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Coverage Opinions
Effective Date:October 6, 2014
Vol. 3, Iss. 14

Declarations: The Coverage Opinions Interview With Laurence Tribe
His New Book; The Next Supreme Court Justice; Justice Obama?; The Handicapper; Boehner vs. Obama; Getting Into Tribe’s Head; A Constitutional Right To A Hibiscus Bush
Today is the first day of the United States Supreme Court’s new term. On this occasion there could not be a more appropriate subject for the Coverage Opinions interview than the leading constitutional scholar in America -- Laurence Tribe of Harvard Law School.

Coverage Opinions Celebrates 2nd Anniversary

Randy Spencer’s Open Mic
The Thank You Wave And Insurance Coverage
A driver fails to get a thank-you wave after letting another driver proceed at a 4-way intersection. Incensed, he attacks the other driver -- And then gets coverage for it. You won’t believe how.

Principles Have An A.L.Eye On The “Innocent Co-Insured” Rules:
Set Sights On Adoption Of The Minority Position

The scorecard nationally is 24-11 in favor of no coverage for “innocent co-insureds,” when an exclusion applies to “an insured” or “any insured,” even if the policy contains a separation of insured’s clause. Despite this landslide, the ALI is seeking to adopt the minority view.

Declarations: The Coverage Opinions Interview With Doug Banfelder Of Premier Dispensary Insurance
Getting Into The Weeds On Insuring The Marijuana Industry
Twenty-three states and D.C. have legalized marijuana for medical use in some form. And, of course, it is legal for recreational use in two states. Legalized marijuana creates an enormous number of challenging insurance issues. Insurance broker Doug Banfelder, of Premier Dispensary Insurance, specializes in placing coverage for various types of businesses involved in the marijuana industry. He provides a fascinating and eye-opening discussion.

Another Ineffective Reservation Of Rights Case
Another court has addressed that not all reservation of rights letters are effective. An ROR that does not “adequately inform” the insured of the issues may not be worth much.

UPS Says No Insurance For A Driver Being UPSet When His Customer Is Sprayed With Bullets

Appeals Court Makes New Law: Insurer Must Pay Interest On Settlement After 30th Day Without Payment

Insurer’s Unwillingness To Sign A Protective Order In An Underlying Case Leads To Discovery Of Its Reserves
The discoverability of an insurer’s reserve information is an issue that does not come with a straightforward, yes or no, answer. Here the insurer was required to turn over reserve information, but for a seemingly unique reason.

Broker May Be On The Hook For Insured’s Failure To Provide Timely Notice Of A $5M Claim
A broker that promises to educate its client’s employees may face hefty consequences for failing to do so.

Pollution Exclusion And Lead:
Supreme Court Declines To Follow Some Others’ Lead

Tapas: Small Dishes Of Insurance Coverage News And Notes
·5th Circuit Addresses Excess Insurer’s Bad Faith Claim Against Primary


Vol. 3, Iss. 14
October 6, 2014

Coverage Opinions Celebrates 2nd Anniversary

I am excited to report that this issue marks the 2nd Anniversary of Coverage Opinions. If there has ever been a labor of love in my career, this is it. Like any such endeavor, on some days there has been more of the former than the later. But despite some challenges and growing pains, I could not be happier with how things have gone for CO over the past two years. And much more is in the works.

In many ways, the current issue of Coverage Opinions looks much different than the one 42 issues ago, such as in appearance, access and substance. Coverage Opinions’s mission, to provide in-depth analysis, for the hard-core insurance professional, of very recent coverage cases that have potentially broad applicability, has never wavered. But there are other aspects of CO that I could have never imagined two years ago, such as the Declarations column (Interview) going from being insurance-related to sometimes more general discussions with some of the country’s most famous and unique lawyers. And thank you to Randy Spencer for hanging in for every issue, despite his occasional belly-aching about having the most popular column in CO, but not getting paid.

Of course, there would be no two-year anniversary to mark if it were not for you -- the Coverage Opinions reader. I can’t thank CO readers enough for taking the time to do so, despite having such busy schedules and being inundated with other newsletters, and the like, competing for your time. I also appreciate all of the reader mail that I receive – mostly positive, but sometimes taking me to task for something I said or didn’t say -- and that’s fine too. Please accept my sincere appreciation for enabling me to send a Coverage Opinions two-year anniversary announcement.


Vol. 3, Iss. 14
October 6, 2014


The Thank You Wave
And Insurance Coverage

I’ve never been to Indiana. I’m sure that the folks there are awfully courteous – especially in a small town. And that was definitely a factor in the court’s decision in this coverage case. But even so, it is still inexplicable.

The Indiana trial court’s decision in Hamilton v. Bloomington Property & Casualty Insurance Company, Circuit Court of Indiana, Jasper County, No. 14-104 (Sept. 23, 2014) started out like this. David Woodhall approached a four-way stop intersection. At virtually the same time Chris Hamilton approached the intersection. It was either a tie who got there first or, according to Hamilton, maybe it was him by a split second. Hamilton gave Woodhall a hand signal for him to proceed first. Woodhall crossed the intersection. But he failed to give Hamilton a thank you wave as he did. Hamilton became incensed by what he viewed as a very serious breach of driver courtesy. Hamilton then proceeded to follow Woodhall. After about two miles, Woodhall pulled into the parking lot of a Circle K convenience store and went inside. Hamilton followed Woodhall in and approached him. Hamilton, in an angry voice, told Woodhall that he failed to give him a thank you wave when Hamilton let him proceed first at the intersection of Main and East 7th. Before Woodhall could say anything, Hamilton pushed him hard in the chest. Woodhall fell backwards into a potato chip display stand and suffered a broken elbow.

Woodhall sued Hamilton for the injuries sustained. Hamilton sought coverage from his homeowner’s insurer--Bloomington Property & Casualty Insurance Company. Not surprisingly, Bloomington disclaimed coverage, citing the policy’s exclusion for injuries that are expected or intended from the standpoint of the insured. Hamilton was forced to defend himself in the litigation. For various procedural reasons, Woodhall’s complaint was dismissed – but not before Hamilton incurred $14,000 in defense costs.

Hamilton filed a declaratory judgment action against Bloomington, alleging that it breached its duty to defend, and seeking payment of his defense costs. Each party filed a motion for summary judgment.

The trial court held that Bloomington breached its duty to defend. It looked to the Indiana Supreme Court’s decision in Freidline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002) that the duty to defend is not determined solely by the allegations in the complaint. Therefore, the court held that Bloomington breached its duty to defend by not considering that, when Hamilton pushed Woodhall, Hamilton was still operating under the rage of having been denied a thank you wave. Therefore, the court held that a duty to defend existed because of the possibility that the self-defense exception, to the expected or intended exclusion, applied. The court looked to the Indiana Court of Appeals’s recent statement in Key v. Hamilton, 963 N.E.2d 573, 591 (Ind. Ct. App. 2012) (no relation) (Mathias, J., dissenting) and was clearly influenced by it: “Hoosiers can be rightfully proud that the courtesy of yielding to other drivers is still rather commonplace in Indiana.”

Based on this pronouncement in Key, the court held: “When a Hoosier driver is deprived a thank you wave, therefore being the victim of an egregious breach of driver etiquette, the standard in Freidline entitles him to a determination whether, under the circumstances, his subsequent push of the offending driver was tantamount to self-defense against what was the equivalent of an assault to the disrespected driver’s sensibilities.” (emphasis in original).

That’s my time. I’m Randy Spencer. Randy.Spencer@coverageopinions.info


Vol. 3, Iss. 14
October 6, 2014

Principles Have An A.L.Eye On The “Innocent Co-Insured” Rules:
Set Sights On Adoption Of The Minority Position


Lately I’ve been using the forum that Coverage Opinions provides me to take issue with certain draft sections of the American Law Institute’s “Principles of the Law of Liability Insurance” Project. In general, my beef has been that some draft Principles in chapter 3 constitute a shift in the law. In doing so, they do not comport with the ALI Principles’s stated mandate to develop “coherent doctrinal statements based largely on current state law, but also grounded in economic efficiency and in fairness to both insureds and insurers.” I’ve looked at this situation in the context of the Principles’ possibly opening the door to coverage for intentional (sometimes very much so) conduct and pre-tender defense costs.

I am mindful that, if all I ever do is criticize the ALI Principles, then at some point it loses credibility. It starts to sound like Chicken Little. [This is why my wife, every once in a while, acknowledges that I’m right about something.] So in the next installment of this ALI Principles series I plan to examine some instances where I believe that the Project achieves its objectives.

But for now I look at another draft ALI Principle in chapter 3 that I believe constitutes a shift in the law -- §46 Severability of Exclusions. Section 46 says that “When the applicability of an exclusion to a claim depends upon the conduct of an insured, an interpretation is preferred that the exclusion applies only to claims against an insured whose conduct meets the requirements of the exclusion, not to claims against other insureds.” (italics added). Section 46 goes on to state that this interpretation is preferred, even if the policy contains a separation of insured’s clause (or some similar term). [In fact a separation of insured’s clause is not needed if this is the rule from the outset; it would only serve to bolster such a rule.]

In a nutshell, Section 46 favors a policy interpretation that preserves coverage for a so-called “innocent co-insured,” a person seeking coverage for the bad/excluded conduct of another insured. Think of parents that are insureds under a homeowner’s policy, with an exclusion for the “criminal acts of ‘an insured,’” who are seeking coverage for negligently failing to prevent their son (also “an insured” under the policy) from assaulting the next door neighbor. Under Section 46, the parents would be covered because they themselves did not commit a criminal act, even though “an insured” did.

Is this the majority rule nationally on this issue? No. Just the opposite in fact. By my count, courts in 24 states hold that when an exclusion applies to “an insured” or “any insured,” coverage is precluded even to a person who did not commit the excluded conduct (the innocent co-insured) and, it is important to note, this remains so even if the policy contains a separation of insureds clause. Eleven states go the other way; in fourteen states the rule is inconclusive; and one state has not addressed the issue in any manner.

The ALI drafters acknowledge in the Comments to §46 that the rule proposed “is not universally accepted.” 24-11. That’s for sure. And it’s just as much of a rout when you consider only states where its highest court has spoken. Nonetheless, the Comments go on to state several rationales for adopting this approach because “the reasoning of the courts adopting this position is more persuasive than that of the courts that do not and more consistent with the approach to liability insurance contract interpretation adopted in these Principles.” In more specific terms, the Comments justify the adoption of the minority view on the following bases (among others):

“[B]ecause the absence of liability insurance often makes it impossible, as a practical matter, to bring a claim, denying liability insurance coverage to the innocent members of insured groups interferes with the deterrence, compensation, civil recourse, and other purposes of liability itself.”

“Applying conduct-based exclusions to insureds who did not engage in the wrongful conduct does not promote the primary purposes of the exclusions. Because these insureds did not engage in the wrongful conduct, there is no concern that the presence of insurance changed their incentives to engage in that conduct, nor is there anything inappropriate about using the resources of the insurance pool on their behalf.”

“[I]n contrast to the comparable situation in the property-insurance context (for example an innocent spouse whose partner intentionally burned down their house), there is little likelihood of collusion and, because any liability insurance payments will go to the victim, there is no possibility that the more blameworthy party will receive the benefit of any insurance payment.”

“While the purpose of any insurance-policy term is an important factor to be taken into account in the interpretation of that term, the purposes at issue here are especially important. If there is any subject in liability insurance that justifies the application of the otherwise rejected strong version of the doctrine of reasonable expectations, pursuant to which the reasonable expectations of the insured will control even in the face of a clearly stated policy provision to the contrary, severability is that subject.”

There is no doubt that the drafters believe that they are setting forth legitimate reasons why they adopted the rule that they did, despite its clear minority status. You can hear a passion that comes though their written words. But there is also no doubt that courts that declined to find coverage for innocent co-insureds were presented with some of these very arguments why coverage should be provided. Yet it wasn’t.

The Comments to §46 make some valid points. But 24-11 is a Globetrotters – Washington Generals score. If the score were closer, then §46 would be easier to swallow, even if still a minority rule.


Vol. 3, Iss. 14
October 6, 2014

Declarations: The Coverage Opinions Interview
With Doug Banfelder Of Premier Dispensary Insurance

Getting Into The Weeds On Insuring The Marijuana Industry

A few months back there was an article in The Wall Street Journal called “The Pot Industry Puts On A Tie.” The story was about how, with marijuana now being legalized in more places, those involved (including some that were previously operating in the black market) need to confront a variety of business issues – some that all companies face and others unique to their industry. The article mentioned a seminar held in June, in Denver, in which 1,200 people came looking for answers to questions about banking and taxes and no doubt other business issues. But what grabbed my attention was that the seminar included a presentation called “Protecting Your Investment: Risk Management and Insurance for the Cannabis Industry.” After that I put on my to-do list: find out more about insurance issues concerning the marijuana industry.

The marijuana industry is big and projected to see extraordinary growth in the next few years. Everyone knows that Colorado and Washington state recently legalized marijuana for recreational use. But there is much more to it than just two states. Twenty-three states and D.C. have legalized marijuana for medical use in some form. And more states may soon be joining the medical and recreational lists. It is an active legislative and ballot issue in several states. As for the size of the marijuana industry in dollars, who knows. I saw statistics that were all over the board. The only thing the numbers had in common is that they were in the billions -- and projected to be in the many more billions in the next few years.

Insurance broker Doug Banfelder, of Premier Southwest Insurance Group in Scottsdale, Arizona, and founder of its Premier Dispensary Insurance Division, specializes in placing coverage for various types of businesses involved in the marijuana industry. Doug was in fact a panelist on the insurance presentation at the Denver seminar. Doug was kind enough to speak with me about insurance and risk issues in the pot business and engage in a very informative Q&A, which is set forth below.

The 54 year old is new to the insurance industry, having joined it just four years ago, with the last three spent at Premier Dispensary. Doug’s background is in Arizona politics. But when his boss lost re-election he set out looking for a new career. Despite Doug’s recent entry into the insurance field, it was clear from speaking to him that he is a very quick study. He sounded like a 20-year veteran when explaining the various types of coverage, and related issues, concerning the marijuana industry. Doug’s many years in politics clearly compliments his role as a broker. The political process plays a large part in understanding the marijuana industry. Doug sensitivity to politics came through very clearly as he spoke to me about the future legalization landscape and various regulatory issues that come with legalization.

I read a lot about insurance issues concerning the marijuana industry in preparation for the piece. But nothing taught me more about the subject than my discussion with Doug and the Q&A that follows. There is now one fewer item on my to-do list.

What are some misconceptions that people have of the marijuana industry and those involved?

Contrary to the marijuana stereotypes and imagines that often come to mind, the majority of cannabusiness entrepreneurs are everyday Americans. They are professionals that embody our nation’s can-do, risk-taking spirit. They see the business potential, are unfazed by the challenges, and, most critically, are unafraid to engage in a degree of civil disobedience, essentially telling the federal government by their actions that the war on marijuana has failed and that new public policy models are needed. These people embrace the idea that, in a free society, it is not only their prerogative but also a civic duty to agitate for changes to failed policies.

Despite the success of the reform movement in twenty three states and the District of Columbia, the bottom line for the foreseeable future remains this: all state-sanctioned cannabis possession, growing and distribution is still federally illegal. Proceed at your own risk.

What are the main aspects of the marijuana industry (e.g., dispensaries, growers, etc.) and what are the principal insurable risks faced by each?

The primary exposures for dispensaries are not much different than those faced by other retailers, such as theft by customers and employees, fire, weather-related and product liability. Strong-arm robberies are very rare: the robust security measures required by state regulators and carriers tend to make criminals seek softer targets (such as liquor stores).

Growers face these risks and more; a simple power outage, if prolonged, can cause the loss of a roomful of plants during sensitive phases of the growth cycle. Hundreds of thousands of dollars worth of plants can lose all value within just a few hours. Plants that pass a state-mandated lab test may still contain trace amounts of pesticides or mold, potentially exposing the entire chain of distribution - grower, test lab and retailer - to product liability suits.

Infusion and Extraction operations have their own risks. Infusing cannabis butter into food products can result in uneven dosing, creating the possibility of product liability claims that a too-strong serving either made a person sick or caused an anxiety attack, especially in a “naive” patient or recreational consumer (hello Maureen Dowd – Google it!). All standard food preparation best practices apply, of course, and the same goes for makers of lip balms, salves, breath strips, etc, etc.

Extraction operations pose fire and explosion hazards when butane or hexane are used. Super Critical CO2 extraction machines are safer but very expensive, with prices of up to $150,000 for a high end unit. For cultivators, professional third-party transport is not yet possible due to chain of custody regulations; in most states licensees must perform all wholesale deliveries. This is problematic from a public safety perspective, as a Master Grower is not likely to also be a security specialist.

Legal cannabis is a very capital-intensive industry, so proper Property coverage is vital. Many retailers aim for an upscale environment, employing furnishings such as glass and wood showcases and high end lighting fixtures to create a hip, comfortable vibe that helps conceal the facility’s extensive security measures – much more jewelry store than pawnshop or headshop.

Lessor’s Risk is another major consideration – the vast majority of carriers want nothing to do with a building housing a cannabis operation. A (very) few will provide policies for those with a dispensary tenant, provided the premises otherwise meets their usual underwriting guidelines. If the building will be home to a commercial cultivation, all bets are off – indoor agriculture poses too complex a set of risks for those who don't know the industry.

This is a shame, really, as these operations – especially in states where production and distribution are tightly regulated means that every aspect of the operation, from security to electrical architecture to air filtration systems and more must be inspected and approved by the state before opening and are then subject to additional inspections, a level of regulation far exceeding that of nearly every other type of business. This intensive, state-performed risk management dramatically lowers the risk assumed by carriers. Fortunately for the cannabis industry, there are at present “just enough” carriers willing to write this business to make those leasing to cultivations fully insurable.

On the professional liability side there is coverage available for testing laboratories, Directors & Officers, cannabis business consultants, and medical malpractice for doctors performing patient evaluations. Security companies also pose huge challenges for so may reasons.

Are there any insurance requirements mandated by law?

In both MA and WA state, regulations require General and Product liability with $1,000,000 limits. The policies must name the state as an Additional Insured (this particular requirement is in effect in IL also). Additionally, WA policies must contain Primary Wording. A director of the WA State Liquor Control Board reached out to me as they were contemplating insurance requirements. We had a good conversation and I sent them a copy of our application form.  Regulations addressing carrier concerns is a win-win.

Some jurisdictions require either performance bonds or escrow accounts. As just one example, CT and IL mandate $2,000,000 performance bonds for cultivations; these are exceedingly difficult to source. The high dollar value aggravates an underwriter’s primary concern: the ever-present possibility that the federal government could do an abrupt about-face and shut these state programs down. While seemingly less and less likely as each day goes by and another state adopts a program, this threat cannot be ignored.

Who are the main insurers in the industry and how long have they been involved?

The Lloyds of London program began in 1998 when a California underwriter realized, two years after that state passed the nation’s first medical marijuana law, that there were no markets for this new risk. This program is very comprehensive and continues to evolve rapidly in response to industry needs.

Other programs exist, offered from Essex, James River, Kinsdale and Scottsdale. These programs have a variety of differences, such as some only being offered in medical states and not serving the recreational market. In some cases, in order to obtain GL, an insured must also carry a professional policy. A carrier might write GL and Products, but no property, so an agent has to source a monoline property to put a package together. Some programs lack desirable endorsements.

Overall I’m seeing a few carriers “dipping their toe” into these mostly uncharted waters, offering limited coverages to build their reserves and actuarials until they understand the industry well enough to begin offering stronger policies with more refined pricing.

What are the biggest challenges faced by marijuana underwriters and what is some of the important information sought by an insurer when underwriting a dispensary and grower?

Being able to see past the stigmatization is key to properly assessing the exposure. Due to cannabis’ history as a black market commodity, many people associate the product with criminal activity, triggering a whole range of negative perceptions. Society’s experience has proven, however, that the most dangerous thing about marijuana is the fact that it’s illegal – we have made it more dangerous to be caught with the substance than to actually use it. As with any other risk, underwriters need to know the industry to understand the risk profile. The agent must be able to fully and accurately convey the true nature of the client’s operations to underwriting so that they may make a clear assessment based on actual rather than perceived risks.

Can you discuss some challenges that come from the industry going from illegal to legal and regulated.

Hands down the lack of banking is number one. What other aboveground $2 billion industry doesn’t have access to checking and savings accounts? Credit card issuers won’t knowingly serve the legal cannabis industry either. This is why so many dispensaries do all their transactions in cash. In fact, many keep an ATM in the reception area. All this cash – held by the customer, kept in the merchant’s till, counted by hand, stored on-site until taken away, and used to pay as many bills as possible – including payroll, even - is obviously a source of great concern to carriers, regulators, and tax authorities.

Location of operations is another tough nut to crack.  In Denver there were no zoning regulations early on, resulting in the dense clustering of dispensaries.  Neighborhoods typically react badly to any land use perceived as adverse to the community’s health and well-being, even more so when they feel under siege by a particular industry.  We’ve seen this play out across the country, with the implementation of moratoria of six months to a year being common; other communities have enacted outright bans.  Washington state’s attorney general issued an opinion that municipalities could ban these facilities under I-502, the state’s enabling legislation – but others disagree.  This and related issues could well end up in the state supreme court. 

Some jurisdictions allow dispensaries but zone them into industrial areas; less than ideal for safe, convenient customer access. Even cultivations, commercial kitchens and extraction operations, as anonymous as other industrial uses, can run into resistance. One client had a nearby property owner protest their use permit, alleging that the presence of a cultivation next to his building would lower his property values, though he offered no supporting data. I was happy to testify that the insurability of these operations, relatively low claims ratios and reasonable rates demonstrates that his fears were unfounded. The hearing officer approved the permit.

What would the reaction be if you approached a large P&C carrier (not involved in the marijuana industry) and asked to place CGL coverage for a dispensary?

You mean once they’ve stopped laughing? Although many underwriters I speak with see where the legalization trend is going and are not personally opposed, management at the vast majority of carriers have zero interest in this industry. I’d wager that 99.9% of admitteds and 98.9% of E&S carriers are definitely not a market for any sort of cannabis-related operation.

The marijuana industry is very regulated.  What are some of the key regulations that benefit insurers by minimizing risks? 

When I first saw the Lloyd’s GL application I was struck by how closely its safety and security requirements paralleled those of the Arizona Department of Health Services, our state’s regulatory agency. This has been the case with nearly every state to come online since then. Key regs generally include a Central Station Alarm connected to all doors and windows; minimum safe requirements; having a reception area or double entrance; access to the showroom controlled by a buzz-in door; cameras trained on every doorway and window, safe or vault and at the point of sale, and many other strategies to prevent theft and diversion.

State regulations require a full range of policy and procedures manuals, often including written product recall plans, loss prevention measures, and a product quality control program. Other requirements can come from counties or municipalities, such as bulletproof glass inside dispensaries, for example. I find this interesting, as such measures are not required of pharmacies or liquor stores in most neighborhoods. One commodity or another - what is the difference, really?

What are some challenges to being a broker in the marijuana industry that are not faced by brokers writing P&C insurance for more traditional businesses?  Can you provide an example. 

With traditional businesses the name of a given enterprise doesn’t raise suspicion! In the cannabis industry business names can be very telling: “herbal” this, “green” that, “high” something, “compassionate” care, “canna” this or that – all of which can set off alarm bells in underwriters’ minds. So right off the bat you’re having to explain the nature of the business. I’m ok with this, however, as I believe in full disclosure, all the time – my markets know what the likely topic of conversation is when they see my call coming in.

Even when a prospect’s business isn’t directly related to the cannabis industry, the mere whiff of an association can cause issues. Case in point: a client needed an office BOP to satisfy the lease requirement for a space he was renting. He has two businesses; one a dispensary, the other a bit unusual but fully legal and comparatively mainstream. He simply wanted a place to work that was away from everything and everyone. Should be easy, right? Not so fast. Underwriters from three different admitted carriers wanted to know what the other businesses were. I told them, explaining that each was fully insured, and yet was still declined by two of the three.

This challenge extends to those who will never even touch the plant. For example, a magazine  publisher who specializes in niche publications for a variety of industries added a B2B magazine for the cannabis industry – and their carrier cancelled the policy!

For agents the learning curve for this industry is significant, and so is the opportunity cost; in the time I spent sourcing a manuscript policy for a security company, or in another case persuading an underwriter to provide product liability for a marijuana vending machine distributor, I could have written plenty of other business.

Fascinating and frustrating in nearly equal measure, insuring the cannabis industry takes creativity, patience, a greater than normal level of risk tolerance, and the desire to make a difference.



Vol. 3, Iss. 14
October 6, 2014

Another Ineffective Reservation Of Rights Case


After two years of writing Coverage Opinions I know when a case resonates with readers. A case in the last issue of CO resonated. Really resonated. The case was Advantage Builders & Exteriors v. Mid-Continent Casualty Co., No. WD 76880 (Mo. Ct. App. Sept. 2, 2014). In a nutshell, Mid-Continent’s insured, Advantage Builders, was sued for construction defects. Mid-Continent undertook its defense, under a “reservation of rights,” filed a declaratory judgment action, and a Missouri trial court found that Mid-Continent owed no coverage. It sounds like a textbook case in claim handling. But a Missouri appeals court held that Mid-Continent was liable for $3 million in compensatory damages for bad faith failure to settle and $2 million in punitive damages. [Although those damage numbers need to be re-tried because of a problem with how they were split.]

How could this be? The answer is this: Even though Mid-Continent provided two reservation of rights letters to its insured, the appeals court held that the reservation of rights letters were not “effective.” It didn’t matter that the letters contained a lot of pages, setting out the facts at issue and voluminous policy language and that Mid-Continent stated that it was reserving its rights. Despite all those words, the court concluded that the letters did not adequately explain why Mid-Continent may not have owed coverage to its insured.

The last issue of CO came out on September 8. Little did I know, but that at the same time that I was putting the finishing touches on the issue, an Illinois appeals court was issuing an opinion that could also be described as an “ineffective reservation of rights case.” While EAN Services, LLC v. Brunson, No. 2-14-118 (Ill. Ct. App. September 8, 2014) is nowhere near the same as Advantage Builders & Exteriors when it comes to the impact that an ineffective reservation of rights played in the outcome, the court did address the issue. Given how significant the issue is, the response that Advantage Builders & Exteriors generated and the coincidental timing, it bears a discussion here.

EAN Services is a lengthy and very complex case involving coverage for damages to an automobile rented from Enterprise, the driver’s personal auto insurance and a collision damage waiver. Any case involving a rental car and a collision damage waiver is never going to be easy. The decision is eye-glazing and I couldn’t tell you a single thing about it.

But one issue in the case was whether Progressive Insurance defended its insured under a reservation of rights. The court held that it did not. The court’s decision was not because the letter that Progressive sent to its insured failed to adequately link the facts at issue to the policy language, as was the situation in Advantage Builders. Nonetheless, when discussing what is a “proper reservation of rights,” the EAS Services court sounded a lot like the court in Advantage Builders:

“Such a reservation of rights [a proper one] must, therefore, adequately inform the insured of the rights which the insurer intends to reserve, for it is only when the insured is adequately informed of the potential policy defense that he can intelligently choose between retaining his own counsel or accepting the tender of defense counsel from the insurer. Accordingly, bare notice of a reservation of rights is insufficient; the notice must make specific reference to the policy defense which ultimately may be asserted and to the potential conflict of interest. If the insurer has adequately informed the insured of its election to proceed under a reservation of rights, and the insured accepts the insurer’s tender of defense counsel, the insurer has not breached its duty of loyalty and is not estopped from asserting policy defenses.” (quoting Royal Insurance Co. v. Process Design Associates, Inc., 221 Ill.App.3d 966 (1991)).

EAS Services is another example of a court’s observation that, for a reservation of rights letter to be effective, it must meet an “adequately inform” standard. Just because a long reservation of rights letter is sent, setting forth oodles of policy language, may not make it effective.


Vol. 3, Iss. 14
October 6, 2014

UPS Says No Insurance For A Driver Being UPSet
When His Customer Is Sprayed With Bullets


Surely UPS has a ton of worker’s compensation claims on account of employing so many people doing physically demanding work. But the comp. claim at issue in United Parcel Service v. Prince, No. 6-14-2 (Va. Ct. App. Sept. 9, 2014) involved a different type of job-related injury – post-traumatic stress disorder, not to mention under very unusual circumstances. It seems to me that the decision to deny benefits in this situation, to a near twenty-year employee of the package delivery behemoth, was unduly harsh. A Virginia appeals court corrected that.

In 2013, Kirk Prince had been a UPS employee since 1995 and worked as a driver for the past twelve years. He had been making deliveries to Barbara Fassett’s home two to three times per week for ten years and had developed a good relationship with her. On an early evening in January 2013, Prince arrived at Ms. Fassett’s home to make a delivery. As he walked toward the house he noticed glass on the porch and saw a woman lying in the doorway. He moved closer to the woman and asked if she was okay. It was Ms. Fassett. She was not okay. She was dead – having been sprayed with bullets. Prince described Ms. Fassett’s face as having shrapnel and bullets in it and said it was “pretty much gone – it was all bloody.” He called it a “really really gruesome scene.” After witnessing the body for five or ten seconds, Prince called 911. He then vomited while waiting for the responders. He later learned that Ms. Fassett’s daughter was dead inside the home.

Mr. Prince sought treatment and was diagnosed with PTSD and sleep disturbance. He sought worker’s compensation benefits. A worker’s compensation commissioner denied benefits. The full Worker’s Compensation Commission reversed, “holding that the ‘sight of [claimant’s] murdered customer was so shocking, frightening, traumatic, catastrophic, and unexpected as to comprise a compensable injury by accident... .’” The Commission also noted that “[t]he events of January 7, 2013 were wholly outside the reasonable expectations of the claimant’s work day.... It was the claimant’s job to deliver packages. He did not volunteer or expect to find the murdered woman.”

The Virginia Court of Appeals affirmed the Commission’s decision, rejecting UPS’s argument that Mr. Prince’s “brief observation of Ms. Fassett’s body was insufficient to constitute a ‘sudden shock or fright’ so as to constitute a compensable injury by accident.” The court rejected UPS’s “brief observation” defense as follows: “Employer places great emphasis on the fact that claimant only looked at Ms. Fassett’s body for five to ten seconds before retreating and calling 911. We note that neither the Supreme Court nor this Court has developed a temporal component or standard for how long a claimant must witness a scene for it to constitute a sufficiently shocking or frightening event, and we decline to do so in this case. Regardless of the length of time claimant looked at Ms. Fassett’s face, it was long enough to determine that it was bloodied and ‘pretty much gone....’ Furthermore, claimant remained at the scene for approximately an hour after the police arrived and during that time was told that there was another dead body in the house. The entire incident, during which claimant remained in shock, crying, and vomiting, lasted over an hour.”


Vol. 3, Iss. 14
October 6, 2014

Appeals Court Makes New Law:
Insurer Must Pay Interest On Settlement After 30th Day Without Payment


Singler v. Zurich American Ins. Co., No. 2014AP391 (Wis. Ct. App. Sept. 16, 2014) involves Zurich’s eve-of-trial settlement of an automobile liability claim for $1.9 million. Zurich’s attorney told the plaintiff’s attorney that it would take “at least a month to get the check authorized out of Australia[.]” The settlement did not specify any time for payment. Forty or so days after the settlement had been reached the plaintiff’s attorney moved for a court order seeking 12% interest on the settlement after the 30th day.

It seems to me that there were some complexities in getting the settlement payment sorted out. The insured’s driver’s employer was an Australian corporation and there was a $2 million SIR. Zurich’s counsel explained it like this: “So, therefore, they have to tender what is left of the first 2 million and subtract defense costs as well as the settlement in a companion case.... And then the XL carrier who has the insurance after that has to determine how much they’re going to pay.”

Nonetheless, the court granted the motion and awarded 12% interest beginning thirty days after the settlement. The court felt that, under the circumstances – with a settlement seemingly on the horizon and Zurich being in the business of paying losses -- Zurich should have “set the wheels in motion” and been able to issue a check in a week.

The Wisconsin appeals court held that interest was owed – albeit only 5% annually and not 12% based on certain statutory considerations. But, more importantly, the court agreed with the concept that interest was owed on an unpaid settlement after the 30th day: “The parties agree that their settlement agreement did not contain any time limit for payment. They also agree that, when a contract does not contain a time limit for performance, a reasonable time is implied.”

The court concluded that, based on the following considerations, it was not clearly erroneous that it was reasonable for Zurich to expect to pay the settlement within 30 days: “At the time of settlement, Singler’s case had been pending for an extended period of time; Zurich had previously made settlement offers of $1.5 million and $1.75 million; The parties did not settle until the eve of trial; consequently, as of the settlement date, Zurich would have known that, in a relatively short time, the jury could award damages in the range of Zurich’s previous settlement offers; Zurich had been involved in the trial and settlement of a companion case; and Zurich was in the business of covering losses.”


Vol. 3, Iss. 14
October 6, 2014

Insurer’s Unwillingness To Sign A Protective Order In An Underlying Case Leads To Discovery Of Its Reserves


The discoverability of an insurer’s reserve information is an issue that does not come with a straightforward, yes or no, answer. The cases can involve unique facts; so their outcomes can be necessarily fact driven. That was certainly the situation in National Union Fire Insurance Co. v. H & R Block Inc., No. 12-1505 (S.D.N.Y. Sept. 4, 2014) -- and then some.

In H & R Block, the New York federal court permitted discovery of the insurer’s reserve information. It’s decision had a unique hook -- the insurer’s refusal to sign a protective order and common interest agreement in an underlying action. The question whether an insurer can refuse to sign a protective order and common interest agreement in an underlying action was not before the court. What was, however, were consequences that the insurer probably didn’t see coming when it declined to do so.

At issue in H & R Block was coverage for an action brought against tax preparer H & R Block, and related companies, by Jackson Hewitt, another tax preparer, for Block allegedly falsely representing that its tax preparation services were superior to those provided by Jackson Hewitt. National Union issued a commercial umbrella general liability policy to Block and at issue was coverage under the personal and advertising injury provisions.

Block claimed that it “provided National Union with all the information that it could provide concerning the Underlying Action, but that it was unable to provide additional information due to National Union’s ultimate refusal to sign the protective order that was entered in the Underlying Action and a common interest agreement.”

Block and Jackson Hewitt began to have discussions concerning the settlement of the Underlying Action. Block alleged “that as a result of National Union’s unreasonable and ongoing refusal to be bound by the protective order and the common interest agreement, it was unable to share with National Union all the information concerning the settlement discussions that it otherwise would have been able to share, and that National Union refused to consent to any of the settlement proposals being discussed. According to [Block], National Union instead accused [Block] of failing to cooperate with it.” Block and Jackson Hewitt entered into a confidential settlement and the litigation was dismissed. Coverage litigation ensued.

The issue before the court was Block’s discovery request for National Union’s reserve information on the claim. Block made an interesting argument in support of its entitlement to the reserve information. If National Union asserts that it lacked sufficient information to value the claims, then let’s see National Unions reserves, as this may imply that it in fact had sufficient information to value Jackson Hewitt’s claims. National Union opposed the production, arguing that the information may be subject to the attorney-client privilege and/or the work product doctrine and that it was irrelevant to the issue of coverage. [The court quickly dismissed the attorney-client objection on the basis that National Union made no representation that counsel was actually involved in setting any reserves.]

The court next turned to the more difficult question -- whether the reserve information was relevant. On one hand, the court was dismissive of reserve information being relevant: “The most relevant factors concerning National Union’s potential liability in this action are the terms of the policy and the conduct of National Union and Tax Group [i.e., Block] during the pendency of the Underlying Action. Whatever reserve National Union may have established cannot alter the policy’s definition of advertising injury or personal injury nor can it alter the nature and amount of information Tax Group provided to National Union concerning the Underlying Action. In addition, the probative value of the reserve information as an aid to the interpretation of possibly ambiguous policy language is attenuated by the fact that there are no certainties in litigation. Regardless of the strength or weakness of an insured’s claim for coverage, I suspect that there are very few cases in which the probability that the insured will succeed on its coverage claim can be valued at zero. Thus, the establishment of a reserve may merely reflect a prudent insurer’s recognition of the risks of inherent in litigation rather than an admission of coverage or liability.” But the court also noted that reserve information may be relevant when, as was the case here, a bad faith refusal to pay was alleged.

After examining several cases on the issue, the court held that National Union’s reserve information was sufficiently relevant to be discoverable: “If National Union was able to perform a detailed analysis of Jackson Hewitt’s claims against Tax Group, identifying all the pertinent legal and factual issues, it would tend to disprove National Union’s claim that it lacked sufficient information to evaluate the claims against Tax Group. On the other hand, if National Union’s reserve analysis was sketchy and incomplete, it would tend to support National Union’s position. Although I express no opinion as to the ultimate admissibility of the reserve information, I do conclude that it is sufficiently relevant to be discoverable.”

H & R Block is a very interesting decision. I suspect that when National Union was considering whether to sign the protective order and common interest agreement, it didn’t see as a potential consequence having its reserve information revealed. Maybe National Union’s reserve analysis is sketchy and incomplete and would therefore tend to support its position that it lacked sufficient information to perform a proper analysis. Or maybe it was wasn’t. The court has set the stage for this question to be answered.


Vol. 3, Iss. 14
October 6, 2014

Broker May Be On The Hook For Insured’s Failure To Provide Timely Notice Of A $5M Claim


When an insured is denied coverage for a claim it is not unusual for someone to suggest that the fault lies with the insured’s broker for its failure to have obtained it.

[On one hand, broker liability cases are not true coverage cases. On the other hand, they are nothing short of coverage cases. After all, if a policyholder fails to obtain any, or adequate, insurance from its own insurer for a claim, and if its insurance broker is legally responsibility for the coverage deficiency, then the broker’s errors and omissions policy may fill the void. Thus, the broker’s errors and omissions policy can sometimes be an insured’s [or plaintiff’s] policy of last resort. When you look at it this way, a broker liability case is a coverage case with just a different name.]

In general, there is a high burden that must be met to pin the blame on the broker in a failure-of-coverage situation. Again, very generally, to prevail in a negligence action, an insured often must establish that it made a particular request to its broker and the requested coverage was not obtained.

C.L. Thomas, Inc. v. Lexington Insurance Co., No. 13-13-566 (Tex. Ct. App. Sept. 11, 2014) involves a broker that may be on the hook in some way for an insurer’s denial of a $5,000,000 claim. But what makes this case different from a typical one, involving broker liability, is that it does not involve the broker’s failure to procure insurance to cover a risk. Rather, the broker’s potential liability is tied to its insured-client’s failure to timely notify an insurer of a claim.

The case gets its start in a wrongful termination and defamation action filed against C.L. Thomas by a truck driver employee. The employee was awarded nearly $5.1 million in an arbitration. C.L. Thomas satisfied the judgment and then sought coverage from Great American, under a primary policy, and Lexington, under an umbrella policy. To make a long story short, coverage litigation ensued. The Texas appeals court held that Lexington had no obligation to provide coverage to C.L. Thomas based on late notice – notice of the arbitration award was provided to Lexington six days after it was issued. The court also concluded that the untimely notice prejudiced Lexington. Nothing about this aspect of the case was too unusual.

C.L. Thomas struck out against Lexington but then did a Texas 2-step – pursuing a breach of contract claim against Acordia, its broker. C.L. Thomas alleged that Acordia: “(1) failed to notify Thomas that the Great American policy was a claims-made policy; (2) failed to timely deliver copies of all insurance policies to Thomas; and (3) failed to instruct Thomas as to the notice requirements of the Great American policy.” In support of its breach of contract claim, C.L. Thomas relied on a Client Service Agreement, between Acordia and Thomas, whereby Acordia “was to provide ‘insurance brokerage services,’ which was defined to include ‘review[ing] policies,’ ‘provid[ing] insurance summary,’ and ‘educat[ing Thomas] employees as needed.’”

The court responded to the breach of contract claim as follows. It rejected the argument that Acordia failed to notify Thomas that the Great American policy was a claims-made policy. A summary produced by Acordia stated, in bold type on each page, that the policy was a claims-made policy. Acordia also established that, under the Client Service Agreement, it had no contractual obligation to deliver copies of insurance policies to Thomas within any specific time.

However, Acordia failed to go three for three. “[W]ith respect to the claim that Acordia failed to instruct Thomas of the applicable notice requirements of the Great American policy, we find that Acordia did not establish its entitlement to judgment as a matter of law. . . . Acordia was contractually obligated to ‘educate [Thomas] employees as needed’ and, even if copies of all policies were eventually provided to Thomas, that does not in and of itself establish that there was no breach of this provision. In any event, it was reasonably foreseeable at the time Acordia allegedly failed to advise Thomas of the notice requirements that such failure may result in Thomas failing to timely file a claim with Great American. . . . Finally, we agree with Thomas that the language ‘This is a Claims–Made Policy,’ which appeared in the insurance summary provided by Acordia, did not ‘educate’ Thomas employees ‘as needed’ because it did not set forth the notice requirements contained in the Great American policy.” The court remanded for further proceedings consistent with its opinion.

There are a few morals to this story. The most obvious one being that a broker that takes on an obligation, in a Client Service Agreement, to educate its client’s employees as needed, must be certain that this is satisfied. And to achieve this, the broker would also be well-served to describe the nature of its educational obligation in more specific terms than the amorphous “educate employees as needed.”


Vol. 3, Iss. 14
October 6, 2014

Pollution Exclusion And Lead: Supreme Court Declines To Follow Some Others’ Lead


It has become difficult to find a pollution exclusion case that warrants discussion. In general, while each case is different, they also often have so many similarities. As a result I’ve resorted to discussing cases that address whether the pollution exclusion applies to seemingly peculiar substances, such as, recently, fireworks, ejaculate and deli odors and a few more.

But the Supreme Court of Nebraska recently bucked the trend and issued a decision in a pollution exclusion case that is worth a look. On one hand, the issue in State Farm Fire & Cas. v. Dantzler, No. S-12-1042 (Neb. Sept. 12, 2014) is pedestrian: the application of the pollution exclusion to exposure to lead paint by a minor-tenant in a rental property. Lots of courts have addressed this very issue. In one way Dantzler is even less important than some of these other cases. After all, here the parties themselves agreed that “lead found in paint” is a pollutant as defined by the pollution exclusion. At least in other cases that issue is disputed. So if the parties agreed that lead paint is a pollutant, what’s left to discuss?

While it wasn’t disputed that lead paint is a pollutant, the parties weren’t so quick to agree on the manner in which the minor-tenant was allegedly exposed to lead paint. In general, the pollution exclusion applied to “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants . . . at or from premises owned, rented or occupied by [Dantzler].” Since lead paint was a pollutant, and the exposure to lead paint occurred on Dantzler’s rental property, the issue before the Nebraska high court was whether the child’s alleged injuries were caused by a “discharge, dispersal, spill, release or escape” of lead-based paint.

Some courts nationally have held that, when it comes to residential exposure to lead paint, it can take place without lead being discharged, dispersed, spilled, released or escaping. For example, the Supreme Court’s of Pennsylvania and Alabama have taken this approach. See Lititz Mut. Ins. Co. v. Steeley, 785 A.2d 975, 981–82 (Pa. 2001) (holding that lead paint is a “pollutant,” but exclusion not applicable because the process by which it degrades and became available for ingestion and inhalation does not involve a “discharge,” “dispersal,” “release,” or “escape”); Porterfield v. Audubon Indem. Co., 856 So. 2d 789, 805 (Ala. 2002) (“reasonably prudent insured might have concluded in 1991 that the presence of lead-paint flakes, chips, and/or dust in a residential apartment would not qualify as a discharge, dispersal, release, or escape of a pollutant”).

But the Nebraska Supreme Court declined to follow this approach. Instead the Dantzler court held that “[b]ecause the above terms [discharge, dispersal, spill, release or escape] encompass the separation of lead-based paint that is inherent in every case of lead paint poisoning, the pollution exclusion is not ambiguous as applied to lead-based paint and a determination of the specific process of exposure in any particular case is not material to application of the exclusion. Regardless of how the lead-based paint is separated from the painted surface or what form it takes once it is separated, an individual’s exposure to and absorption of that lead-based paint results from the ‘discharge, dispersal, spill, release or escape’ of a pollutant. Thus, it is not necessary to differentiate between the processes by which exposure occurs. It is not material to application of the pollution exclusion to determine the manner in which the injured party was allegedly exposed to lead-based paint. The foregoing interpretation of pollution exclusions takes into account the realities of lead paint poisoning and is consistent with the broad interpretation we have given these exclusions. It avoids the practical difficulties of compelling the court hearing the declaratory judgment to make a finding as to the causation of the alleged injuries in the underlying personal injury case in order to determine whether a ‘discharge, dispersal, spill, release or escape’ had occurred. From a practical perspective, this would be problematic. The court’s ultimate finding as to the cause of the alleged injuries might be contrary to the findings of causation in the underlying personal injury case. For these reasons, we conclude that the manner of exposure was not a material fact that prevented summary judgment.”

It is possible that courts that have taken the other approach—that the process by which lead paint degrades and becomes available for ingestion and inhalation does not involve a “discharge,” “dispersal,” “release,” or “escape” – have been motivated by a desire to find coverage for a claim involving an injured child, by a substance that the court was constraned to find was a pollutant.

Vol. 3, Iss. 14
October 6, 2014

5th Circuit Addresses Excess Insurer’s Bad Faith Claim Against Primary

RSUI Indem. Co. v. American States Ins. Co., No. 14–30033 (5th Cir. Sept. 25, 2014) (addressing Louisiana law) (“We hold only that under the circumstances of this case, where an excess carrier alleges that a primary insurer in bad faith breached its duty to defend a common insured properly and caused exposure of the insured to an increase in the settlement value of the case above the primary policy limit, which the excess insurer must then satisfy on the insured’s behalf, the excess insurer has a subrogated cause of action against the primary insurer for any payment above what it otherwise would have been required to pay.”)