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Coverage Opinions
Effective Date:November 5, 2014
Vol. 3, Iss. 15
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Declarations: The Coverage Opinions Interview With Oscar Goodman –
From Mob Lawyer To Mayor Of Las Vegas
The Real Most Interesting Man In The World
Only in America – and perhaps only in Las Vegas – could one of the greatest mob lawyers ever switch careers and become the mayor of a major city. Oh, and his wife is now the mayor. For Oscar Goodman, it has been a life very well lived.

Randy Spencer’s Open Mic
Las Vegas: The Wall Street Journal And A Call Girl

Mafia Property & Casualty Insurance Company
The mafia has an operation that isn’t much different from what insurance companies offer.

Viva Las Vegas: Elvis And Insurance Coverage
Coverage Opinions is excited to introduce its new celebrity endorser.

Frozen And Coverage Opinions
A star of the Disney mega-blockbuster reads Coverage Opinions.

The Real Ebola Epidemic: Insurance Articles
The number of victims of an illness should exceed the number of articles written about insurance implications for the illness.

Thank You Temple University Risk And Insurance Students
This is what happens when you give a lecture at a university on Halloween.

As The Policyholder Sees It: Carl Salisbury’s Ten Things He Really, Really Wishes Insurers Wouldn’t Do
Prominent policyholder counsel lists ten things that insurers sometimes do that make the claims process more complex and contentious.

New A.L.Idea: “Principles of the Law of Liability Insurance” To Now Be A “Restatement”
As a Restatement, the importance of the ALI project cannot be overstated.

Happy Halloween: How The ALI Restatement Could Be Scary For Insurers
A Halloween-related case that demonstrates how a possible ALI provision can lead to coverage for undeserving insureds.

Son Of “Sudden And Accidental:” Those Three Famous Words Now Starring In Construction Defect Coverage
See what happens when two behemoths of the coverage world – pollution exclusion and construction defect -- come face to face.

Must Read Voluntary Payments Case: Could Severely Limit The Defense (And A Possible Cyber Angle)
It is not often that you see the words must read and voluntary payments in the same sentence. This is one time.

The Curious Coverage Provision: Real Estate Manager As An Insured
The “real estate manager as an insured” provision gets a rare day out in the sun

When The Duty To Defend Doesn’t End
The rules that determine when an insurer’s duty to defend attaches are well-known. But in some states is may never un-attach.

“Arising Out Of:” The Policy Language That Cuts Both Ways
The phrase “arising out of” is interpreted broadly. Whether this is a good thing depends on the issue and which side of it you are on.

Tapas: Small Dishes Of Insurance Coverage News And Notes
· South Carolina [First Impression]: Prejudice Required For Pretender Defense Costs
· Texas Supreme Court Puts The Kibosh On Discovery Of Other Claim Files


Vol. 3, Iss. 15
November 5, 2014


Las Vegas:
The Wall Street Journal And A Call Girl

During a recent stay in Las Vegas I was walking into a casino and was approached by a man who looked really down on his luck. “Please sir, can you help me?,” he asked. “My wife is very sick and she needs medicine. I’ll take anything you can spare,” he pleaded. He seemed really sincere and I concluded that he was not just a professional pan-handler. So I was getting ready to put my hand in my pocket, but then hesitated at the very last second. “I’d like to help you,” I said. “Really, I would. But how do I know you won’t take this money and go straight into the casino and gamble with it?,” I asked. “Oh, you don’t have it worry about that,” he assured me. “I got gamblin’ money.” [Credit to David Letterman for that great joke.]

There is only one way to describe Las Vegas in just a few words -- a city like none other. Here are just a few examples.

You can go to Paris without having to meet any French people.

On my last trip I spent twice as much time on the hotel gym treadmill. It was easy. I was distracted by the K-State – Oklahoma football game on the TV in front of me because I had money riding on the outcome.

$9 for a large soda at the Mirage. I have the receipt. Unconscionable? Of course. But worth it for the story.

Last year I did a stand-up routine at the world’s largest gentlemen’s club. [Oscar Goodman asked me if I closed my eyes.]

You can stand in a swimming pool and play blackjack.

They still have cigarette machines. Remember them?

[Absolutely true story.] On a recent trip I went to the hotel sundries store at 6 AM to buy The Wall Street Journal and a six foot tall woman, in a skin tight dress and four inch heels, asked me if I wanted company reading it. No, I replied. I hate when someone else reads my newspaper. They never fold it back up the way I like.

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


Vol. 3, Iss. 15
November 5, 2014

Mafia Property & Casualty Insurance Company

In preparing to interview mob lawyer turned mayor Oscar Goodman (located nearby) I learned much about the mafia. My education came from Goodman’s autobiography Being Oscar, a visit to Las Vegas’s Mob Museum and Blood Aces, Dallas Morning News reporter Doug Swanson’s gripping new book about the life of Benny Binion – ruthless Dallas gangster who came to Las Vegas and became a legendary casino owner.

Since its inception two years ago, Coverage Opinions has sometimes strayed from its stated mandate of addressing insurance coverage issues. I’ll deny I said this – but, yes, other areas of the law can also be interesting. That being so, some CO interviews have focused on such things as sports, constitutional and tort law. Interviewing a mob lawyer is surely in this insurance-detour category. But maybe not.

It occurred to me that the mafia has an operation that isn’t much different from what insurance companies offer. The mafia is known for using extortion or shakedown schemes. This involves obtaining money or property from a person or business in exchange for a promise not to inflict future violence on them. To put it another way, in a shakedown arrangement, a person is paying money to be protected against a loss (violence to them) that is more costly to them than the amount paid. How is this any different from a person who pays $1,400 for homeowner’s insurance to be protected against having to pay $3,000 to repair damage that their overflowing toilet caused to a downstairs neighbor? It’s not. They are identical. In both situations a person is paying an amount of money to avoid the consequences of a greater loss. Indeed, paying protection money to the mafia has been referred to as insurance. Actually, there is one difference. The mob provides its insurance without 52 pages of terms and conditions.


Vol. 3, Iss. 15
November 5, 2014

Viva Las Vegas:
Elvis And Insurance Coverage

Coverage Opinions is excited to introduce its new celebrity endorser.

Elvis may seem an odd choice as pitch man for an insurance coverage newsletter. But not so.

Elvis always dreamed of being a policyholder lawyer – especially one who would very strongly seek a defense, additional insured rights and contractual indemnity. Quite simply, he would love to tender.

Love to tender,
Love to sue,
All my dreams fulfill,
For quarrelling I love to do,
And I always bill.


Vol. 3, Iss. 15
November 5, 2014

Frozen And Coverage Opinions

It seems that people don’t talk about global warming as much as they used to. Perhaps that’s because they are now too busy talking about Frozen.

For many, they just can’t get enough of the Disney mega-blockbuster. Others wish they would just let it go.

Imagine my surprise (well, not really) when I ran into Frozen star Olaf on the Las Vegas Strip last month and he was taking in some insurance coverage news from his favorite source. He told me that he enjoys the Coverage Opinions interviews, timely reporting of coverage decisions, the odd cases and holiday-themed stories. Olaf also mentioned that he prefers the old-style format of the newsletter -- as a .pdf download.

Anyway, I got into a discussion with Olaf about coverage and asked him if he or his co-stars had any insurance issues. He mentioned that once the Kingdom of Arendelle thawed there was a little problem with some stachybotrys in the basement of the castle. But it caused no harm to Princess Elsa he assured me. As she has said – The mold never bothered me anyway!


Vol. 3, Iss. 15
November 5, 2014

The Real Ebola Epidemic: Insurance Articles

Look, coming down with Ebola is definitely not on my to-do list. I’d even rather clean out the garage than catch it. I don’t want to minimize this potentially deadly illness. And the suffering by those afflicted is horrendous, as Saturday’s Wall Street Journal cover story made clear. But despite all this, I’m not sure that this recent headline in Insurance Journal was necessary: “12 Articles on Ebola Risk and Insurance.” The IJ story went on to link to these dozen offerings, with such titles as: “Various Insurance Lines Could Potentially Be Affected by Ebola;” “Some Insurers Exclude Ebola; Others Offer New Products;” and “Aon Activates Ebola Response Task Force, Launches Ebola Response Room.” And these dozen aren’t the only Ebola-insurance articles that have been written. [I would love to see what AON’s “Ebola Response Room” looks like. If it has a day old chicken salad sandwich in it then it’s creating a greater likelihood of bodily injury than Ebola.]

Here is a gem from the article about various insurance lines potentially being affected by Ebola: “Injuries that could have been expected are excluded. Carriers may argue that any prudent person would have known there was an increased exposure to Ebola.”

A recent Business Insurance story had this eye-roller: “People contracting Ebola on an airliner or at a hotel or sports venue might sue companies involved, alleging negligence for failing to prevent their exposure. A company would expect its general liability insurers to respond, but there could be coverage disputes, experts say. One could involve general liability policies’ pollution exclusion, which typically bars claims arising from any ‘solid, liquid, gaseous or thermal irritant or contaminant,’ including waste.” If I went to a Lakers game, and contracted Ebola from the guy sitting next to me, I’d be hard-pressed to see the Lakers being liable for not conducting Ebola screenings at the front door. And the pollution exclusion’s applicability to Ebola?

Some are arguing that if you spell Ebola as E-bola, then it could be covered under a cyber liability policy.

To date, two people have contracted Ebola while in the United States. Two people. Total. And it was hardly random – they were nurses who treated an Ebola patient (and perhaps under deficient hospital protocols). Nonetheless, more than a dozen articles have been written about Ebola risk and insurance – some addressing claim scenarios that remind me of that annoying guy in my Torts class who would pose the most outlandish hypotheticals.

Insurance companies are in the business of identifying, and responding to, future risks. And insurers that are considering Ebola’s potential implications on their existing lines of business, especially where this is a legitimate possible link, are right to, and should, do so. And I recognize that Ebola could become a wide-spread public health crisis – notwithstanding that the U.S. health system is currently showing itself to be quite capable of curing Ebola when it is caught early.

But even with all this, shouldn’t the number of victims of an illness exceed the number of articles written about insurance implications for the illness? That just seems like a good rule of thumb.


Vol. 3, Iss. 15
November 5, 2014

Thank You Temple University
Risk And Insurance Students

While it made me feel old, I very much enjoyed giving a CGL concepts presentation last week to students in the Risk, Insurance and Healthcare Management program at Temple University. It was an honor to be invited by Professor Storm Wilkins and Senior student Michael McGuire to speak to members of Gamma Iota Sigma (the International Risk Management, Insurance and Actuarial Science Collegiate Fraternity). The room was packed (and not just because free pizza was being served).

The fact that it was Halloween made it all the more enjoyable. I’ve given a lot of presentations. But I’ve never looked out at an audience and seen a stuffed bear and penguin looking back at me.

Temple’s Risk and Insurance Program is one of the highest ranked in the nation. From the questions the students asked, and projects they told me about, I could not have been more impressed. What a thrill to meet such young people who are so enthusiastic about insurance and risk management and already so well-versed in the subject.

Randy Maniloff (r) and Future Risk Manager


Vol. 3, Iss. 15
November 5, 2014

As The Policyholder Sees It:
Carl Salisbury’s Ten Things He Really, Really Wishes Insurers Wouldn’t Do

A popular part of the White and Williams Coverage College has always been the closing general session where a prominent policyholder-side lawyer provides his thoughts on the claims process. In past years, policyholder counsel have looked at mistakes that insurers sometimes make that policyholders then attempt to use to their advantage.

Kilpatrick Townsend & Stockton New York partner Carl Salisbury was kind enough to accept our invitation to tackle the “As The Policyholder Sees It” session at last month’s 8th Annual Coverage College. Carl took a somewhat different take on the presentation than some others. Instead of focusing on mistakes that insurers can make, he looked at ten things that he really, really wished insurers wouldn’t do. To be sure, some of these could also be mistakes that policyholders attempt to exploit. But some are also simply things that insurers sometimes do that simply make the claims process more complex and contentious and can sour the relationship between policyholder and insurer.

Carl’s presentation was superb and very-well received. He was in hostile territory – an audience of hundreds of insurance adjusters and their counsel – but there was nothing at all hostile about his presentation. He was unfailingly gracious and spoke in a non-accusatory tone. He was there to present a policyholder-side view and advocate for change. We sent Carl home with a White and Williams Coverage College golf shirt – the only policyholder lawyer in America to own one.

Here are Carl Salisbury’s “Ten Things That I Really, Really Wished You Wouldn’t Do:”

The Five-Minute Claim Investigation: Denials and reservations of rights in complex coverage claims that come directly on the heels of an insured’s notice

The Kitchen-Sink Information Request: Five-page single-spaced letters that essentially require the policyholder to conduct the claim investigation

The Kitchen-Sink Reservation of Rights Letter: The letter that cuts and pastes every policy provision, relevant or not, into the carrier’s ROR

The Passive-Aggressive Excess Carrier: The excess carrier that denies any obligation to become involved in a claim until underlying limits are exhausted and then conducts all-out litigation warfare when underlying limits do become exhausted

The Thumb-In-the-Eye Settlement Offer: The offer to settle a disputed claim with such a low-ball number that it effectively ends all conversation

The Sprint to the Courthouse: The carrier that rushes to file a pre-emptive declaratory judgment action immediately after receiving a claim for coverage

The Misdirected Allocation Brou-Ha-Ha: Carriers that put the entire burden of allocating among triggered policies on the policyholder instead of engaging other involved carriers in allocation discussions

The Other-Insurance Brou-Ha-Ha: Carriers that put the entire burden on the policyholder to determine which carrier will be primary under an “other insurance” clause

The Impossible Billing Guidelines: Billing requirements that are so onerous or unreasonable they make it difficult for policyholders to find counsel to defend under reimbursement-of-defense coverage

The Notice of Circumstances Shell Game:
Asserting that a notice of circumstances under a previous year’s policy was technically ineffective to trigger coverage after a claim is eventually made


Vol. 3, Iss. 15
November 5, 2014

New A.L.Idea:
“Principles of the Law of Liability Insurance” To Now Be A “Restatement”

I have been studying, as well as writing and speaking on, the American Law Institute’s “Principles of the Law of Liability Insurance” for a while now. The ALI is best known for publishing “Restatements” on various aspects of the law. For that reason, when I’ve addressed the subject, I’ve sometimes had to answer, at the get-go, the obvious question -- How are ALI “Principles” different from a “Restatement?” The ALI has now saved me from this chore. Just days ago the ALI announced that the “Principles of the Law of Liability Insurance” will now be called “Restatement of the Law of Liability Insurance.” This news came by way of e-mail from the ALI Director to the involved parties. But its impact will be akin to one that was delivered via stone tablets.

While the new name sounds similar, the change is far from cosmetic. In doctrinal terms, as a Principles project, its objective was to set forth what the law on liability insurance should be, i.e., it was aspirational. The objective of a Restatement, however, is much different. It is to lay out rules describing what the law is. In practical terms, the change from a Principles project to a Restatement means that it will carry more weight with courts. Many courts are quite comfortable citing to the ALI’s various Restatements when it comes to deciding cases. There is surely no reason why this won’t be the case with the Restatement of the Law of Liability Insurance. Not to say that the Principles did not have the ability to influence judicial decisions, but that possibility is now magnified by this left turn.

This difference in purpose – from describing what the law “should be” to what it “is” – naturally means that there needs to be a different analysis undertaken when drafting the Restatement provisions. To the extent that Principles provisions have already been drafted (some approved by the ALI membership and some in earlier stages), the ALI has taken care of this. In announcing the change, the ALI stated that “[t]he Reporters will closely examine the existing text to determine what portions will need to be changed.” In addition, ample time will be provided at the ALI Annual Meeting (May 2015) “to review all the text that has already been approved and to vote on it again in light of the change in the project’s title.”

Therein lies the most important issue concerning the Restatement (also known as the ALI project formerly known as the Principles of the Law of Liability Insurance) – to what extent its approved and drafted provisions will be amended, as well as new ones approached.

To be sure, the insurance industry has not had a love affair with the Principles project. In general, insurers and their counsel have criticized the project for adopting the minority position on several issues that are adverse to their interests. If that’s so, then insurers’ initial reaction to the name change may be one of disdain. After all, if you don’t like a Principles project, then you really must not like a project that is going to carry more weight with courts. But, in fact, insurers should welcome this change from a Principles project to a Restatement.

The ALI defines a Restatement as follows: “Restatements are addressed to courts and others applying existing law. They aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might plausibly be stated by a court. Restatement black-letter formulations assume the stance of describing the law as it is.”

The ALI’s description of a Restatement could not be clearer that its objective is to set forth what the law is. That being so, those involved in putting together the now-Restatement should have no choice but to go back and amend several provisions – both approved and in draft – and approach new ones from a different perspective. After all, if the purpose of a Restatement is to set forth what the law is, then minority positions surely have to be revisited.

For example, the ALI Principles adopted a provision that, generally speaking, if an insurer breaches the duty to defend, it loses the ability to disclaim coverage for indemnity, even if there is an otherwise applicable exclusion. While this is the law in some states, it is the minority. The Reporter’s Notes to the provision admit as much.

And several more examples like this abound. 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. Despite a 24-11 score, the ALI drafters have sought to adopt the minority rule that, under this circumstance, coverage is owed.

The score on pre-tender defense costs is this: 21 states preclude coverage without the insurer needing to prove prejudice and 6 states preclude coverage only if the insurer can prove prejudice. But despite this lopsided score favoring no prejudice required, the ALI Principles seem to be requiring an insurer to establish “substantial prejudice” to disclaim coverage for pre-tender defense costs.

When it comes to the often contentious issue of the hourly rate to be paid to independent counsel, when an insured is being defended under a reservation of rights, the Principles concluded that the insurer must pay counsel whatever it asks for – and litigate the reasonableness of that when the case is over. No court has ever said that.

Faced with the adoption of unwelcomed minority positions via a Principles project, insurers should embrace this change to a Restatement. As a Principles project, the ALI has been able to support the adoption of minority positions by saying, well, it’s a Principles project. As a Restatement, this cover should no longer be available. Even if the ALI abandons minority positions, insurers will still confront Restatement provisions that they object to. That’s to be expected. No side in a project like this can be satisfied with everything.

It seems possible that efforts will be made by some of those involved in the Restatement process to maintain the adoption of minority positions. I’ve never seen how a Restatement comes to life, but I suspect that some would say that there is more to it than just counting states. In addition, in some situations it will not be clear what the law is. Not to mention that the Restatement may seek to visit unfertile ground. So even if the ALI, now penning a Restatement, is forced to reverse course on some minority positions, there are still ample opportunities for debate, and fierce for sure, over the final text.

When the ALI’s Principles project first got going in 2010, it went largely unnoticed. And some who noticed it, like me, dismissed it as academic mumbo jumbo – something for law professors to talk about when they ran out of things to say about Blackstone. Over time the Principles project took on a raised profile – garnering a lot of attention, and efforts by insurer contingents to influence its outcome. This coverage lawyer went from rolling his eyes to calling the Principles project the most important topic in liability coverage today. Now, as a Restatement, the importance of the project cannot be overstated. The work being undertaken by the ALI is surely going to add to the universe of what some courts consider when deciding coverage disputes.

[Note: I mentioned in the last issue of Coverage Opinions that I planned to address in this issue some instances where I believe that the ALI Principles project achieved its objectives. This was to be a change from several prior articles that criticized the project for not achieving its stated mandate. I was all set to do this when news broke that the Principles had been changed to a Restatement. This significant development trumped the planned article. I’ll get back to that – in the context of the new ALI landscape.]


Vol. 3, Iss. 15
November 5, 2014

Happy Halloween: How The ALI Restatement Could Be Scary For Insurers

Coverage Opinions is always mindful of the calendar and I try to write articles that have a tie-in to close-by holidays. Last year’s Halloween article – “From Boo To Sue,” involving liability for being scared in a haunted house – was particularly successful. It was the subject of ABA Journal and Wall Street Journal stories. Here is this year’s Halloween effort – which, admittedly, is nowhere near as good as last year’s.

In prior issues of Coverage Opinions I have taken issue with the then-American Law Institute’s “Principles of the Law of Liability Insurance” for adopting or considering adoption of certain provisions that adopt minority positions. One of these is Chapter 3’s proposed adoption of the following definition of “accident:” “an action or event that causes a result that the insured does not subjectively expect or intend.”

My beef has been that, to define “accident” based on a “result that the insured does not subjectively expect or intend” is likely to lead to coverage for undeserving situations. It is to open the door to arguments by insureds that, despite how substantially certainty a result is to occur – say, serious injury from a fist to the face – such a serious injury was, in fact, not subjectively expected or intended (a less serious one was), so, therefore, it was an “accident.” Even if a court sees this as ludicrous, it may nonetheless be compelled, if following the ALI’s definition of “accident,” to rule in the face of incredulousness. After all, with policy language being the test for determining coverage, courts may be constrained to conclude that it trumps common sense. In other words, this definition of “accident” could create coverage based on self-serving statements of intent (or lack of subjective intent) that fly in the face of reality.

OK, here is the holiday angle – a Halloween-related case that demonstrates how a subjective definition of “accident” (or, related, expected or intended exclusion) can lead to coverage for undeserving insureds based on self-serving statements of intent.

Vermont Mutual Insurance Company v. Dalzell, 218 N.W.2d 52 (Mich. Ct. App. 1974) involved coverage under these circumstances. On October 31, 1965, a 17-year-old “threw a 30—40 pound pumpkin over the side of a highway overpass in Shiawassee County, Michigan. The pumpkin struck a vehicle being driven by defendant Dalzell and shattered the windshield. As a result, Dalzell suffered serious facial and eye injuries. The youth was later apprehended and pled guilty to aggravated assault.”

Dalzell filed suit against the youth’s parents. The court found that their son’s conduct was wilful and malicious and entered a judgment against the son in the amount of 75,000. A declaratory judgment action was filed to determine rights and obligations under the parents’ homeowners policy.

The trial court in the declaratory judgment action held that no coverage was owed based on the policy provision that excluded “bodily injury * * * caused intentionally by or at the direction of the Insured” or “caused intentionally by an Insured over the age of 12 years.”

The Michigan Court of Appeals reversed: “The trial court found that the youth’s act of throwing the pumpkin was intentional and there was abundant evidence presented to support this finding. In addition, however, the trial court found that the youth intended to injure the motorist, defendant Dalzell. This was error since there was no evidence presented to support the conclusion that the youth intended to injure Dalzell. Throughout the criminal and civil proceedings, the youth maintained that the pumpkin was thrown to strike in front of or alongside of defendant Dalzell’s vehicle in order to frighten him. This testimony stood uncontradicted. . . . Inasmuch as under the terms of the homeowners policy in question, the insurer is not insulated from liability for intentional injuries unless there was both an intentional act and an intent to injure, . . . and since there was no evidence presented indicating that the insured intended to injure defendant Dalzell, we hold that the plaintiff is liable up to the limits of the policy for the damage suffered by defendant Dalzell.”

Even if the youth truly did not intend to injure Dalzell, Dalzell’s injury must be considered to have been substantially certain to occur. However, a definition of “accident” that is tied to the insured’s subjective intent to injure – and, of course, the insured will always argue that he or she had none – would preclude a court from considering that an injury was surely substantially certain to occur.


Vol. 3, Iss. 15
November 5, 2014

Son Of “Sudden And Accidental:”
Those Three Famous Words Now Starring In Construction Defect Coverage

No discussion is required of the terms “sudden and accidental” and their role in several decades of pollution exclusion litigation. It is the giant tortoise of coverage litigation. The cases move slowly and the issue will live for a hundred years.

The only coverage issue as abundant as the pollution exclusion is that involving construction defect. In Assurance Company of America v. Ironshore Specialty Insurance Company, No. 13-2191 (D. Nevada Sept. 30, 2014) these behemoths of the coverage world come face to face.

The facts of the case are like so many in Nevada. Owners of residences sued developers and contractors alleging “damages stemming from, among other items, defectively built roofs, leaking windows, dirt coming through windows, drywall cracking, stucco cracking, stucco staining, water and insect intrusion through foundation slabs, and other poor workmanship.” One of the defendants, Centex Homes, filed a third-party complaint against allegedly responsible subcontractors, including Champion Masonry. Champion was insured by American Guarantee under a commercial general liability policy in effect from 2001 to 2002. Champion was also insured under a CGL policy issued by Ironshore Specialty Insurance Company from 2009 to 2010.

Ironshore maintained that “undisputed and incontrovertible proof exists that all work on the residences in the Garcia action, including work performed by Champion, was completed many years before the Ironshore Policy inception date of May 31, 2009.” Therefore, Ironshore, in response to a claim by American Guarantee -- which was defending Champion -- argued that its policy did not owe coverage based on the Continuous or Progressive Injury or Damage exclusion, which precluded coverage for property damage “which first existed, or is alleged to have first existed, prior to the inception of this policy. ‘Property damage’ from ‘your work’, or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such ‘property damage’ is sudden and accidental and takes place within the policy period.”

In essence, Ironshore maintained that, under the Continuous or Progressive Injury or Damage exclusion, since the work was performed prior to the policy inception, any property damage is deemed to have first existed prior to the policy inception. This may have been so. However, the court concluded that the Continuous or Progressive Injury or Damage exclusion did not apply, because the exception, for property damage that is sudden and accidental and takes place within the policy period, did apply.

The court noted that the underlying complaint alleged that “[w]ithin the last year, Plaintiffs have discovered that the subject property has and is experiencing additional defective conditions, in particular, there are damages stemming from, among other items, defectively built roofs, leaking windows, …” As a result, the court concluded that the underlying complaint was vague as to the temporal implications of the alleged damages, and therefore, “it is not clear on the face of the Garcia Complaint whether the alleged damages were or were not sudden and accidental. Accordingly, this exclusion alone did not preclude all possible or arguable coverage.”

It would be wrong to make too much of Assurance v. Ironshore because the decision is without much analysis and it was decided based on a duty to defend standard. On the other hand, it would be wrong to ignore it. Cases addressing the applicability of Continuous or Progressive Injury or Damage exclusions – or similar exclusions with different names – have become legion in the past few years. I don’t know how many involve an exclusion that contains a “sudden and accidental” exception. However, I do not believe that such exceptions are out of the ordinary. So Assurance v. Ironshore is not without potential relevance – both to other courts and policy drafters.

Damages at issue in construction defect claims generally have a gradual nature to them. In other words, some defective construction takes place and it causes damages to occur, which then plod along over time, until corrected. However, as Assurance v. Ironshore could be read, this on-going damage could qualify as being “sudden and accidental,” within a Continuous or Progressive Injury or Damage exclusion – as long as it is not specifically alleged that it is not sudden and accidental. In other words, damages that are surely gradual could qualify as being “sudden and accidental.” Where have I heard that before?


Vol. 3, Iss. 15
November 5, 2014

Must Read Voluntary Payments Case:
Could Severely Limit The Defense (And A Possible Cyber Angle)

It is not often that you see the words must read and voluntary payments in the same sentence. Not to say that voluntary payments is not an important issue; but the cases are generally on the dull side, not to mention usually being fact specific. For these reasons, voluntary payments cases usually do not make the cut for Coverage Opinions. But the Western District of Pennsylvania’s decision in First Commonwealth Bank v. St. Paul Mercury Insurance Co., No. 14-19 (W.D. Pa. Oct. 6, 2014) easily found a place in this issue.

First Commonwealth starts off with interesting facts. On August 31, 2012, one of First Commonwealth’s clients was “the victim of malware (i.e. malicious software) that allowed an unknown third party to access the [client’s computer] systems.” This enabled access to the Senior Vice President’s on-line banking user name and password for the client’s bank accounts with First Commonwealth. To make a long story short, an unknown third party initiated unauthorized wire transfers to banks in Russia and Belarus to the tune of $3,508,500. The fraudulent wire transfers were determined a few days later. A couple of days after that, First Commonwealth’s client made several demands to the bank to immediately refund/credit the substantial funds that had been withdrawn due to the Russian and Belarusian wires. The bank, using its own funds, did just that.

In short order, First Commonwealth notified St. Paul Mercury Insurance of the loss and sought recovery of the funds under a certain liability policy. St. Paul Mercury, however, refused to provide coverage on the basis that, by refunding the money to its client, without the insurer’s prior consent, the insurer was relieved of its obligations under the terms of its policy. Coverage litigation ensued.

St. Paul Mercury’s argument was that the bank’s voluntary reimbursement of the unauthorized wire transfers constituted a breach of the policy’s Defense and Settlement provision: “[t]he Insureds agree not to settle or offer to settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation, admit any liability, voluntarily make any payment or confess or otherwise agree to any Damages or judgments with respect to any Claim covered by this Policy without the Insurer’s written consent, which shall not be unreasonably withheld. The Insurer shall not be liable for any settlement, Defense Costs, assumed obligation, admitted liability, voluntary payment, or confessed or agreed Damages or judgment to which it has not consented.”

The court rejected St. Paul Mercury’s argument – holding that the bank’s payment was, in fact, not voluntary. The court based its decision on the existence of a Pennsylvania statute that required the bank, by law, to refund the fraudulent wires. Further, the court rejected the insurer’s argument that it was deprived of its right, under the policy, to defend the claim against the bank. “The fact that Defendant has the right to defend claims brought against Plaintiffs and that Plaintiffs may demand that Defendant provide that defense, however, is not dispositive of whether Plaintiffs’ payment to their client was voluntary.”

Lastly, in one fell swoop, the court rejected, as distinguishable, the voluntary payments cases cited by the insurer: “These cases merely stand for the proposition that voluntary payment provisions in liability policies are enforceable and that when an insured takes it upon itself to settle a claim without notifying the insurer, the insurer is no longer liable under the terms of the insurance policy. None of these cases, however, involve a bank’s legal and statutory obligation to refund a client when an unauthorized wire transfer has been made or any other situation where the insured’s act of paying a claim was compelled by law or other outside influences. As such, the cases cited by Defendant do not provide the basis for finding that the payment made by Plaintiffs in this case was voluntary.”

Procedurally, First Commonwealth Bank v. St. Paul Mercury involved a denial of a motion to dismiss. And it is an unpublished federal district court decision. Nonetheless, if followed by other courts, the decision could have significant consequences on insurers’ ability to assert a voluntary payments defense. Even if there is something special about the Pennsylvania banking statute that compelled the result here, the court’s decision spoke in more sweeping terms: any situation “where the insured’s act of paying a claim was compelled by law or other outside influences” would make it non-voluntary. It seems that it would not be difficult for policyholders to come up with reasons why their payments made, in various scenarios, prior to giving notice to their insurers, were compelled by law or some other outside influence.

Indeed, it didn’t take long for one policyholder firm to see this point. Connecticut’s Saxe Doernberger & Vita, P.C. made this argument in an October 24th Case Alert (SD&V does a great job with its e-mail Case Alerts I should add): “This holding is especially relevant for policyholders seeking coverage for payments made to notify potential claimants in a data breach or cyber-related incident. State and federal statutes requiring notice be given to affected individuals leave insureds no choice but to incur costs to inform the public when personal information has been compromised. Although policyholders should always strive to give prompt and complete notice to avoid this issue, First Commonwealth addresses an important issue facing insureds in fields that are increasingly affected by the need for immediate and costly response measures. Based on First Commonwealth, voluntary payment provisions may not be a valid basis for an insurer to deny coverage where an insured incurs notification costs prior to notifying its insurer of the payments.”


Vol. 3, Iss. 15
November 5, 2014

The Curious Coverage Provision: Real Estate Manager As An Insured

I’ve always found it curious that ISO’s standard form CGL policy includes, as an insured, any person (other than an employee or volunteer) or any organization while acting as the named insured’s real estate manager. There is nothing wrong with covering an insured’s real estate managers if insurers so desire. But does this provision need to be in a CGL policy’s standard form terms and conditions, except, say, one issued to condominium associations or commercial property owners? After all, I suspect that, looking at all insureds across the board, very, very (make that one more very) few insureds actually have a real estate manager. I’m sure there’s some historic reason for this. The fact that there is so little litigation over the “real estate manager as an insured” provision proves my point.

In any event, since the “real estate manager as an insured” provision doesn’t get out much, I thought I’d discuss Moon v. Cincinnati Insurance Co., No. 14-10264 (11th Cir. Oct. 24, 2014), where it was the sole issue in the case.

A two-year old child drowned in a swimming pool at a home occupied by Shawn and Tanya Moon. Terry Moon, Shawn’s father, owned the home. He had bought the home from Shawn and Tanya to avoid foreclosure and he was allowing them to live there to help them out.

At the time of the accident, Tanya Moon was babysitting the child. At issue was the availability of coverage, for the subsequent suit and $10 million judgment, under a Cincinnati Insurance Company policy issued to Terry Moon, the owner of the home. In addition to Terry Moon, the insurance policy extended coverage to “[a]ny person . . . while acting as [Terry Moon’s] real estate manager.”

The district court held that no coverage was owed to Shawn and Tanya Moon for the wrongful death action as they were neither the insured nor acting as real estate managers at the time of the accident. On appeal, the Moons argued that they were real estate managers.

So their argument went, since the term “real estate manager” is undefined in the policy, it is ambiguous and must be strictly construed in favor of coverage. The Moons asserted “that a ‘real estate manager’ is ‘one who simply takes care of an owners’ (sic) needs with regard to a piece of real estate.’ They argued that, because they took care of the home they leased from Shawn Moon’s father, Terry, they were real estate managers as well as lessees.”

The Eleventh Circuit rejected the argument, noting that, as the district court concluded, “the term real estate manager has an accepted meaning in the industry and is not ambiguous. The industry term ‘real estate manager’ implicates real estate transactions rather than routine maintenance.” The court also looked at the issue from a practical side: “Furthermore, to extend the definition of real estate manager to include a tenant who performs routine maintenance on the home he is leasing would render meaningless the policy’s lack of coverage for tenants of the property. Indeed, it would transform every tenant, family member or friend living in another’s home, who cuts the yard or paints a wall, into a covered real estate manager. This is not a reasonable interpretation of real estate manager.”


Vol. 3, Iss. 15
November 5, 2014

When The Duty To Defend Doesn’t End

The rules that determine when an insurer’s duty to defend attaches are well-known and need no mention here. Less clear is when the insurer’s duty to defend may un-attach. It is often stated that the duty to defend continues until all potentially covered claims have been dismissed. To take a simple CGL example -- a complaint contains two causes of action: one potentially covered (defamation) and one not covered (say, involving financial losses). The potentially covered defamation claim triggered a defense. Now suppose that the defamation claim is dismissed on summary judgment. As the only claim left in the underlying action is the one involving non-covered financial losses, the insurer can withdraw its defense. This is the rule in the great majority of states. [Whether an insurer can look to information uncovered in discovery, as a basis to conclude that a defense is no longer owed, is a different, and more complex, issue.]

But in a few states the insurer’s defense may continue on – and perhaps for a while -- even if the only potentially covered claims were dismissed. I have not done the research that it would take to put together a complete list of these states, but several were discussed in Well’s Dairy, Inc. v. Travelers Indemnity Co., 336 F. Supp. 2d 906 (N.D. Iowa 2004).

In Well’s Dairy, the Iowa federal court addressed whether an insurer was obligated to continue to defend an insured, in an underlying action, where summary judgment on a breach of contract claim was denied -- but granted on a negligence claim. So with only a non-covered breach of contract claim at issue in the case, the insurer maintained that it no longer owed a defense. The Iowa federal court cited a litany of cases from across the country that have adopted a rule that “an insurer can withdraw from a defense after all arguably covered claims have been extinguished.”

But here’s the rub. The court noted that such decisions “often do not address the question of when the dismissed claims become final so as to permit an insurer to withdraw its defense.” With no Iowa decisions on point, the court adopted the rule from the Minnesota and Hawaii Supreme Courts: “An insurer is not relieved of its duty to defend as a result of the granting of a partial summary judgment until no further rights to appeal arguably covered claims exist.” [The Minnesota and Hawaii Supreme Court decisions relied upon were Meadowbrook, Inc. v. Tower Ins. Co., Inc., 559 N.W.2d 411 (Minn. 1997) and Commerce & Indus. Ins. Co. v. Bank of Hawaii, 832 P.2d 733 (Hawaii 1992).]

The Well’s Dairy court also concluded that such rule applied in Oregon and New York. The court cited Klamath Pac. Corp. v. Reliance Ins. Co., 950 P.2d 909 (Ore. Ap. Ct. 1997) for the proposition that, although the trial court dismissed the one covered claim, the insurer was still obligated to provide a defense because an “intermediate order from a trial court dismissing a claim is not a final resolution of that claim.” The Well’s Dairy court also cited Harrington Haley L.L.P. v. Nutmeg Ins. Co., 39 F. Supp. 2d 403 (S.D.N.Y. 1999) and described its holding as follows: “[U]nder New York law [] insurer’s duty to defend continued to exist even though covered claims had been dismissed where it was possible that the appellate court would reverse.”

Given that almost all cases settle, a rule that the duty to defend continues on, until no further rights to appeal potentially covered claims exist, is, in essence, a rule that the duty to defend goes to the end of the case, despite what happens along the way. Perhaps counsel in these five states will dispute that such a seemingly unending duty to defend is in fact the law. In any event, I have not examined the issue beyond how it was addressed by the Iowa federal court in Well’s Dairy. Well’s Dairy is not a new decision. And Coverage Opinions tends to focus on recent decisions. But this is an interesting issue and one that doesn’t get much discussion. So I thought I’d toss it out there for consideration.


Vol. 3, Iss. 15
November 5, 2014

“Arising Out Of:” The Policy Language That Cuts Both Ways

It is hardly a revelation to state that the phrase “arising out of,” as used in an insurance policy, is interpreted broadly. Whether this is a good thing depends on the issue and which side of it you are on. This was demonstrated clearly by two recent decisions interpreting this workhorse three word phrase.

In Bond Safeguard Insurance Co. v. National Union, No. 13-561 (M.D. Fla. Oct. 20, 2014), the Florida federal court addressed a breach of contract exclusion, stating that the insurer “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured ... alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement.”

The court noted that “arising out of” has been defined to preclude coverage for claims originating from, having its origin in, growing out of, flowing from, incident to or having connection with, a specified excluding circumstance.

From there the court held that “[c]onsistent with Florida case law, this Court finds that the phrase ‘arising out of’ as used in [the breach of contract exclusion] is unambiguously broad and precludes coverage for purported tort claims that depend on ‘the existence of actual or alleged contractual liability’ of an insured ‘under any express contract or agreement.’”

While an insurer benefits from the broadly interpreted “arising out of,” when the phrase appears in an exclusion, the free lunch gets paid for when “arising out of” appears in an insuring agreement. In Shamoun & Norman, LLP v. Ironshore Indemnity, Inc., No. 14-1340 (N.D. Tex. Oct. 28, 2014), the court held that a professional liability insurer was obligated to provide a defense to a law firm for a fee dispute, rejecting the insurer’s argument that this was not the rendering or failure to render professional legal services.

The court noted that a legitimate argument existed that non-specialized tasks, such as billing and fee setting, do not fall under the definition of professional legal services. But, in the case before it, a different outcome was possible, on account of the language of the insuring agreement: “arising out of the rendering of or failure to render Professional Legal Services.” As the court put it: “While billing and fee setting may not be acts constituting ‘professional services,’ this does not answer whether they are acts ‘arising out of professional services.’”

The court held that, given the breadth of the phrase “arising out of,” a defense was owed: “[U]nder Texas law, the phrase ‘arising out of’ means that there is simply a causal connection or relation, which is interpreted to mean that there is but for causation, though not necessarily direct or proximate causation.” Therefore, despite being a fee dispute, if the claim had a ‘causal connection or relation’ to the provision of professional legal services, a defense was owed.

Vol. 3, Iss. 15
November 5, 2014

South Carolina [First Impression]: Prejudice Required For Pretender Defense Costs

In a case of first impression, a South Carolina District Court, following a detailed analysis, concluded that the South Carolina Supreme Court would hold that, “absent a showing by the insurer of substantial prejudice caused by the insured’s late notice, an insurer who breached its duty to defend will be liable for reasonable costs of defense incurred both before and after notice.” Episcopal Church in South Carolina v. Church Insurance Company of Vermont, No. 13-2475 (D.S.C. Sept. 22, 2014) (“[A]n insurer’s duty to defend is triggered when the underlying claim is brought and thus pre-exists any obligation on the part of the insured as to notice or compliance with the voluntary payment provision of an insurance contract.”) (internal quotations omitted).

Texas Supreme Court Puts The Kibosh On Discovery Of Other Claim Files

Last week the Texas Supreme Court directed a trial court to vacate a discovery order, thereby precluding a claimant, in a property claim, from obtaining discovery of its insurer’s other claim files, in an effort to establish that the insurer had undervalued her own claim. While the claim at issue was for first party property, the decision reads as one just as relevant to a third-party liability claim. The court discussed why the discovery request was impermissible and perhaps also shed some light on how the discovery of other claim files could be had. See In re National Lloyds Insurance Company, No. 13-0761 (Tex. Oct. 31, 2014).