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Coverage Opinions
Effective Date: December 3, 2014
Vol. 3, Iss. 16

Declarations: The Coverage Opinions Interview With Former Senate Majority Leader George Mitchell
George Mitchell’s Secret; Senator And Backseat Driver; Saying No To The U.S. Supreme Court; The Partisan Divide; The State Of The Union; The Secret Of George Mitchell’s Success; The Bespoke Joke
George Mitchell, former Majority Leader of the United States Senate and Statesman, has achieved unparalleled accomplishments. Of course that’s a measure of success. But there is another one – the tremendous respect that he earned along the way. I had the privilege of speaking with this legendary politician and peacemaker. And you won’t believe the secret that he shared with me.

Randy Spencer’s Open Mic
Tom And Jerry Go To Court

Love It And List It:
“14th Annual Ten Most Significant Coverage Decisions Of The Year”

2014: The Year In Review

The Selection Process: Ten Most Significant Coverage Decisions Of 2014

Ewing Construction Company v. Amerisure Insurance Company
(Texas Supreme Court)

What Could Have Been For The Contractual Liability Exclusion

Travelers Indemnity Co. v. AAA Waterproofing
(District of Colorado)

How To Achieve “Additional Insured” Cost Sharing For Construction Defects

Hartford Casualty Insurance Company v. Swift Distribution, Inc.
(California Supreme Court)

Scaling Back Implied Trade Disparagement And Slashing Coverage For Markdowns
Guest Author: Joshua A. Mooney

IMG Worldwide, Inc. v. Westchester Fire Insurance Company
(6th Circuit Court of Appeals)

Excess Insurers’ Chins Should Drop Down

Tidyman's Management Services Inc. v. Davis
(Montana Supreme Court)

Supreme Court Awards The Entire Kitchen For Insurer’s Breach Of The Duty To Defend

Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co.
(Missouri Court of Appeals)

The Loudest Case Yet To Conclude That A Reservation Of Rights Letter Was Ineffective For Lack Of An Adequate Explanation

Quihuis v. State Farm Mutual Auto Ins. Co.
(Arizona Supreme Court)

Insurer Can Litigate Facts Determinative Of Both Liability And Coverage
Following A Consent Judgment

National Union Fire Ins. Co. v. Coinstar, Inc.
(District of Washington)

Solving The Dispute Over The Rate To Pay Independent Counsel

Henriquez-Disla v. Allstate Property & Casualty Company
(District of Pennsylvania)

Opinion-aided: Courts Granting Policyholders Access To Outside Coverage Counsel’s Opinion Letters

Minnesota Life Insurance Company v. Columbia Casualty Company
(Mississippi Supreme Court)

The Extended Reporting Period: A Lesson Before Denying


Vol. 3, Iss. 16
December 3, 2014


Tom And Jerry Go To Court

It is the mother of all proverbial accidents – slipping on a banana peel. Of course it is de rigueur for cartoons. But does this mishap actually happen in real life? University of Memphis Law School Professor Andrew McClurg recently took up this question on his superb legal humor website – lawhaha.com. Professor McClurg’s answer -- it does. In fact, the issue has long-been studied by first year law students in what the Professor calls the “famous trilogy” of banana peel cases. And numerous other examples abound. But to make the point, like, really make the point, Professor McClurg posted a Tennessee death certificate, from 1927, stating: “patient fell on banana peeling and fell shortly before death.”

So if slipping on a banana peel can be the real deal, I wondered if other common cartoon accidents also take place? I checked. Yes, they do. Consider these other mishaps that made their way from Tom and Jerry to the courthouse:

Dow Drug Co. v. Nieman, 13 N.E.2d 130 (Ohio. Ct. App. 1936) (plaintiff purchased a cigar at a drug store, took it home, proceeded to smoke it and it exploded)

Allstate Ins. Co. v. Furman, 445 N.Y.S.2d 236 (N.Y. App. Div. 1981) (involving coverage for injuries sustained by a child when an anvil fell on his hand)

Perotti v. Seiter, 869 F.2d 1492 (6th Cir. 1992) (plaintiff slipped and fell on a bar of soap while showering and injured his back)

Crovetto v. New Orleans City Park Imp. Ass’n, 653 So. 2d 752 (La. Ct. App. 1995) (plaintiff struck in the head by a golf club that flew from the hands of another golfer who was receiving a golf lesson)

Cerrato v. Carapella, 804 N.Y.S.2d 402 (N.Y. App. Div. 2005) (child injured at a bowling alley when a bowling ball fell from a rack to the floor, and then bounced up and hit him in the face) (Come on, how can that happen?)

Dunn v. Bilger, 1995 WL 230961 (Conn. Super. Ct. Apr. 11, 1995) (defendant attempted to put his bowling ball into a locker, it slipped from his hand and landed on the head of a person putting his own ball into a lower locker).

Jimenez v. Omni Royal Orleans Hotel, 2007 WL 808662 (E.D. La. Mar. 14, 2007) (plaintiff fell into an open manhole while walking down the street)

Faulhaber v. Roberts Dairy Co., 24 N.W.2d 571 (Neb. 1946) (workers compensation claim involving an employee who hit his thumb with a hammer)

Wringer v. U.S., 790 F. Supp. 210 (D. Ariz. 1992) (plaintiff fell through thin ice on a lake)

Parra v. Rieth-Riley Const. Co., 2001 WL 310414 (Tenn. Workers Comp. Panel 2001) (workers compensation claim involving an employee that struck his foot while operating a jack hammer)

Kearns v. Smith, 131 P.2d 36 (Cal. Ct. App. 1942) (landlord not liable for injuries suffered by a tenant who inserted a finger into an electrical socket)

Meehan v. McCloy, 40 N.Y.S.2d 207 (N.Y. App. Div. 1943) (plaintiff injured when a Murphy bed in a room she rented collapsed and struck her)

Johnson v. Outdoor Installations, LLC, 979 N.Y.S.2d 523 (N.Y. App. Div. 2014) (police officer ran into a pole during the lawful pursuit of a fleeing suspect)

Reed v. Western Union Telegraph Co., 141 P.161 (Or. 1914) (a pail of paint fell from the top of a telegraph pole and struck the plaintiff)

Shaggy, as Guardian for Scooby v. The Cairo Museum, 26 P.3d 434 (Cal. Ct. App. 1975) (dog injured when all four of its legs landed in buckets while being chased by a mummy)

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


Vol. 3, Iss. 16
December 3, 2014

The Selection Process: Ten Most Significant Coverage Decisions Of 2014

Welcome to the 14th annual look back at the year’s ten most significant insurance coverage decisions. As I always do at the outset, here is my description of the selection process (repeated from past years’ editions). The process is highly subjective, not in the least bit scientific, and is in no way democratic. But just because the selection process has no accountability or checks and balances whatsoever does not mean that it wants for deliberativeness. To the contrary, the process is very deliberate and involves a lot of analysis, balancing and hand-wringing. It’s just that only one person is doing any of this.

The selection process operates throughout the year to identify coverage decisions (usually, but not always, from state high courts) that (i) involve a frequently occurring claim scenario that has not been the subject of many, or clear-cut, decisions; (ii) alter a previously held view on an issue; (iii) are part of a new trend; (iv) involve a burgeoning or novel issue; or (v) provide a novel policy interpretation. Some of these criteria overlap. Admittedly, there is also an element of “I know one when I see one” in the process.

In general, the most important consideration for selecting a case as one of the year’s ten most significant is its potential ability to influence other courts nationally. Many courts in coverage cases have no qualms about seeking guidance from case law outside their borders. In fact, it is routine--especially so when in-state guidance is lacking. The selection criteria operates to identify the ten cases most likely to be looked at by courts on a national scale and influence their decisions.

That being said, the most common reasons why many unquestionably important decisions are not selected are because other states do not need guidance on the particular issue, or the decision is tied to something unique about the particular state. Therefore, a decision that may be hugely important for its own state – indeed, it may even be the most important decision of the year for that state – nonetheless will be passed over as one of the year’s ten most significant if it has little chance of being called upon by other states at a later time.

For example, this year the Nevada Supreme Court issued its first-ever decision addressing whether the pollution exclusion should be interpreted narrowly (limited to traditional environmental pollution) or broadly (applying to all hazardous substances). See Century Sur. Co. v. Casino West, Inc. Resolution of this issue was a long-time coming for Nevada. But courts nationally are hardly in need of guidance on whether to interpret the pollution exclusion narrowly or broadly. Thus, despite the decision’s significance for the Silver State, it was not considered for inclusion on the annual Top 10 Best in Show.

The year’s ten most significant insurance coverage decisions are listed in the order that they were decided.



Vol. 3, Iss. 16
December 3, 2014

Ewing Construction Company v. Amerisure Insurance Company,
420 S.W.3d 30 (Tex. 2014)

What Could Have Been For The Contractual Liability Exclusion

Ewing Construction Company v. Amerisure is a funny case. Not funny ha ha. Funny strange.

The Texas Supreme Court’s decision was a very easy choice as one of the year’s ten most significant. And an argument could be made that it was the most significant. Yet, despite that, one way to characterize the decision is that it essentially didn’t do anything.

At issue were certified questions from the Fifth Circuit concerning, under what circumstances, the contractual liability exclusion, contained in a commercial general liability policy, serves to preclude coverage for a contractor for claims for property damage allegedly caused by its construction defects. More specifically, does the contractual liability exclusion apply broadly – to liability assumed by an insured arising from its express and implied promises to complete a contract in a good and workmanlike manner? In other words, the typical promises that contractors make in construction contracts. Or, does the contractual liability exclusion apply narrowly -- as most courts nationally that have addressed the issue have concluded – being solely to an insured’s assumption of liability of another, such as, one example, a hold harmless or indemnity agreement? The issue could be described in more technical terms, but that’ll suffice for the purposes here.

If the Ewing court adopted the broader interpretation – applying the contractual liability exclusion to preclude coverage for a pedestrian construction defect claim – there was a real possibility that other courts may have followed suit. Consider that many courts have not addressed the issue and the Texas Supreme Court is an important, and influential, one when it comes to insurance coverage (most important, I have argued). At a minimum, if the Ewing court adopted the contractual liability exclusion broadly, more insurers no doubt would have looked at the exclusion and considered raising it – something that few do.

And it was not without risk for policyholders that the Texas Supreme Court could have interpreted the contractual liability exclusion to preclude coverage for the most typical of construction defect claims. After all, the District Court, and then the Fifth Circuit in the case, had done just that. Ewing successfully petitioned the Fifth Circuit for re-hearing. The court withdrew its opinion and certified the issue to the Texas Supreme Court.

That Ewing presented a serious concern for policyholders is evidenced by the number of amicus briefs filed in the Texas Supreme Court on behalf of Ewing – three, representing a staggering twenty contractor and other policyholder parties. As evidence that insurers were not convinced by Amerisure’s position, it had no amicus support. That’s unusual for a Texas Supreme Court case involving liability coverage.

Following this long and winding road the Texas Supreme Court interpreted the contractual liability exclusion narrowly – limiting it to an insured’s assumption of liability – being one that exceeds the liability the insured would have under general law. In other words, after all this, Ewing interpreted the contractual liability exclusion as most insurers already saw it – not applicable to an insured’s breach of its promise to complete a contract in a good and workmanlike manner. But it cannot be overstated that, if the Ewing court had adopted the contractual liability exclusion, to preclude coverage for an insured’s breach of such promise, more insurers would have looked at the exclusion and considered raising it, even if they hadn’t in the past. Ewing could have put in play the contractual liability exclusion much more so than it had ever been in the context of construction defect claims. So while it could be said that Ewing essentially didn’t do anything, not doing anything was in fact doing something, and very significant at that – preventing a change on the construction defect landscape.

While I’ve described Ewing here in general terms, here is a brief summary of the case itself – borrowing heavily directly from the court’s opinion for convenience sake. [People familiar with the case know that the decision and its rationale is more complex than this. But the nuts and bolts, to make the case for Ewing’s significance, are as follows.]

“Ewing Construction Company, Inc. entered into a standard American Institute of Architects contract with Tuluso–Midway Independent School District (TMISD) to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. Shortly after construction of the tennis courts was completed, TMISD complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. TMISD filed suit in Texas state court against Ewing and others. Its damage claims against Ewing were based on faulty construction of the courts and its theories of liability were breach of contract and negligence.”

Ewing sought coverage from Amerisure under a commercial general liability policy. Amerisure denied coverage and Ewing instituted litigation. Amerisure did not dispute that the alleged defects in the tennis courts occurred during the policy period and constituted “property damage” caused by an “occurrence.”

At issue before the Texas Supreme Court was the potential applicability of the contractual liability exclusion, which precludes coverage for damages based on an insured’s contractual assumption of liability except (1) where the insured’s liability for damages would exist absent the contract, and (2) where the contract is an insured contract.

Amerisure argued “that the exclusion applies because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet that standard.” Ewing countered that its “agreement to construct the courts in a good and workmanlike manner does not enlarge its obligations beyond any general common—law duty it might have. That is, Ewing posits, its agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it has under general law to comply with the contract’s terms and to exercise ordinary care in doing so. That being so, Ewing argues, its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an ‘assumption of liability’ within the meaning of the policy’s contractual liability exclusion.”

The court ruled in favor of Ewing: “[W]e conclude that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” To put it another way, the court held that “‘assumption of liability’ means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.”

Epilogue: Just when you thought that the Ewing issue was laid to rest, it had a brief resuscitation – six months later the Fifth Circuit applied the contractual liability exclusion to a construction defect claim in Crownover v. Mid-Continent Casualty Company, 757 F.3d 200 (5th Cir. 2014) (Crownover I). It resembled a scene right out of a horror movie, where the killer dies, and as the camera is panning over his lifeless body, he quickly jerks up, causing screams in the theater. But, just as in the movie, where the Freddy Kruger-like character then falls back down, this time really dead, the Fifth Circuit kept Crownover from bringing Ewing back to life. The court granted rehearing, withdrew Crownover I, and in late October issued Crownover II, holding “that for a contractual-liability exclusion to apply, the insurer must prove that a contractually-assumed duty effected an expansion of liability beyond that supplied by general law.”



Vol. 3, Iss. 16
December 3, 2014

Travelers Indemnity Co. v. AAA Waterproofing, 2014 WL 201726 (D. Colo. Jan. 17, 2014)

How To Achieve “Additional Insured” Cost Sharing For Construction Defects

Anyone reading this knows that construction defect claims often involve a lot of parties. I was once involved in a California CD case, with so many parties, that when it came time for a mediation in Los Angeles it was necessary to rent the Kodak Theatre to accommodate all of the defense lawyers, coverage lawyers, claims professionals, party representatives and experts. And it’s not surprising that there were so many players. After all the case was about a defective door knob. [That was a joke. But because it is also so believable I thought it best to say so.]

The coverage issues surrounding construction defect can be, in and of themselves, complex and lacking consensus. But there is sometimes another layer of complexity that gets placed on top of an already vexing situation – how to resolve coverage owed to a general contractor when numerous of its subcontractors were obligated to afford it additional insured status. Then consider that some of the subcontractors did not acquire the promised insurance for the GC. And of those who did, they may not have obtained coverage for an equal period of time. This may all be workable when there are only one or two subcontractors sitting at the table next to the general contractor. But what about when there are many more than that – dozens even.

This Gordian Knot was addressed in detail by a Colorado federal court in Travelers Indemnity Co. v. AAA Waterproofing, Inc. While AAA Waterproofing is an unpublished federal court decision, it is worthy of being one of the year’s ten most significant for a few reasons: its thoroughness; the frequency of the issue; and dearth of authority addressing it. Even states that have generally well-developed law on allocation are unlikely to find that it offers answers for a scenario this complex. For these reasons, AAA Waterproofing is a decision that other courts, confronting this unwieldy situation, may choose to follow.

The court in AAA Waterproofing did a good job of taking an obviously complex case and distilling it into simple terms. I’ll try to do the same. A homeowners association filed an action against D.R. Horton, the general contractor for the construction of a residential community, for alleged construction defects. DRH’s contracts with its various subcontractors required each of them to carry a commercial general liability policy naming DRH as an additional insured. Numerous third-party defendants were subcontractors that performed work or their insurers. Travelers insured some of D.R. Horton’s subcontractors.

The construction defect litigation was ultimately settled for $39.5 million. In the course of litigation, DRH incurred approximately $1.2 million in fees and costs. DRH attempted to negotiate with Travelers and other subcontractors’ insurers regarding the extent of their obligations for payment of DRH’s defense. DRH sought to recover the $200,000 deductible that it paid and the amount that DRH’s insurer paid in defense (DRH’s insurer assigned this claim to DRH).

DRH and Travelers settled their claims against each other. The court determined that Travelers’ obligation to defend DRH was joint and several. Thus, at issue was the extent that Travelers was entitled to recover from other subcontractors, and their insurers, for having paid more than its equitable share of DRH’s defense fees and costs in the construction defect litigation.

How to allocate DRH’s defense costs and fees incurred in the construction defect litigation was no small task when you consider that there were 54 subcontractors implicated by DRH in the underlying CD litigation (or their respective insurers), with only 23 subcontractors represented as parties or by their insurers in the allocation case.

The court looked at various approaches to allocation. First, while its discussion was brief, the court rejected allocating by respective liability for the underlying construction defects. The court considered this to be neither a workable nor reliable way to determine each subcontractor’s respective liability given the settlement in the underlying case.

The court also easily rejected a policy limits-based allocation method in this case. “[S]uch a system is not workable in this case, because numerous parties failed to obtain the requisite insurance policies, making them de facto self-insurers without policy limits upon which to base their allocation. The process of determining the allocation for such de facto insurers would require the Court either to adopt an arbitrary policy limit for them, or to hybridize its approach and assign a policy limit based on a time-on-the-risk determination of the scope of its de facto policy.”

Having rejected these approaches the court settled upon an “equal shares” method, concluding that it will result in the most equitable allocation under the circumstances. “While equal shares allocation has been applied in a minority of jurisdictions, the circumstances of this case—in which each subcontractor/insurer had a joint and several duty to provide a complete defense to DRH, and no reliable method exists to tie allocation to liability or policy limits—militates in favor of a holding that those subcontractors/insurers’ responsibility for equitable contribution to DRH’s defense costs should be apportioned evenly.”

Even though the court decided upon “equal shares,” there were still more issues to be addressed. For example, how should shares be assigned? One share per subcontractor or one share per policy? After looking at the competing arguments the court concluded that the most equitable allocation method was to divide the contribution amounts into equal shares per subcontractor. The court found persuasive Travelers’ argument that, “because each subcontractor (or its respective insurer) owed DRH a complete duty to defend only once, a subcontractor that held multiple policies should not be allocated multiple shares.”

And still another question sprung from the equal shares determination -- which subcontractors should be included in the allocation? The court rejected the subcontractors’ argument that allocation should be applied to all 54 subcontractors implicated by DRH in the construction defect litigation. Instead the court adopted Travelers’s approach that allocation should apply only to the subcontractors who were represented in the case, either directly or through their insurers.

While the court in AAA Waterproofing explained that its decision, to adopt equal shares, was justified by the circumstances of the case, those circumstances are not so unique when it comes to multi-party construction defect litigation -- each subcontractor/insurer has a joint and several duty to provide a complete defense to the general contractor, no reliable method exists to tie allocation to liability or policy limits, some subcontractors did not obtain insurance, some obtained more than others and not all subcontractors are before the court.


Vol. 3, Iss. 16
December 3, 2014

Hartford Casualty Insurance Company v. Swift Distribution, Inc., 326 P.3d 253 (Cal. 2014)

Scaling Back Implied Trade Disparagement And Slashing Coverage For Markdowns

By Joshua A. Mooney

[Editor’s Note: My colleague Josh Mooney is an expert on all things cyber, privacy and personal-advertising injury coverage. If you read his newsletter, The Coverage Inkwell, you know that. If you don’t, check out the newsletter here - thecoverageinkwell.com. For this reason I asked Josh to tackle the write-up of Swift Distribution. rjm]

Hartford Casualty Insurance Company v. Swift Distribution is worthy of designation as one of the year’s ten most significant coverage decisions for two reasons: (1) it scales back implied disparagement claims for purposes of the duty to defend under Coverage B “personal and advertising injury,” and (2) it ends the brief period in California law where a retailer’s markdown of a product’s prices could imply disparagement of the product and trigger an insurer’s duty to defend.

The importance of this second point is hugely significant. Discounting by retailers, and often-times deeply so, is how a lot of retail works these days. If every time a retailer decided to mark down a manufacturer’s product it was disparaging the product, the resulting coverage obligations for litigation between retailers and manufacturers would resemble a 4 A.M. stampede at Walmart on the day after Thanksgiving. By recognizing that price cutting and retail markdowns are not instances of trade disparagement, but, rather, routine commercial behavior, the California Supreme Court shut the door on what could have looked liked a coverage door buster.

Swift Distribution involved an underlying, quintessential and modern “passing off” case. The plaintiff Gary-Michael Dahl manufactured and sold the “Multi–Cart,” a cart that could be manipulated into various configurations to move music, sound, and video equipment quickly and easily. The product apparently was a popular one, and the insured, Swift Distribution d/b/a Ultimate Support Systems began selling an alleged knock-off cart it called – wait for it – the “Ulti-Cart.” Not surprisingly, Dahl sued Swift Distribution, asserting patent and trademark infringement, unfair competition, dilution of a famous mark, and false advertising. In his complaint, Dahl asserted that Swift Distribution’s false and misleading advertisements and use of a “nearly identical mark” were likely to cause consumer confusion or mistake, or to deceive the public “as to the affiliation, connection, or association” of the two parties. The complaint attached Swift Distribution’s advertisements. Importantly, the advertisements did not name the Multi-Cart or any other product.

Swift Distribution tendered its defense under Coverage B of its general liability policy, which defined “personal and advertising injury” in part as injury arising out of “[o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” Swift Distribution asserted that the underlying action stated a claim for disparagement, thereby implicating coverage. The insurer disagreed and denied coverage, stating there was no disparagement absent a specific statement about a competitor’s goods.

Coverage litigation ensued. The trial court held that the insurer had no duty to defend. The California Court of Appeal affirmed. In doing so, the appellate court condemned (okay, that’s my word) an earlier decision rendered by a separate panel that summer, in the case Travelers Property & Casualty Company v. Charlotte Russe Holding, Inc. In Charlotte Russe, the court had held that a lawsuit over the price markdown of name brand clothing apparel alleged trade libel for purposes of implicating the duty to defend. Swift Distribution appealed the case to the Supreme Court of California, which affirmed and took the opportunity to clarify the meaning of commercial disparagement and abrogate the controversial Charlotte Russe decision.

Noting that disparagement emerged from the common law tort for slander of title, the Supreme Court of California explained that the tort had expanded to include statements disparaging the quality of property rather than simply its ownership, a form of disparagement commonly referred to as trade libel, and also came to encompass a broader theory of economic or commercial injury caused by a false, derogatory statement. This expansion, in turn, had created confusion among courts: “Confusion surrounds the tort of ‘commercial disparagement’ because not only is its content blurred and uncertain, so also is its very name. The tort has received various labels, such as ‘commercial disparagement,’ ‘injurious falsehood,’ ‘product disparagement,’ ‘trade libel,’ ‘disparagement of property,’ and ‘slander of goods.’ These shifting names have led counsel and the courts into confusion, thinking that they were dealing with different bodies of law. In fact, all these labels denominate the same basic legal claim.”

Disparagement, the Court concluded, is often included as “a specific example of the more general principle of injurious falsehood.” For purposes of insurance coverage, disparagement has come “to mean a knowingly false or misleading publication that derogates another’s property or business and results in special damages.”

Working within the confines of that understanding, the Court then concluded that, when determining whether a disparagement claim has been alleged for purposes of the duty to defend, courts must require that the purported disparaging comments “have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business.” The Court explained: “A false or misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business. Each requirement must be satisfied by express mention or by clear implication.”

According to the Court, “[w]hat distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages.” (Emphasis in original). The specificity requirements limit the type of statements that may constitute disparagement, especially since advertisements and promotional materials often avoid express mention of competitors.” Examining the case before it, the court determined that the underlying allegations failed to assert product disparagement to implicate a duty to defend. “There is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own.” “[A] party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement.”

In fact, underlying allegations pertaining to the likeness of the products belied any assertion that the lawsuit alleged product disparagement, a defense California courts previously had rejected: “Dahl repeatedly asserted that the two products were “nearly identical, folding transport carts.” Indeed, Dahl’s claims relied heavily on the fact that the mark and design of the two products were nearly indistinguishable. A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement. Because the alleged likeness of the two products did not derogate the Multi–Cart, we reject Swift Distribution’s theory of disparagement based on consumer confusion over the product name and design.”

Allegations that Swift Distribution claimed its Ulti-Cart was superior, without specific reference to Dahl’s Multi-Cart, simply were insufficient to constitute disparagement: “Were we to adopt Swift Distribution’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation. Proliferation of such litigation would interfere with the free flow of commercial information.”

Finally, and critically, the California Supreme Court put a stop to the logic expressed in Charlotte Russe. In doing so, the Court was careful to preserve the doctrine of implied disparagement in instances, for example, where an insured falsely alleges that its product is the only such product available, or that its product is superior to all other products. Make no mistake, in those instances, the Swift Distribution Court believed that alleged derogatory statements possess requisite specificity and reference to a plaintiff’s product to implicate a duty to defend. However, the court concluded that the claim of disparagement recognized in Charlotte Russe lacked requisite specificity: “There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product. But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality. . . . . Charlotte Russe’s prices did not carry an implication clear enough to derogate People Liberation’s product for purposes of a disparagement claim. We disapprove Charlotte Russe to the extent it is inconsistent with this opinion.” [Emphasis added.]

In other words, the Supreme Court of California, thankfully, recognized that price cutting and retail markdowns are not instances of trade disparagement. They are examples of routine commercial behavior. With Black Friday last week, Cyber Monday this week and a whole holiday season of deals upon us, Swift Distribution is a decision worthy of any insurer’s basket. Happy Shopping.


Vol. 3, Iss. 16
December 3, 2014

IMG Worldwide, Inc. v. Westchester Fire Insurance Company, 572 Fed. Appx. 402
(6th Cir. 2014)

Excess Insurers’ Chins Should Drop Down

A case involving an excess insurer’s obligation to drop down wouldn’t seem to be the stuff of one of the year’s ten most significant. In general, drop down provisions in excess or umbrella policies are often-times unique and the decisions dictated by such language. So no matter how seemingly important a drop down decision, that it was tied to possibly unique policy language would likely diminish its ability to influence cases to come. It is for this reason that drop down decisions rarely even make it into a regular issue of Coverage Opinions -- let alone the annual insurance coverage Best Of.

But the Sixth Circuit’s decision in IMG Worldwide, Inc. v. Westchester Fire Insurance Company is an exception. Its holding is significant, it involves a recurring claim scenario and the drop down language at issue, far from being unique, is what’s contained in ISO’s standard Commercial Liability Umbrella form (CU 00 01 12 07). This combination landed the decision here. Given that IMG Worldwide involves policy language contained in a standard ISO coverage form, it is also an ISO-take-note decision. [Curiously, a Law360 article about the decision stated that, “according to attorneys,” the opinion dealt with unusual policy language. I can’t see how that can be when the relevant language appears in ISO’s CU 00 01 12 07.]

IMG Worldwide has a lot going on. There is more to the case than just the drop down issue. But to keep things as simple as possible I will endeavor to focus solely on the drop down aspect.

The case had its start with a real estate deal that went bad. A suit was filed in Florida state court against IMG and real estate developers seeking over $300 million in damages stemming from the failure of a real estate development project in Orlando. The plaintiffs were 270 persons who had invested in the project and alleged that the developer had sold them undeveloped properties with the promise that they would be upgraded and developed into high-end condominiums. IMG’s involvement with the project was as a consultant and not a developer.

IMG sought coverage for the suit from its primary insurer, Great Divide Insurance Company, and its excess insurer, Westchester Fire Insurance Company. The primary policy provided a $1 million occurrence limit and the excess policy contained a $25 million limit above that. IMG sought coverage from Great Divide and Westchester. Both insurers denied a defense. IMG ultimately settled the suit for nearly $5 million (Galstaldi settlement) and incurred over $8 million in defense costs.

IMG and Great Divide reached a settlement of their dispute. Great Divide paid $1 million, exhausting its occurrence limit, and $250,000 toward defense costs. Westchester refused to settle and suit was filed by IMG. The case proceeded to a jury trial. “[T]he jury returned a special verdict form, finding: (1) IMG had proven by a preponderance of the evidence that Westchester breached its contract with IMG by not paying on the Policy; (2) IMG proved by a preponderance of the evidence that there was an ‘occurrence;’ (3) there was ‘property damage;’ and, (4) Westchester had not proven by the requisite burden of proof that the ‘expected or intended injury’ exclusion applied.”

“Accordingly, the jury returned a verdict in favor of IMG, finding that Westchester was liable for breaching its duty to indemnify IMG, and awarding damages to IMG in the amount of $3,900,000 for the Galstaldi settlement. The court retained the question of whether Westchester is also liable for reimbursement of IMG’s defense costs over and above the $250,000 contributed by Great Divide in its settlement with IMG.” The trial court ultimately concluded that Westchester was not liable for IMG’s defense costs.

The case went to the Sixth Circuit. Putting aside some detail that is not directly relevant to the drop down issue, the federal appeals court affirmed the jury’s decision that IMG’s liability in the underlying Florida suit satisfied the “occurrence” and “property damage” aspects of the Westchester policy.

Next the court turned to IMG’s appeal of the duty to defend -- where the lower court held that Westchester did not have an obligation. The appeals court first noted that it was not being guided by labels. The parties were apparently making arguments using such terms as “true” excess insurer or “coincidental” excess insurer or whether Westchester was obligated to provide “drop down” coverage. The court, however, called these issues “red herrings” and stated that “[t]o determine whether Westchester had a duty to defend IMG in the Galstaldi suit, we look to the language of the Policy.”

The Westchester “policy provides that Westchester has a ‘duty to defend the insured against any ‘suit’ seeking damages for ... ‘property damage’ when the ‘underlying insurance’ [Great Divide] does not provide coverage ....’” [The court set out the full text of this policy language, which reveals that it is the same as that which is contained in the insuring agreement of ISO’s standard Commercial Liability Umbrella form (CU 00 01 12 07).]

The IMG court described the issue this way: “Westchester’s obligations under this provision turn on what it means to ‘provide coverage’—and, more specifically, whether an underlying insurance that provides for coverage, but nevertheless improperly denies coverage, ‘provides coverage,’ under the terms of the Policy.” The court concluded that “[t]he term ‘provides’ could reasonably mean either ‘provide for’ or ‘undertakes to deliver.’ Under the latter reading, Westchester would have become responsible for defending IMG in the Galstaldi suit when Great Divide wrongfully denied coverage. Since the language in this Policy is susceptible to more than one meaning, it is ambiguous.” The court held that “[b]ecause the Galstaldi suit was a ‘suit’ seeking damages for ‘property damage,’ and Great Divide did not undertake to deliver coverage, we find that Westchester had a duty to defend IMG after Great Divide wrongfully denied coverage.”

The court also found support for its decision in a Westchester policy condition: “A second, separate provision of the Policy also independently supports the finding that Westchester owed a duty to cover IMG’s defense costs when Great Divide wrongly denied coverage: ‘If no other insurer defends, [Westchester] will undertake to do so, but [Westchester] will be entitled to the insured’s rights against all those other insurers.’ At the time IMG requested that Westchester defend it in the Galstaldi suit, after Great Divide had refused to do so, ‘no other insurer’ had defended IMG. At that time, Westchester had a duty to defend IMG, since, as discussed above, the Galstaldi suit was a ‘suit’ for ‘property damage.’” [Here too this policy language appears in ISO Umbrella form CU 00 01 12 07.]

The court held that Westchester was obligated to pay IMG just about $8 million for its defense costs plus pre-judgment interest.

The court also examined whether its decision should be impacted by the fact that Westchester did not have a subrogation right against Great Divide – on account of the settlement between IMG and Great Divide. The answer was no: “We also disagree with the district court’s finding that Westchester’s promise to undertake defense ‘is dependent on the fulfillment of [the] condition [ ] ... that Westchester maintains subrogation rights against the primary insurer.’ Other than the fact that this provision as a whole happens to be included in a section of the contract under the umbrella heading, ‘Conditions,’ nothing in this provision makes Westchester’s duty to defend contingent on a right of subrogation against the primary insurer. Indeed, the only conditional language in the provision is ‘if no other insurer steps in to defend,’ and it is undisputed that that happened in this case: Great Divide denied coverage, i.e., did not defend. Under a plain reading of this clause, obtaining or preserving subrogation rights was not a condition precedent to Westchester’s duty. Accordingly, under the terms of the Policy, Westchester was obligated to defend IMG when Great Divide improperly refused to do so. Westchester breached the Policy when it refused to provide a defense to IMG after no other insurer did so, despite IMG's specific demand.”

[The court did note that Westchester could still seek reimbursement from Great Divide under various equitable principles including equitable contribution and subrogation.]

The court’s decision in IMG Worldwide turned on its conclusion that when a primary policy improperly denies coverage, it fails to “provide coverage” under the terms of the policy. As noted above, the court held that “provides” could reasonably mean either “provide for” or “undertakes to deliver.” Thus, the court saw the language as ambiguous and held that “[b]ecause the Galstaldi suit was a ‘suit’ seeking damages for ‘property damage,’ and Great Divide did not undertake to deliver coverage,” it did not provide coverage.

The IMG Worldwide court’s decision is simply wrong. Under the court’s rationale, an excess insurer not only insures its policyholder’s risks of causing injury or damage – it bargained for that -- but also the risk of its policyholder’s primary insurer improperly disclaiming coverage. For that risk the excess insurer did not bargain. A primary insurer can now disclaim coverage, and, even if blatantly wrong, shift the defense obligation to the excess insurer. And what if the claim has no realistic chance of reaching the excess layer? Here too the excess insurer would be obligated to defend. There is something wrong with the picture of an excess insurer, that attaches at $5 million, being required to defend a soft tissue slip and fall action because the primary insurer disclaimed coverage. While the excess insurer would have a right of subrogation, the time and expense of handling the defense, as well as enforcing that subrogation right, places an unfair burden on the insurer. Not to mention placing a burden on the excess insurer to ensure that the primary insurer does not reach any sort of settlement that prejudices the excess insurer’s subrogation right.

Even if “provides” could reasonably mean either “provide for” or “undertakes to deliver,” the term is not ambiguous when interpreted in its rightful context – the relationship between a primary insurer (which receives extra premium because of its defense obligation) and an excess insurer. That’s not to say that there are never situations where an excess insurer has a duty to defend, but this is not intended to be one of them.

As I said, given that IMG Worldwide involves critical policy language contained in a standard ISO coverage form, it is an ISO-take-note decision.


Vol. 3, Iss. 16
December 3, 2014

Tidyman's Management Services Inc. v. Davis, 330 P.3d 1139 (Mont. 2014)

Supreme Court Awards The Entire Kitchen For Insurer’s Breach Of The Duty To Defend

If an insurer is determined to have breached the duty to defend, consequences will attach. It may be that the insurer must pay for the defense costs that it otherwise owed. Or the consequences may be much harsher – the insurer may lose the right to assert otherwise applicable defenses to indemnity, as well as owing, besides the defense costs, a host of other costs, including attorney’s fees. And the consequences can go still further. They vary widely by state. In general, it seems that courts have been stepping-up the consequences imposed on insurers that breach the duty to defend. In Tidyman’s Management Services, Inc. v. Davis, the Supreme Court of Montana demonstrated just how harsh those consequences can be. Tidyman’s may involve the harshest consequences possible for an insurer that breaches the duty to defend.

In Tidyman’s the Montana high court concluded that National Union breached its duty to defend directors, Davis and Maxwell, under a corporate liability insurance policy, for claims alleging breach of corporate duties arising out of a merger. [The case is lengthy and complex. The point of this summary is not to address the specifics of the underlying facts. Rather, it is to demonstrate how the court dealt with the consequences for an insurer’s breach of the duty to defend. Thus, I address just enough of the facts to provide context.]

National Union originally defended Davis and Maxwell, but then determined that, following a change in circumstances, a defense would no longer be provided. In response, Davis’s counsel, “filed a ‘stipulation resulting from insurer’s refusal to provide coverage’ with the court, recognizing his client’s inability to pay for a defense and need to protect himself. The stipulation provides that Davis is an insured under the Policy; that 29 million dollars in damages is sought for Davis’s alleged breach of fiduciary duties as an officer and/or director; that NUFI has wrongfully denied a defense to Davis and Davis lacks the funds to defend himself; that Davis assigns all rights, claims and causes of action against NUFI to the plaintiffs; and that the plaintiffs will not seek to execute judgment against Davis’s personal assets.”

The Montana trial court approved the stipulations for entry of judgment. “Notably, the District Court concluded that Montana case law did not impose any duty upon the court to consider the reasonableness of the amount of the stipulated agreement, and that NUFI’s collusion argument was speculative.”

On appeal to the Montana Supreme Court the court made the following determinations:

National Union breached its duty to defend. The court was particularly troubled by this: “Finally, the insurer’s recognition that the Policy was potentially implicated was cemented when, after the first stipulated settlement had been filed, it receded from its coverage position and agreed to defend under a reservation of rights. These facts show that NUFI saw that the Policy was implicated, but refused to provide a defense and thereby breached its duty to defend.”

Here’s the real sting in the decision. Consider these consequences for the insurer’s breach of the duty to defend: “Montana case law clearly provides that where the insurer refuses to defend a claim and does so unjustifiably, that insurer becomes liable for defense costs and judgments. Moreover, ‘[an insurer] cannot escape liability by declaring in advance of trial that the claim for damages is not one covered by the policy.’ Rather, an insurer who breaches the duty to defend is liable for the full amount of the judgment, including amounts in excess of policy limits.” (citations omitted).

In other words, the consequences for the insurer’s breach of the duty to defend is the loss of coverage defenses and liability for amounts in excess of the policy limit.

But surely $29 million may not have been a reasonable settlement amount? After all, it was simply the result of an agreement between parties in a dispute -- with no risk for personal liability. While the trial court concluded that, under Montana law, it had no duty to consider the reasonableness of the amount of the stipulated agreement, the Montana Supreme Court put its foot down there. The court held that, based on issues that National Union had raised, a remand to the trial court was appropriate for a hearing on the reasonableness of the settlement. The burden is to be on National Union to prove that the stipulated judgment was unreasonable.

National Union also argued that the parties “had no incentive to minimize the settlement amount, and, consequently, the settlement was per se unreasonable because it was improperly collusive.” The Montana Supreme Court did not agree, holding as follows: “Neither Montana authority, nor the facts to which NUFI directs our attention, persuade us that the District Court improperly disposed of NUFI’s collusion argument. Montana precedent does not require a court to consider whether a stipulated settlement is collusive where the insurer has breached the duty to defend.” The court suggested that, perhaps in a different case a collusion inquiry might be permissible, but this was not it. [I direct your attention to a highly thoughtful (and scathing) dissent.]

To recap, following Tidyman’s, an insurer that breaches the duty to defend under Montana law is confronting this situation: waiver of any coverage defenses; liability for the amount of a stipulated judgment -- even the portion in excess of policy limits; probably the right (but with the burden) to prove that the stipulated judgment was unreasonable; and probably not the right to prove that the settlement was the result of collusion.

The waiver of coverage defenses for breach of the duty to defend is very harsh. But it is not unheard of. Some states apply such rule. But for an insurer to then also be liable for the portion of a stipulated judgment in excess of policy limits goes too far. An insurer that issues a $1 million primary policy could be liable for a judgment that is many multiples of that. That is simply punitive, for conduct that may not, and likely does not, satisfy the standard for an award of punitive damages. Maybe that’s the next battleground for this issue – due process arguments.


Vol. 3, Iss. 16
December 3, 2014

Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., -- S.W.3d –
(Mo. Ct. App. 2014)

The Loudest Case Yet To Conclude That A Reservation Of Rights Letter Was Ineffective For Lack Of An Adequate Explanation

In Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., 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. So how it is that 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.]

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 court put it like this: “Here, both letters only vaguely informed the insured that Mid–Continent would investigate and perform a coverage analysis and that it was reserving its right to assert that there may be no duty to defend or indemnify against the claims. The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.”

Because of what the court called ineffective reservation of rights letters, Mid-Continent was estopped to deny coverage: “Here, Mid–Continent’s purported ‘reservation of rights’ notification was not timely or clear, nor did it fully and unambiguously inform the insured of the insurance company’s position as to coverage. Thus, regardless of the court’s January 2012 declaratory judgment ruling that the policy language did not explicitly cover the claims of Alsation, because Mid–Continent failed to effect a proper reservation of rights, it was prohibited from asserting only limited coverage for the claim. Therefore, Mid–Continent was estopped to deny coverage for the claim to the extent of its policy limits.”

There is a lot of detail to the opinion concerning how the claim was handled and how that played into the court’s decision. It’s too much to get into here. Although it cannot be overlooked. But the point of the discussion is that, simply because an insurer sends a letter, even a very long letter, and calls it a reservation of rights, may not make it so.

Despite how commonplace reservation of rights letters are for insurers in the claims context, some courts have concluded that they are not always done right – concluding that, while a letter with the words “reservation of rights” may have been issued, the notice provided to the insured in such letter, of the reasons why coverage may not be owed for some claims or damages, was not sufficiently specific to be adequate. The courts’ conclusion is that the reservation of rights letter did not “fairly inform” the insured of the bases why coverage may not be owed. See Safeco Ins. Co. of Am. v. Liss, No. DV 29-99-12, 2005 Mont. Dist. LEXIS 1073, at *41 (Mont. Dist. Ct. Mar. 11, 2005) (“In this case, the Court finds that Safeco’s reservation of rights letter did not ‘fairly inform’ Liss of the reasons it was reserving its rights and that the letter was inadequate as a matter of law to preclude application of the estoppel doctrine. The only factual reference contained within the policy is: ‘As you are aware, this lawsuit arises out of a gunshot incident on July 10, 1997.’ More importantly, the letter sets forth pages of policy provisions but does not explain why Safeco believed the insurance policy would possibly not cover Liss for the shooting incident. In other words, Safeco did not ‘apply’ the sole fact stated to the policy’s legal terms.”); Osburn, Inc. v. Auto Owners Ins. Co., No. 242313, 2003 WL 22718194, at *3 (Mich. Ct. App. Nov. 18, 2003) (“[W]e conclude that, because Auto Owners’ reservation of rights letter was not sufficiently specific to inform plaintiffs of the policy defenses the insurer might assert, the letter did not constitute ‘reasonable notice.’”); Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (explaining that a “reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position,” and holding that insurer’s letter was inadequate because it “did not unambiguously inform [the insured] that [insurer] intended to pursue a defense based on untimely notice of the claim”).

The significance of Advantage Builders is that it is the loudest and clearest decision I have seen to conclude that a reservation of rights letter, despite being many pages long, was ineffective because it did not fairly inform the insured of the bases why coverage may not be owed. More and more policyholders are surely going to borrow a page from the Advantage Builders playbook and argue that, despite being sent a letter that calls itself a reservation of rights, the insurer did not in fact reserve its rights. Because the letter they were sent did not clearly and unambiguously explain how the numerous cited policy provisions were relevant for purposes of explaining potential coverage issues, it was tantamount to no letter at all.

Three out of the last five of my Top 10 Coverage Cases of the Year articles have included one addressing reservation of rights letters that were ineffective because they failed to meet the fairly inform standard. Needless to say, given how many reservation of rights letters insurers write, this issue is critically important for them. Thankfully for insurers it is a preventable problem -- with everything they need to do being in their control.


Vol. 3, Iss. 16
December 3, 2014

Quihuis v. State Farm Mutual Auto Ins. Co., 334 P.3d 719 (Ariz. 2014)

Insurer Can Litigate Facts Determinative Of Both Liability And Coverage Following A Consent Judgment

The Arizona Supreme Court’s decision in Quihuis v. State Farm answered the following Certified Question from the Ninth Circuit: “Whether a default judgment against insured-defendants that was entered pursuant to a Damron agreement that stipulated facts determinative of both liability and coverage has (1) collateral estoppel effect and precludes litigation of that issue in a subsequent coverage action against the insurer, as held in Associated Aviation Underwriters v. Wood, 98 P.3d 572 (Ariz. Ct. App. 2004), or (2) no preclusive or binding effect, as suggested in United Services Automobile Association v. Morris, 741 P.2d 246 (Ariz.1987).”

Damon, Wood and Morris are unquestionably important coverage decisions concerning Arizona law. In Quihuis the Arizona high court addressed an issue concerning these decisions, especially Damron v. Sledge, 460 P.2d 997 (Ariz. 1969). On its face, Quihuis appears to be the kind of case that I discussed in the top ten selection process as one that does not get selected. It looks like one of those cases that, despite its importance to its home state, is too state-specific to be called upon by other states at a later time. In other words, surely a decision where a Certified Question specifically lists three Arizona cases by name is not a good candidate for having the potential ability to influence other courts nationally. But an examination of Quihuis v. State Farm suggests otherwise. The issue before the court was an important one, is not overflowing with guidance nationally and the court’s rationale for its decision was not all Arizona-specific. For these reasons the significance of Quihuis may not be limited to those who practice in the sweltering desert heat -- but which is, thankfully, dry.

The underlying facts go like this. Norma Bojorquez and Carol Cox were coworkers. Norma purchased Carol’s Jeep, requiring Norma to make eight monthly installments totaling $3,000. Norma gave the keys to her daughter, Iliana. Carol did not transfer the Jeep’s title certificate to Norma as she believed that this would give her collateral until Norma paid off the Jeep.

Carol Cox maintained insurance coverage on the Jeep with State Farm. Iliana got into an accident with Yolanda Quihuis. Quihuis and her husband sued Iliana for negligence and the Coxes for negligent entrustment, based on the Coxes’ still-alleged ownership of the Jeep at the time of the accident. But State Farm refused to defend the Coxes because the Jeep’s ownership had transferred to Norma before the accident.

The Coxes, the Bojorquezes and the Quihuises entered into a “Damron agreement.” “They stipulated that the Coxes owned the Jeep at the time of the accident, that Iliana was incompetent to drive a motor vehicle and her negligence caused the accident, and that the Coxes should have known that Iliana was incompetent to drive and therefore should not have entrusted the Jeep to her. The Coxes and Bojorquezes agreed to damages in the amount of $275,000. The Coxes assigned their rights under the Policy to the Quihuises, who agreed not to execute upon a judgment against the Coxes or the Bojorquezes. The parties also agreed to request a default judgment to terminate the case. On December 31, 2009, the state court entered default judgment in the amount of $350,000—$325,000 for Yolanda's injuries and $25,000 for Robert Quihuis’ loss of consortium.”

To understand Quihuis first requires a quick lesson on Damron and the basis for the so-named agreement that the parties entered into. The Quihuis court conveniently described Damron in the following succinct fashion: “When a liability insurer refuses to defend its insured against a third party’s tort claims . . . the insured and the claimant may enter into a Damron agreement under which the insured stipulates to a judgment, assigns his rights against the insurer to the claimant, and receives in return a covenant from the claimant not to execute against the insured. . . . After obtaining a judgment pursuant to a Damron . . . agreement, the claimant then seeks payment of the judgment by the insurer based on the latter’s indemnity obligation under the policy. The insurer, in turn, generally may contest any duty to indemnify by asserting that its policy did not cover the accident or claim.”

The Quihuises, as the assignee of the Coxes’ policy, filed a declaratory judgment action against State Farm for indemnification and failure to defend. The District Court of Arizona held that the default judgment did not preclude State Farm from litigating the question of whether the Coxes owned the Jeep at the time of the accident. And, on that question, the court held that, as a matter of law, the Bojorquezes owned the Jeep at the time of the accident. So no coverage was owed under the Coxes policy. On appeal, the Ninth Circuit agreed with the District Court that the Coxes did not own the Jeep at the time of the accident. But that was putting the cart ahead of the horse. The Quihuises argued that, under Arizona law, “an insurer may not litigate an issue determinative of coverage if that issue is also determinative of liability and was stipulated to as part of a Damron agreement that resulted in entry of a default judgment.” Here, the ownership of the vehicle was an element of liability in the negligent entrustment tort claim and a requirement of coverage under the State Farm policy.

The case made its way to the Supreme Court of Arizona on the Certified Question set out above, and which now no doubt makes more sense in the context of the facts and explanation of Damron: whether a default judgment against insured-defendants, that was entered pursuant to a Damron agreement, that stipulated facts determinative of both liability and coverage, has collateral estoppel effect and precludes litigation of that issue in a subsequent coverage action against the insurer or no preclusive or binding effect.

The Arizona high court took a long and complex road to reach its decision. A full explanation is well beyond the scope here. In general, the court looked to the Restatement (Second) of Judgments Section 58, addressing issue preclusion, for its decision. Based on Section 58, and Arizona law, the court held as follows: “[W]e reject the Quihuises’ assertion that issue preclusion ‘arises from the entry of a judgment against insureds whether after trial or by default. Section 58(1)(b) does not preclude State Farm from litigating the ownership issue in the DJA. That issue was not ‘determined in the action’ because it was not actually litigated and decided by the trial court that entered the stipulated default judgment. This is not to say that the default judgment has no preclusive effect or is meaningless. It precludes State Farm from denying the ‘existence and extent’ of the Coxes’ liability—established by the default judgment—under § 58(1)(a), and it prevents State Farm from avoiding that result simply by crafting a coverage argument that, in essence, merely disputes the Coxes’ tort liability. The result does not change simply because the issue that determines coverage also happens to be an element of the liability claim against the Coxes.”

[Apologies to the lawyers in the case for skipping all the analysis. The objective here is simply to get to the conclusion and an explanation how the decision could be relevant on a wider scale.]

Despite having a moniker that makes it sound unique, the concept of a Damron agreement is not at all unusual across the country. Lots of states have a procedure where, after a liability insurer disclaims coverage for a tort claim, the insured-tortfeasor and claimant enter into a settlement agreement whereby the insured stipulates to a judgment, assigns his rights against his insurer to the claimant, and, in return, receives a covenant from the claimant not to execute against him. The claimant, as assignee, then seeks coverage for the judgment from the tortfeasor’s insurer.

When insurers disclaim coverage, and it is followed by an assignment and consent judgment, the stakes for them can be high. See Tidyman’s, supra. The agreed-to judgment may be excessive -- but not so much so that it won’t pass a reasonableness test. And, besides paying the judgment and defense costs, a variety of other damages can befell an insurer that has breached the duty to defend. It’s a state specific issue.

When examining whether an insurer has wrongly disclaimed coverage it is not unusual for there to be facts that are determinative of both the coverage question and underlying liability. Indeed, when policyholders are seeking independent counsel they often-times have no problem pointing out examples where the same facts are relevant to both. Quilhuis serves as support for an insurer’s argument – in this high-stakes situation -- that any facts agreed to between the claimant and insured, with or without a stipulated default judgment, are not determinative for purposes of resolving the insurer’s coverage obligation. While Quilhuis has a lot of Arizonaness to it, that the court looked so heavily to a Restatement provision may serve as a basis for other courts to overlook that -- and likewise conclude that the coverage facts remain an open question because they were not determined in the action and therefore were not actually litigated.


Vol. 3, Iss. 16
December 3, 2014

National Union Fire Ins. Co. v. Coinstar, Inc., 2014 WL 3891275 (W.D. Wash. Aug. 7, 2014)

Solving The Dispute Over The Rate To Pay Independent Counsel

It is an issue that has confronted us all and one with no easy answers. An insurer determines that, on account of a defense being provided under a reservation of rights, the insured is entitled to independent counsel, to be paid for by the insurer (or a court makes this decision for the insurer). Now the question turns to determining the hourly rate to be paid to the insured’s selected counsel. The insurer usually maintains that it will pay independent counsel the same rates it would have paid its panel counsel, who is well-qualified to handle the case. Not so fast says the insured, countering that panel counsel’s hourly rates are lower than market rates (i.e., the rates sought to be charged by independent counsel) because panel counsel is willing to work at a discount—in exchange for the volume of work that is receives on account of serving in such role. As we all know, the difference between these two rates can be substantial--and the disputes quite heated.

But is a simple solution to this complex problem staring insurers in the face? Since the duty to defend is based on contract, why not simply put the rate to be paid to independent counsel--if the insured is so entitled--in the contract (policy) itself? As for any concern that rates vary by jurisdiction or if an older policy is triggered the rate may be out of date, this can be easily addressed by insurers borrowing the language from California’s Cumis statute--which essentially says that independent counsel will be paid the same rate as panel counsel in the relevant jurisdiction.

Surely policyholders can’t complain about this, given how fond they are of the argument that, “If this is what the insurer wanted, it should have written it in the policy.”

Two decisions this year, that I know of, made this suggestion. The first one was from a Washington federal court in National Union Fire Ins. Co. v. Coinstar, Inc. I’ll skip the details of what Coinstar is about since that’s not necessary to address the rate issue. Briefly, the case involved coverage for claims that Redbox, an operator of automated DVD-vending machines, acted inappropriately with respect to its customers’ personally identifiable information.

An issue arose over the rates to be paid to counsel retained to defend Redbox under a reservation of rights. National Union argued that, based on certain policy provisions, it had unlimited discretion to determine that amounts that it will pay to defend Redbox.

The court disagreed: “[B]arring a contract term to the contrary, National Union does not have unbounded discretion to unilaterally limit the rates it will pay. Here, there were no provisions in the policy that explicitly limited the rates National Union would pay. It is true that generally insureds may not freely conduct their own litigation and then seek reimbursement where the policy obligates the insurer only to ‘defend through counsel of its own choosing. But here, National Union explicitly “agree[d] to [the attorneys’] continued retention as Redbox’s defense counsel.’ In doing so, it relinquished its right to choose an attorney to defend the underlying suits. And while National Union did say that the rates it would pay were limited by the terms and conditions of the insurance policies, no attorney fee rates were set out in the policies. Nor did National Union alert Redbox to the relevant attorney fee rates in its reservation of rights letters. In the absence of a policy provision limiting the rates National Union agreed to pay, it is responsible for the reasonable defense costs incurred by its insured.”

Note that in two separate places the court indicated that its decision would have seemingly been different if National Union had set out the rates to be paid to defense counsel in its policies.

As an aside, in case you are wondering, the court did not specify what rates should be paid to Redbox’s defense counsel. It held that this was a question of fact that should not be decided on a motion for summary judgment. “There is a genuine issue of material fact as to whether National Union was allowed to limit the rates paid to attorneys to defend the underlying suits to $240 for senior partners, $220 for junior partners, $183 for senior associates, $173 for junior associates, and $80 for paralegals.”

When I first saw the decision in Coinstar I knew it was important. It presented a novel solution to a complex problem. But I was ambivalent about whether it had top ten potential. It was still just an unpublished federal trial court decision – even if it were from Washington, which many say is the worst state on the planet for insurers. But the hemming and hawing that I had, about whether Coinstar would earn a spot here, was eliminated a few weeks later when a Minnesota District Court made the same observation as Coinstar.

In the Minnesota case -- Select Comfort Corp. v. Arrowood Indemnity Co., No. 13-2975 (D. Minn. Aug. 26, 2014) – a federal court addressed whether Select Comfort was entitled to independent counsel on account of being defended by its insurer under a reservation of rights. Select Comfort was named as a defendant, in a putative class action in California, brought by certain purchasers of the company’s Sleep Number beds, alleging that the beds had a propensity to develop and incubate mold, leading to adverse health consequences.

The court held that the reservation of rights created a conflict that justified independent counsel. Turning to the insurer’s concern about the “potential for abuse” because independent counsel “often charge more than panel counsel regularly retained by the insurer,” the court had this to say: any such abuse could be better managed “by the parties through contract, i.e. by setting out the parameters for the insured’s hiring of independent counsel, in the event the insured believes a conflict of interest exists, as part of the insurance agreement.” I’ve certainly seen policies that do this – but not often.

Given the frequency of the independent counsel rate issue, the challenge to resolve it and policyholders’ fondness of the argument that, if this is what the insurer wanted it should have written it in the policy, I selected Coinstar as one of the year’s ten most significant coverage decisions -- after the issue and same solution was reprised in Select Comfort -- because it raised this important question: Is a simple solution to a complex problem out there for the taking?


Vol. 3, Iss. 16
December 3, 2014

Henriquez-Disla v. Allstate Property & Casualty Company, 2014 WL 2217808
(E.D. Pa. Aug. 7, 2014)

Opinion-aided: Courts Granting Policyholders Access To Outside Coverage Counsel’s Opinion Letters

Sometimes a coverage case, especially from a trial court, is selected as one of the year’s ten most significant -- but it is not really so. Rather, it is chosen as a representative of a series of similar cases decided that year. In other words, standing alone, the case would not be one of the year’s top ten. But because several like it were decided during the year, involving an important issue, they collectively represent a possible trend. It is the possibility of this trend continuing, and not any particular case itself, that is in fact the top ten selection.

In this category there were several decisions this year, from courts across the country, addressing whether a policyholder, in coverage litigation, is entitled to discover the coverage opinions and other work product, prepared for an insurer, by its outside coverage counsel. Of course not, you say. An insurer’s coverage opinion letter goes to the heart of the relationship between an insurer and its outside counsel. A policyholder surely can’t get that in discovery. But, in several cases this year courts allowed policyholders – either actually or potentially -- to obtain the coverage opinions or other work product prepared for insurers by their outside counsel. One such case is the Eastern District of Pennsylvania’s in Henriquez-Disla v. Allstate Property & Casualty Company. A list of several more examples is provided below.

At issue in Henriquez-Disla was a discovery dispute in a bad faith case. The policyholder sought discovery from Allstate of unredacted log entries. Specifically at issue were redacted log entries concerning Allstate’s communications with its counsel, Curtin and Heefner. Allstate considered the redacted information to be privileged and protected from discovery.

In an earlier opinion in the case, the court followed a 1986 Minnesota federal court decision which held that the attorney-client privilege drew a distinction between legal work performed by attorneys, which was covered by the attorney-client privilege, and claims investigation performed by attorneys, which was not.

Allstate argued “that it never hired Curtin and Heefner for anything other than legal services. Counsel has attached an affidavit from Holly Kelly, a claims adjuster assigned to Plaintiffs’ claims, in which Ms. Kelly states that Allstate retained Curtin and Heefner ‘to render legal services including the taking of Plaintiffs’ Examinations Under Oath to ultimately render legal/coverage opinions,’ and also states that ‘[a]t no time, did Defendant retain Curtin & Heefner LLP as a ‘Claims Investigator’ or to perform any non-legal claim related functions.’”

The court was not convinced. It described its earlier opinion as follows: “However, the log entries belie the affidavit. Without disclosing their contents, review of the redacted log entries reveals that they contain direction to conduct routine investigation, whether to be done by counsel or by a claims representative[.]” “As explained in my earlier opinion, such activities (investigating subrogation possibilities, determining the cause of the fire, gathering background information on the claimants, and arranging for EUO’s) are ordinary business functions in claims investigation. The fact that they were performed by an attorney at the behest of a claims adjuster does not change the character of the activity—basic claims investigation.”

Now, on reconsideration, the court was persuaded that it may have been too stringent in deciding that certain communications between Allstate and its counsel simply involved basic claims investigation. This time around the court was guided by a 1996 opinion from Judge Wettick, of the Allegheny (Pa.) Court of Common Pleas, that “extoll[ed] the benefits of insurance companies hiring counsel in the decision making process and cautions that open and honest exchanges between company and counsel are less likely if such communications are discoverable.”

Turning to Judge Wettick’s reasoning, the court vacated its earlier opinion and held that certain log entries should remain redacted. The court explained its decision as follows: “Guided by Judge Wettick’s reasoning encouraging open and honest exchanges between counsel and the insurance company, I have again reviewed the log entries that I previously ordered unredacted and will grant Defendant’s motion for reconsideration with respect to eight of them. I believe an argument can be made that Allstate and counsel were participating in the type of information exchange Judge Wettick discussed with respect to these eight entries. Each entry pertains to an actual or contemplated communication with counsel and can be read to touch on strategy or thought process, rather than solely directing an item of basic claims investigation.” [Of note, the court certified the issue for interlocutory appeal to the Third Circuit.]

While the Henriquez-Disla court held that certain log entries were protected from discovery by the attorney-client privilege, the point of the case is why that was so: Because the log entries (at least arguably) involved legal advice and not, per se, because they involved communications between an insurer and its counsel.

Several other decisions in 2014, listed below in no particular order, said something similar.

The take-away from all of these decisions seems to be that insurers that employ outside coverage counsel should insist that counsel provide legal analysis to support its opinions or recommendations. Likewise, counsel, when communicating to its insurer-clients, should be mindful that it must provide legal advice, and not simply be serving as an aide to the insurer in the process of deciding which of the two indicated actions to pursue. However, as the judge in Henriquez-Disla made clear in the decision to grant reconsideration – noting that certain communications with counsel “c[ould] be read to touch on strategy or thought process” – the line between these two functions may not always be bright.

• Nguyen v. American Commerce Ins. Co., 2014 WL 1381384 (Ariz. Ct. App. Apr 8, 2014)
“The superior court stated, ‘[t]hough defense counsel did conduct some investigation into Plaintiff’s claim, such investigation does not then render all communication between Defendant and its counsel automatically discoverable.’ This statement was made after two rounds of briefing and two oral arguments on the subject (and after having reviewed the sample documents). The superior court found Perry both involved himself in the claim investigation and provided legal advice in confidence. Ultimately, only portions of the communications within the claim file were redacted or found completely privileged by the special master; the remaining portions of the claim file were disclosed to plaintiffs. This record indicates the superior court correctly applied Arizona's attorney-client privilege to the facts of this case.”

• Amerisure Mut. Ins. Co. v. Crum & Forster Specialty Ins. Co., 2014 WL 1689275 (M.D. Fla. Apr. 29, 2014)
“[T]o the extent that an attorney acts as a claims adjuster or claims processor and not as a legal advisor, the attorney-client privilege does not apply. . . . In light of this, the Court has reviewed the Luken Affidavit and finds that the documents are not protected by the attorney-client privilege, as the Luken Affidavit does not provide the Court with sufficient information to determine whether the documents are in fact protected. These documents appear to involve claims handling that are dated after C & F’s reservation of rights letter regarding whether the SIR had been satisfied and do not appear to concern legal advice on coverage issues.”

• Hartford Roman Catholic Diocesan Corp. v. Interstate Fire & Cas. Co., 297 F.R.D. 22 (D. Conn. 2014)
“An insurance company may not insulate itself from discovery by hiring an attorney to conduct ordinary claims investigations. To the extent an attorney acts as a claims adjuster, claims process supervisor, or claims investigation monitor, and not as a legal advisor, the attorney-client privilege does not apply.” (citation omitted).

• National Union Fire Ins. Co. v TransCanada Energy USA, 990 N.Y.S.2d 510 (N.Y.A.D. 2014)
“The motion court properly found that the majority of the documents sought to be withheld are not protected by the attorney-client privilege or the work product doctrine or as materials prepared in anticipation of litigation. Following an in camera review, the court determined that certain documents were privileged because they contained legal advice. As for the remaining documents, the court found that the insurance companies had not met their burden of demonstrating privilege. The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. Further, the record shows that counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company. Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

• Barnard Pipeline, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 1576543 (D. Mont. Apr. 17, 2014)
“While the privilege applies equally in insurance litigation, in insurance bad faith cases when an attorney serves as coverage counsel, the ‘line between what constitutes claim handling and the rendition of legal advice is often more cloudy than crystalline.’ Thus, ‘the question of whether a communication falls within the attorney-client privilege can often be difficult because of the investigatory nature of the insurance business.’ ‘[T]o the extent that an attorney acts as a claims adjuster, claims process supervisor, or claims investigation monitor, and not as a legal advisor, the attorney-client privilege does not apply.’” (citations omitted).

• McAdam v. State Nat. Ins. Co., Inc., 15 F. Supp. 3d 1009 (S.D. Cal. 2014)
“State National argues that Judge Dembin erred in concluding that the dominant purpose of the engagement between [Gordon & Rees] and State National was claims adjustment up until the filing of this lawsuit on June 4, 2012. As evidence of a pre-litigation attorney-client relationship with George Soares of G & R, the objectors point to, e.g., State National’s claims log and a March 13, 2012 reference to ‘GS-cover counsel’ in Optimum Claims Adjuster Wanda Didier’s notes. Additionally, the terms ‘coverage’ and ‘coverage counsel’ are scribbled on printouts of a March 9–13, 2012 email exchange between Mr. Soares and Ms. Didier discussing the claim adjustment. These documents say little or nothing about the existence or scope of an attorney-client relationship, and they are insufficient to establish an attorney-client relationship prior to the inception of litigation.”


Vol. 3, Iss. 16
December 3, 2014

Minnesota Life Insurance Company v. Columbia Casualty Company, -- So. 3d --
(Miss. 2014)

The Extended Reporting Period: A Lesson Before Denying

A case involving an issue under a claims made policy is ordinarily not the stuff of the annual coverage top ten. Despite there being lots of cases decided every year involving claims made policies, they often-times involve such things as what is a claim, when was a claim first made and various timing issues. With such issues frequently turning on unique facts and policy language, claims made cases are not always good candidates for ones that have the ability to influence future decisions.

The Mississippi Supreme Court’s claims made decision in Minnesota Life Insurance Company v. Columbia Casualty Company involves a “timing” issue and policy language that may or may not be unique (the terms of claims made policies vary widely). For these reasons perhaps Minnesota Life should not qualify as one of the year’s ten most significant coverage decisions for the same reasons why other claims made cases do not. Nonetheless, I selected it because it offers a lesson of wide-reach concerning the drafting of an important provision in claims made policies.

The full facts of Minnesota Life are unbelievably lengthy and detailed. They are as eye-glazing as any you’ll see in a coverage case. To set them out here in such detail would be to lose the point that is intended to be made. I describe just enough of them to get to the reason why the case was selected as one of the year’s ten most significant.

Four individuals were employed by C. Douglas Gulley Jr. and Associates, Inc., as agents for Minnesota Life. The agents purchased claims made Insurance Agents Errors & Omissions Policies from Columbia Casualty covering the periods from March 1, 1997 to March 1, 1998 and March 1, 1998 to March 1, 1999.

On January 30, 1998, the agents resigned from the agency because of suspicions that Gulley was embezzling funds from clients. On February 2, 1998, the agents’ contracts with Minnesota Life were terminated. At that point, the agents’ coverage with Columbia Casualty terminated. The agents founded Cornerestone Group and obtained errors and omission policies from AIG.

It was determined that Gulley was misappropriating client funds. In July 1998, suits were filed against the agents and others alleging that the agents committed wrongful acts while employed by Minnesota Life. It was alleged that the agents should have known that Gulley was misappropriating funds.

To make an unbelievably long story short, at issue before the Mississippi Supreme Court was whether the claim-timing requirement of a Columbia Casualty policy had been satisfied for purposes of the agents’ claims for the suits filed against them. In particular, the issue was to be addressed in the context of a Terminated Insured Extended Reporting Period endorsement that provided as follows: “In consideration of the premium charged, it is hereby understood and agreed that upon termination, during the Policy Term or any Renewal thereof, of a contract of an Agent who was an Insured under this policy, said Insured shall have an automatic Extended Claim Reporting Period to report Claims (as long as this policy or a renewal thereof is in force) but only for Wrongful Acts which occur prior to the termination of the Agent’s contract and only if there is no other Life Insurance Agent’s Professional Liability coverage in force.”

The parties disputed the applicability of the Terminated Insured Extended Reporting Period endorsement. The competing arguments were as follows: “Throughout this entire litigation, the Ex–Agents and Minnesota Life have contended that the ERP provides coverage because the AIG policy did not provide coverage to the Ex–Agents for alleged wrongful acts occurring while they were Minnesota Life agents. Because coverage was denied by AIG, the Ex–Agents contend that Columbia should have concluded that there was no “coverage in force”. [quotes added] Columbia, however, contends that “coverage” is synonymous with “policy” and that it does not matter what type of “coverage” is provided under that “policy,” as long as the Ex–Agents have a “policy in force.”

The court rejected Columbia Casualty’s argument: “[I]t is clear from the record that Columbia was aware that there were different interpretations as to what “coverage in force” might mean. Reviewing the entire Columbia policy, there are numerous instances where the terms ‘insurance,’ ‘policy,’ ‘claim,’ ‘coverage,’ and ‘in force are used: ‘valid and collectible insurance available,’ ‘other insurance against a claim covered by this policy,’ ‘same or similar policy,’ ‘claim arising out of a wrongful act,’ ‘master policy remains in force,’ ‘as long as this policy ... remains in force,’ ‘coverage in force,’ ‘insurance in force which would apply to a claim also covered by this policy,’ and ‘coverage will not extend to ... any claim.’ While policy language clearly makes distinctions between these words, Columbia now argues that all are synonymous.”

The court concluded that “[c]overage applies to losses, damages, or claims afforded by an insurance policy. It is more than obtaining an insurance policy. One must look to the actual policy obtained to determine what coverage is in force.” This interpretation of “coverage” led to the court’s decision: “The Ex–Agents had coverage under the ERP endorsement for the underlying claims as long as they had no other coverage in force for those same alleged wrongful acts. The AIG policy did not provide coverage for wrongful acts that occurred while the Ex–Agents were employed by Minnesota Life and covered by Columbia; it covered acts only while the Ex–Agents were employed by [Cornerstone]. The Ex–Agents were covered by the ERP endorsement of the Columbia policies for the wrongful acts alleged in the underlying claims, because they had no other ‘coverage in force’ for those alleged wrongful acts which occurred before they were employed by [Cornerstone].”

Minnesota Life involves coverage for suits that were filed in 1998. Admittedly, I do not know why the answer to the coverage question didn’t come until sixteen years later. There may be more to the delay than the dispute over the Extended Reporting Period. Nonetheless, that’s a long time.

While Extended Reporting Periods vary widely in their terms, insurers that are drafting an ERP, or considering whether to litigate one’s applicability, should take a lesson from Minnesota Life. While policy language may be king when it comes to coverage determinations, policy purpose sometimes has a way of creeping in. The purpose of an ERP is to address the situation that the agents faced here. The Minnesota Life court found a way to make that happen.