child, resulting in four lacerations, is not violative of our statutes, regardless of the identity of the perpetrator and regardless whether a conviction could be obtained. The language of the exclusion does not specify that the statutory violation must result in a conviction.”

So, if the “violation of any statute” exclusion applies, what difference does it make if the insuring agreement is or is not satisfied?  While the opinion does not address this issue specifically, the dissenting opinion from the court of appeals, which is discussed by the supreme court, provides an explanation.

In dissenting from the court of appeals decision, Judge Acree stated that the “violation of any statute” exclusion only applied to the Endorsement, which provided coverage for claims “arising out of the rendering of or failure to render professional services in connection with the operation of the Insured’s business as a day care.”  The judge stated that “[t]o give meaning to the restriction of this exclusion to this coverage, the contract must be interpreted as referencing the violation of laws regulating Mr. Thomas’s ‘business as a day care.’”  Therefore, according to the judge, this “limits the applicable violable laws to those regulating day care businesses.”  (emphasis in original).

The supreme court picked up on this:

“[W]e believe it is important to briefly address certain matters which are likely to reoccur on remand. We are troubled by the expansive reading embraced by the trial court of the “violation of any statute” exclusion and the apparent broadening of that interpretation by the Court of Appeals to include the violation by any person—not limited to the insured’s or their employees—of any of the Commonwealth’s thousands of statutes—regardless of the subject matter covered thereby. As noted by Judge Acree in his dissent, the exclusions in the endorsement would appear to apply only to the expanded coverage for damages ‘arising out of the rendering or failure to render professional services in connection with the operation of the Insured’s business as a daycare.’  Neither court below adequately analyzed or explained why the statutory violation exclusion should be read to cover anyone other than the insured or apply to statutes outside the realm of operating a daycare. On remand, should the trial court determine there was an ‘occurrence’ triggering coverage and again be tasked with interpreting the exclusionary provisions of the base policy and the endorsement, it must rely solely on facts which are in evidence and draw all reasonable inferences in favor of the party opposing any summary judgment motion.”

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

California Legislature Adopts Statute To Help Prevent Bad Faith Set-Ups

 

It is a not unusual situation.  A plaintiff’s attorney has a strong case on liability and damages -- but the defendant has inadequate limits of liability to satisfy the potential verdict.  Facing the situation of a partially – even substantially -- uncollectable judgment, the plaintiff’s attorney attempts insurance alchemy.  He or she sends the defendant’s insurer a letter demanding that it settle the case within policy limits. 

Of course, despite the seemingly sincere-sounding settlement offer being made, counsel is, in fact, hoping that the insurer rejects it.  If so, and the case goes to trial, and there is a verdict against the defendant-insured in excess of the policy’s limits, the insured (or plaintiff’s counsel, via assignment) will argue that the insurer’s rejection of the settlement demand was in bad faith.  In other words, the insurer, based on the state’s standards for accepting a within-limits settlement demand, should have done so to prevent the very situation that has now transpired – an insured facing personal liability for the verdict amount above its limits.  Thus, because of its failure, it will be argued that the insurer is liable for the entirety of the verdict -- including the amount of excess of the limits.  If all goes according to plan, the plaintiff’s attorney, ala King Midas, may have now turned a low limits policy into a no limits policy.

In an effort to increase the chances of this desired scenario playing out, the plaintiff’s attorney will sometimes impose hurdles to make it more difficult for the insurer to accept the within-limits settlement demand.  The demand may have a very short time limit for acceptance.  It may not provide adequate information to enable the insurer to accept it.  It may be vague as to the scope of releases that will be provided as part of a settlement.  It may require that the insurer’s acceptance be provided by mail using an inverted Jenny stamp.            

In general, the plaintiff’s counsel’s offer may be designed to make it impossible for an insurer to reasonably accept it.  The argument will likely be that the insurer’s request for an extension, additional information or any other questions about the demand qualifies as a rejection.  So the argument will go -- the insurer was presented with a settlement demand within limits and did not accept it.  Translation: the plaintiff’s attorney has set-up the insurer for possible bad faith and liability for the entirety of an excess verdict.  

In an attempt to ameliorate this situation, on September 28, 2022, California’s Democratic Governor, Gavin Newsom, signed into law SB No. 1155, which amends the state’s Code of Civil Procedure.  The statutory amendment is designed to prevent bad faith set-ups by adopting a mechanism that governs time limited demands. 

The crux of the law are its statements that an insurer’s “attempt to seek clarification or additional information or a request for an extension due to the need for further information or investigation, made during the time within which to accept a time-limited demand, shall not, in and of itself, be deemed a counteroffer or rejection of the demand.”  Further, the law provides that “a time-limited demand that does not substantially comply with the terms of this chapter shall not be considered to be a reasonable offer to settle the claims against the tortfeasor for an amount within the insurance policy limits for purposes of any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.”  Additionally, a time-limited demand must contain “an offer for a complete release from the claimant for the liability insurer’s insureds from all present and future liability for the occurrence.”  This is no insignificant point.

Interestingly, the statute does not address to which settlement demands it is applicable.  If the demand has a complete connection to California – policy issued in California and underlying action venued in California – that shouldn’t be an issue. But what about if the policy was issued outside of California and the action is in California.  Or vice-versa.  That will no doubt be sorted out by courts.     

While the Golden State is not the first in the nation to put into place statutory procedures for this purpose -- there are not many – I still chose SB 1155 for inclusion as one of 2022’s ten most significant coverage decisions of the year.  [While not a judicial decision, its adoption was still a “decision.”]  My reason being, having been adopted by California -- a state widely-known for its extremely zealous consumer protection laws – it could cause other states to follow suit.  [Did you know that it is a Class B misdemeanor for a company to sell potato chips in California without including a warning on the package that they are not part of a healthy diet for squirrels.]    

Of note, the California statute is procedural.  It does not affect the state’s case law that governs whether an insurer’s rejection, of a procedurally appropriate time-limited demand, will be a basis for a finding that an insurer’s rejection of a limits-demand was made in bad faith.  Given the potential liability and damages, should the demand have been accepted based on the standards adopted by courts?

On that point, the statute requires that that the insurer notify the claimant, in writing, of its reason for rejecting a settlement demand and this “shall be relevant in any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.”  But that’s what a bad faith failure to settle case is going to focus on anyway. 

To be clear, while the new law will certainly be a factor in preventing bad faith set-ups of insurers, time limited-demands that are genuine and made in good faith, can also benefit from expressly defined procedures.

If you are interested in the statute, I suggest reviewing the legislative history, which is easily found on-line.  It contains a summary of its purpose, earlier provisions that did not make the final cut and statements by trade organizations for and against the law.

Rather than summarize the new California statute, it is easier to set out the key provisions verbatim as they are relatively brief and there may be some nuance in the provisions.

Time-limited demands made on or after January 1, 2023 -- putting aside the open issue of the statute’s applicability to demands without a complete connection to California -- are subject to the following [Chapter 3.2 (commencing with Section 999) added to Title 14 of Part 2 of the Code of Civil Procedure]:

A time-limited demand to settle any claim shall be in writing, be labeled as a time-limited demand or reference this section, and contain material terms, which include the following:

(a) The time period within which the demand must be accepted shall be not fewer than 30 days from date of transmission of the demand, if transmission is by email, facsimile, or certified mail, or not fewer than 33 days, if transmission is by mail.

(b) A clear and unequivocal offer to settle all claims within policy limits, including the satisfaction of all liens.

(c) An offer for a complete release from the claimant for the liability insurer’s insureds from all present and future liability for the occurrence.

(d) The date and location of the loss.

(e) The claim number, if known.

(f) A description of all known injuries sustained by the claimant.

(g) Reasonable proof, which may include, if applicable, medical records or bills, sufficient to support the claim.

999.2.

(a) A claimant shall send their time-limited demand to either of the following:

(1) The email address or physical address designated by the liability insurer for receipt of time-limited demands for purposes of this chapter, if an address has been provided by the liability insurer to the Department of Insurance and the Department of Insurance has made the address publicly available.

(2) The insurance representative assigned to handle the claim, if known.

(b) To implement this section, the Department of Insurance shall post on its internet website the email address or physical address designated by a liability insurer for receipt of time-limited demands for purposes of this chapter.

(c) An act by the Department of Insurance pursuant to this section is a discretionary act for purposes of Section 820.2 of the Government Code.

999.3.

(a) The recipients of a time-limited demand may accept the demand by providing written acceptance of the material terms outlined in Section 999.1 in their entirety.

(b) Upon receipt of a time-limited demand, an attempt to seek clarification or additional information or a request for an extension due to the need for further information or investigation, made during the time within which to accept a time-limited demand, shall not, in and of itself, be deemed a counteroffer or rejection of the demand.

(c) If, for any reason, an insurer does not accept a time-limited demand, the insurer shall notify the claimant, in writing, of its decision and the basis for its decision. This notification shall be sent prior to the expiration of the time-limited demand, including any extension agreed to by the parties, and shall be relevant in any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.

999.4.

(a) In any lawsuit filed by a claimant, or by a claimant as an assignee of the tortfeasor or by the tortfeasor for the benefit of the claimant, a time-limited demand that does not substantially comply with the terms of this chapter shall not be considered to be a reasonable offer to settle the claims against the tortfeasor for an amount within the insurance policy limits for purposes of any lawsuit alleging extracontractual damages against the tortfeasor’s liability insurer.

 


 

 

 

 

Vol. 12 - Issue 1

January 12, 2023

 

Penn National Mutual Casualty Company v. Beach Mart, Inc., No. 14-08 (E.D.N.C. Sept. 30, 2022)
    
Court Finds A Novel Way To Address A Deficient Reservation Of Rights Letter

 

Between the work that I do for insurer-clients, and writing about this, that and the other 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 critically important because reservation of rights 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.  Few issues play this large of a role in the coverage arena.  Not to mention that they are the backbone of an insurer’s ability to satisfy its obligation to defend, but not lose its right to later assert coverage defenses.      

As a long-time student and teacher of this issue, I was fascinated by the North Carolina federal court’s decision in Penn National Mutual Casualty Company v. Beach Mart, Inc., No. 14-08 (E.D.N.C. Sept. 30, 2022).  The court was critical of the manner in which the insurer’s reservation of rights was drafted.  But, importantly, it did not lead to a waiver of the insurer’s defenses.  I suspect that it would have in some states.

Sometimes that is where the issue ends.  The reservation of rights letter had its problems, there was room for improvement, but it did not lead to the insurer’s waiver of its coverage defenses.
 
However, here, that’s not where the issue ended.  The Beach Mart court left open the possibility that the reservation of rights letter, on account of its drafting deficiencies, 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.

I am not familiar with any cases that have treated an insurer’s inadequately drafted reservation of rights letter as a possible violation of a state’s “Unfair Claim Settlement Practices” statute.  I have only seen the situation where the result is a possible waiver of coverage defenses.  Given the uniqueness of the decision, on such an important issue, I did not hesitate to include Beach Mart as a top 10 coverage case of 2022, despite being an unpublished district court decision.    

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 reservation of rights 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 reservation of rights 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 reservation of rights 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 a reservation of rights 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 reservation of rights 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.