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Coverage Opinions
Effective Date: January 14, 2015
Vol. 4, Iss. 1

Declarations: The Coverage Opinions Interview With Robert S. Smith, Former Judge, New York Court Of Appeals
Eleven Years On The New York High Court; Instant Comedian; The Pope As Co-Counsel; Getting Back Into Court; The K2 Do-Over; Overruling Palsgraf
Judge Robert Smith retired from the New York Court of Appeals at the end of 2014. The next day he joined New York City’s Friedman, Kaplan, Seiler & Adelman. Judge Smith was kind enough to speak to me about his career, the Court, his time on the bench, insurance cases, what lies ahead and whether he played any pranks on his last day.

You Can’t Judge A Judge By His Coverage
I looked at 20 of Judge Robert Smith’s insurance-related opinions as part of the preparation for my interview of him. My conclusion. Neither side in a coverage dispute could have counted on his vote before seeing the opinion.

Randy Spencer’s Open Mic
A Christmas Story And Insurance Coverage
Seeking coverage when a tongue gets stuck to a frozen flagpole.

Book Review: Construction Defect Coverage: Concise And Understandable
Joe Junfola, of Admiral Insurance Company, has put his 37 years of insurance experience into a just-published e-book that provides the fundamentals of construction defect coverage in one neat and tidy package. The book is CD coverage -- soup to nuts.

Thank You To Marsh
Marsh held its annual Insurance Company Conference last month and I would be remiss not to include a brief note giving it well-deserved kudos and a thank you for the privilege of speaking.

I Goofed: Top Ten Coverage Cases Revisited
2014’s installment of the Top Ten Coverage Cases overlooked an important one. I flubbed it. One of the lawyers in the case set me straight.

Oh My. Look Who I Spotted Reading Coverage Opinions
I walked out of New York’s Marriott Marquis and could not believe who I saw reading Coverage Opinions!

7th Annual “Coverage For Dummies”
Seeking Coverage For The Frailty And Imperfection Of The Human Brain

In This Year’s Installment: The All-Time Best “Dummies” Case

Remembrance: A Tribute To Don Malecki
The insurance industry lost a giant on December 12th when Don Malecki passed away.

High Court Hands Excess Insurers A Big Bad Faith Stick Against Primaries
The Missouri Supreme Court illustrates a risk for primary insurers who fail to accept a limits settlement demand initially -- and then do so later.

The Vexing “Employee Exclusion” Issue: Is The Occasional Helper An “Employee”?
Court addresses the Employer’s Liability exclusion when the injured person is just someone who comes around, now and then, to perform random tasks.

Court Provides A Clinic In Sometimes Overlooked Coverage Issue
The risk of an insurer having to pay its policyholder’s attorney’s fees is sometimes not given enough weight in the calculus whether to engage in coverage litigation.

More On The Duty To Defend -- And When It Might Never End
Whether an insurer’s duty to defend attaches arises in every liability claim. The less-frequent issue -- when does an insurer’s duty to defend un-attach.

Tapas: Small Dishes Of Insurance Coverage News And Notes
· Siblings Who Hate Each Other and Insurance Coverage
· Neighbors Who Hate Each Other and Insurance Coverage

Back Issues:

Vol. 4, Iss. 1
January 14, 2015

You Can’t Judge A Judge By His Coverage



It may not be unreasonable to think that, if you examined a judge’s entire body of opinions, addressing a certain issue, over a decade or more-long career, a pattern would emerge. You can imagine that you would get into the judge’s head and pretty soon you’d be able to predict how he or she would rule in similar cases. Maybe this is so when it comes to certain ideological issues, such as First Amendment or the death penalty. But each time that I have tried to find a pattern in a judge’s rulings in insurance coverage cases I have found that it is a fool’s errand.

My examination of Judge Robert Smith’s opinions – majority and dissenting -- in property-casualty coverage cases, and some others insurance-related, over his eleven years on the New York Court of Appeals, was no exception. I looked at 20 such opinions as part of the preparation for my interview of the Judge (see nearby article). My conclusion -- I could not tell you how he would rule in the 21st. As I see it, neither side in a coverage dispute could have counted on his vote before seeing the opinion. I guess that means he was doing his job the way judges are supposed to. But this is not to say that I did not see a pattern.

As for policy language-based cases, they are sui generis -- at least factually, even if the same contract provisions are at issue. Each case should stand on its own. Any comparison between such cases should be apples to oranges. When it comes to this type of coverage case, Judge Smith told me that he, and the Court, followed the rule that in a close case you find coverage. There was plenty of evidence of this in his opinions. I saw no propensity, one way or another, for Judge Smith to find policy language to be ambiguous or not.

For example, in determining whether an earth movement exclusion applied to excavation, Judge Smith concluded that both the policyholder’s and insurer’s readings of the exclusion were reasonable. As a result, he was bound to adopt the reading that resulted in coverage. See Pioneer Tower Owners Ass’n v. State Farm Fire & Cas. Co., 908 N.E.2d 875 (N.Y. 2009). More recently, in Nesmith v. Allstate Ins. Co., -- N.E.3d. -- (N.Y. 2014), Judge Smith held that the language of a “non-cumulation clause” was clear and capped an insurer’s maximum total liability to only one policy limit, despite that members of different families were successively exposed to lead paint, in the same apartment, over more than one policy period.

While I saw no pattern in Judge Smith’s opinions that were tied to the interpretation of policy language, I did see a pattern in his decisions where the coverage issue was conceptual and not contractual. In such opinions he may have considered the nature of insurance, and the risk business itself, in reaching his decisions. While a few of these examples come in the form of dissenting opinions, the most impactful one, a majority opinion, used this rationale to hand a significant win to a policyholder.

In Voss v. Netherlands Ins. Co., 8 N.E.3d 823 (N.Y. 2014), Judge Smith, in a dissenting opinion, would have preferred to see the court take a narrower view of insurance agent liability in the situation before him: “It is natural for a client that has suffered a loss not covered by its insurance to blame its insurance agent; and if lawsuits by clients against their agents are welcomed by the courts, the consequence may be to make the agent into a kind of backup insurer, a result neither sensible nor fair.” [Of course, the agent’s professional liability carrier is then the backup, backup insurer.]

In Kramer v. Phoenix Life Ins. Co., 940 N.E.2d 535 (N.Y. 2010), Judge Smith, in a dissenting opinion, would have ruled that it was unlawful for one to purchase a life insurance policy on his or her own life, and then transfer it to someone without an insurable interest in that life, even if the policy was obtained for that purpose. He stated: “Even if we ignore the possibility that the owner of the policy will be tempted to murder the insured, this kind of ‘insurance’ has nothing to be said for it. It exists only to enable a bettor with superior knowledge of the insured’s health to pick an insurance company’s pocket.”

In Bi-Economy Market, Inc. v. Harleysville Ins. Co., 886 N.E.2d 127 (N.Y. 2008), Judge Smith dissented from the majority’s opinion, which held that an insured could seek consequential damages arising out of an insurer’s breach of policy obligations. He stated: “[W]here there is no agreement on what money will be paid in the event of a breach, a court must try to decide what damages the parties contemplated--what damages they would have agreed to had they considered the question when the contract was signed. But in insurance contracts or other contracts for the payment of money, the parties have already told us what damages they contemplated; in the case of insurance, it is payment equal to the losses covered by the policy, up to the policy limits.”

In Union Carbide Corp. v. Affiliated FM Ins. Co., 947 N.E.2d 111 (N.Y. 2011), Judge Smith addressed whether the aggregate limit, in a three year excess liability policy, covering asbestos claims made against Union Carbide, applied annually or continued over the three-year life of the policy. The insurers argued that one limit applied and Carbide argued for three. Judge Smith held that three aggregate limits applied. In doing so, he was persuaded less so by tedious policy language than a more fundamental issue: “UCC has the better of the argument. While the reading Continental and Argonaut give to the word ‘aggregate’ might be plausible in many contexts, here the follow-the-form clause should prevail. Such clauses serve the important purpose of allowing an insured, like UCC, that deals with many insurers for the same risk to obtain uniform coverage, and to know, without a minute policy-by-policy analysis, the nature and extent of that coverage. It is implausible that an insured with as large and complicated an insurance program as UCC would have bargained for policies that differed, as between primary and excess layers, in the time over which policy limits were spread. Under Continental’s and Argonaut’s reading, UCC could (and in fact did) reach the second and third years of its excess policies with the full limit of its primary coverage in place, but with its fifth-layer excess coverage exhausted. It is unlikely that the parties intended this result.”

Lastly, looking at New York’s grand dames of insurance law, § 3420(d) and late notice, Judge Smith mandated strict compliance with both notice-related rules. That can benefit both insurers and policyholders – depending on the issue. In Sierra v. 4401 Sunset Park, LLC, -- N.E.3d – (N.Y. 2014), he held that a contractor’s insurer, that sent a disclaimer to an additional insured’s insurer, but not to the additional insured itself, did not meet the requirement of § 3420(d). In Argo Corp. v. Greater New York Mut. Ins. Co., 827 N.E.2d 762 (N.Y. 2005), Judge Smith strictly applied New York’s (then) no prejudice required rule for a liability insurer to disclaim coverage based on late notice: “A liability insurer, which has a duty to indemnify and often also to defend, requires timely notice of lawsuit in order to be able to take an active, early role in the litigation process and in any settlement discussions and to set adequate reserves. Late notice of lawsuit in the liability insurance context is so likely to be prejudicial to these concerns as to justify the application of the no-prejudice rule.” See also Briggs Ave. LLC v. Insurance Corp. of Hannover, 899 N.E.2d 947 (N.Y. 2008) (following Argo Corp.).

But Judge Smith also held that there can be times when requiring strict compliance with a notice provision is simply not reasonable. In Executive Plaza, LLC v. Peerless Ins. Co., 5 N.E.3d 989 (N.Y. 2014), he wrote that a clause in a fire insurance policy, limiting the time in which the insured may bring suit under the policy to two years, running from the date of the fire, is unreasonable and unenforceable when the policy also says that the insured may recover the cost of replacing destroyed property—but only after the property has already been replaced. Judge Smith concluded: “Thus, if (as happened in this case) the process of replacing the property takes more than two years, the insured’s claim will be time-barred before it comes into existence.”

Perhaps it should not come as a surprise that my examination of 20 of Judge Smith’s insurance opinions left me unable to predict how he would rule in such future cases. After all, I’ve been married to my wife for seventeen years and I can’t predict how she will respond to anything I say.


Vol. 4, Iss. 1
January 14, 2015


A Christmas Story
And Insurance Coverage

Last month Turner Broadcasting continued its tradition of showing A Christmas Story for 24 consecutive hours during the holiday. Not to mention, for the first time, it did so on two networks--TNT and TBS. Boy that’s a lot of airings. But there were still more Law and Order reruns on during that time.

A Christmas Story is more than just a movie. Nine-year-old Ralphie Parker’s dream of receiving a Red Ryder Carbine Action 200-shot Range Model air rifle for Christmas, has become part of American pop culture. The movie is most famous for the scene where Flick, in response to a Triple Dog Dare, places his tongue on the school yard flag pole believing that, despite the frigid temperature, it will not stick. We all know that it did. Then the bell sounded, signifying the end of recess, and Flick was left all alone stuck to the pole.

The news is full of stories about kids, wondering if that could really happen, who gave it a try. And some of them learned the hard way that A Christmas Story isn’t all fiction. Doing this, especially the pulling off part, can cause serious injury.

Why is it not at all surprising that one youngster, who was inspired by Flick, filed suit on account of injuries sustained when his tongue became stuck to the tetherball pole in his friend’s backyard? Equally not surprising, the suit gave rise to coverage litigation. I’ve been waiting all year for the “Open Mic” column near Christmas to tell this story.

Six year-old Mitchell Turner slept over his friend Tim Morgan’s house in Burnsville, Minnesota during Christmas break in 2012. The two watched A Christmas Story before going to bed. The next morning they were in the back yard, the temperature was in the single digits, and Tim dared Mitchell to stick his tongue on the tetherball pole. You can see where this is going. Mitchell did so and it became stuck. He panicked, instinct took over, and he pulled his tongue off, losing a piece of it in the process. The injuries, and long term consequences, are serious.

Mitchell’s mother, as guardian for her son, filed suit against Tim’s parents for failure to supervise the boys in the backyard. She also named the tetherball pole manufacturer for products liability – defective product and failure to warn. The complaint in Gloria Turner, as Guardian for Mitchell Turner v. Barbara and Michael Morgan, et al., District Court of Minnesota, Dakota County, No. 13-7543, alleged that, because Tim’s parents knew that the boys had watched A Christmas Story, it was reckless to let them go outside the next morning, unsupervised, in an area that included a tetherball pole.

The commercial general liability insurer for the pole manufacturer undertook its defense in the underlying Turner suit. The homeowner’s insurer for the Morgan’s, 10,000 Lakes Property Casualty, disclaimed coverage based on no occurrence. The Morgan’s retained their own counsel.

The defendants filed summary judgment on the basis of assumption of the risk. It was not disputed that Mitchell had watched A Christmas Story the night before the incident and saw the scene where Flick got his tongue stuck to the pole. The court granted the motion based on Toetschinger v. Ihnot, 250 N.W.2d 204 (Minn. 1977), where the Minnesota Supreme Court held that, in appropriate cases, children under seven years of age can be held contributorily negligent. Here the court concluded that it applied to Mitchell as a matter of law.

While the case was now over, and no appeal was filed, the Morgans incurred $12,000 in defense costs. They filed suit against 10,000 Lakes P&C, seeking payment of their defense costs and damages for the insurer’s bad faith denial of coverage. At issue in Morgan v. 10,000 Lakes P&C, District Court of Minnesota, Dakota County, No. 13-9862, was whether Mitchell’s injury was caused by an occurrence when the Morgans failed to supervise the boys, knowing that they had watched A Christmas Story the night before and their backyard had a tetherball pole.

The 10,000 Lakes court described the issue as “unique to say the least.” The court undertook an examination of Minnesota law concerning the “occurrence” issue and set out a laundry list of decisions that have confronted whether certain injury-causing conduct was an accident. Following this lengthy examination, the 10,000 Lakes court held that the injury sustained by Mitchell was not caused by an accident.

The court explained its conclusion as follows: “Minnesota courts have long held that, for purposes of a liability insurance policy, an ‘accident’ is an ‘unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause.’ Simply stated, the Morgans had to appreciate that six year old boys, with insatiable curiosity, a limitless spirit of adventure and A Christmas Story still fresh in their minds from just twelve hours earlier, would see the tetherball pole and be drawn toward it like moths to a porch light. Despite this, the Morgans did nothing to prevent the inevitable. From the Morgans’ perspective, Mitchell’s loss of his tongue was not an unexpected, unforeseen, or undesigned happening. The Morgans’s conduct speaks for itself.”

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


Vol. 4, Iss. 1
January 14, 2015

Book Review:
Construction Defect Coverage:
Concise And Understandable



Construction defect coverage has become a hydra-headed monster. The occurrence issue. Business risk exclusions. Sub-contractor exceptions. Montrose endorsements. Additional insured endorsements. Contractual indemnity. And on and on.

Those confronting these challenging issues have lots of places to go for help. Cases, and articles about cases, are abundant. Google any construction defect coverage issue and the results will be astronomical. While these are surely useful resources, each is generally limited to a specific issue. Proceed this way and your library of construction defect coverage resources will resemble that house on the block with way too many additions.

Joe Junfola of Admiral Insurance Company gets this. And he sees a better way. Joe, with 37 years in the insurance industry, has put that experience into a just-published e-book: Construction Defect Claims: A Handbook for Insurance, Risk Management, Construction, and Design Professionals. It is, simply put, the fundamentals of construction defect coverage in one neat and tidy package. The book is CD coverage -- soup to nuts. All of the key issues are discussed, including: What is a construction defect claim?; Is faulty workmanship an occurrence?; Are construction defects property damage?; Trigger of coverage; Montrose issues; the various “business risk” exclusions; and reconciling contractual indemnity and additional insured rights.

Joe Junfola is not a lawyer. So that means one thing – he doesn’t feel the urge to sound like a lawyer. That’s not to say that the “Handbook” doesn’t discuss plenty of case law. That can’t be avoided when it comes to CD coverage. But what can be avoided is unnecessary complexity in the explanation. That’s where Joe’s book really shines. It teaches the core concepts of construction defect coverage without getting bogged in legalese and going in circles. He doesn’t dwell on comparing and contrasting the law in different jurisdictions. Of course this is important. But Joe’s objective is to explain the general principles. Now, the reader, armed with that understanding, can next tackle any jurisdictional issues.

Case in point. It is hard to imagine a clearer explanation of the relationship between additional insured rights and contractual indemnity than this from Joe:

1. Plaintiff sues the general contractor (“GC”).

2. GC tenders an additional insured claim to the subcontractor’s (“Sub”) insurer on Sub’s policy as an additional insured.

3. GC tenders to Sub for contractual indemnification based on the indemnity provision in the subcontract.

4. Sub tenders GC’s indemnification claim to Sub’s insurer.

5. Alternatively, GC tenders additional insured claim and contractual indemnity claim to Sub’s insurer.

[T]he general contractor has a direct relationship as an additional insured with the sub’s insurer. . . . [T]he general contractor does not have a direct relationship, as an indemnitee, with the sub’s insurer but will benefit from the policy because the sub is covered for its assumption of the tort liability of the general contractor[.]”

And if you still need help, this text is accompanied by a diagram depicting all of these actions and relationships.

Is construction defect coverage more difficult than what’s explained in Construction Defect Claim: A Handbook? Yes. But you gotta tread water before you can swim. You wouldn’t be handed Mozart for your first piano lesson. And nobody goes on I-95 for their first driving lesson. Yet, in my experience, some people are trained to handle construction defect claims by having a big, ugly file thrown on their desk and told to have at it. Your chances of becoming adept at CD claims is much greater if you have the opportunity to first learn the core concepts before being tossed into the deep-end. The “Handbook” provides the building blocks needed to later understand the more complex and nuanced construction defect coverage issues.

Construction Defect Claims: A Handbook for Insurance, Risk Management, Construction, and Design Professionals is one-stop shopping for guidance for those who confront construction defect coverage -- insurers, lawyers, risk managers, brokers and the folks who actually hammer in the nails and draw the blueprints.

More information on Joe Junfola’s Construction Defect Claims: A Handbook for Insurance, Risk Management, Construction, and Design Professionals can be found here:


[Full disclosure: I do coverage work for Joe.]


Vol. 4, Iss. 1
January 14, 2015

Thank You To Marsh



Marsh held its annual Insurance Company Conference last month and I would be remiss not to include a brief note giving it well-deserved kudos and a thank you for the privilege of speaking.

It was just as you would expect from a Marsh conference. Held at the uber-hip W hotel on Union Square in New York, snacks between sessions that could have held their own on the Food Network’s Chopped, and, most importantly, superb conference panels. You know it’s a serious conference when the President and CEO of the company shows up. I had the pleasure of meeting Dan Glaser, the man at the top of Marsh & McLennan, parent company of the 54,000 employee organization made up of Marsh, Guy Carpenter, Mercer and Oliver Wyman.

There were panels on such things as underwriting trends, Wall Street and insurance, regulation and cyber. I’ve seen a lot of cyber panels. But never one that included an FBI Special Agent involved with fighting cyber crime against ISIS and Al-Qaeda. It was riveting. And, I hate to say, more exciting than analyzing whether web site hacks involve a “publication” for purposes of Part B coverage of a CGL policy.

Thank you to Don Roberts and Chris Cancro of Marsh for the kind invitation to speak on my annual top ten coverage cases of the year article. But I am holding you both responsible for the three pounds that I gained.


Vol. 4, Iss. 1
January 14, 2015

I Goofed: Top Ten Coverage Cases Revisited

This year’s installment of the Top Ten Coverage Cases (Coverage Opinions; December 3, 2014) did not include the New York Court of Appeals’s decision in K2 Investment Group v. American Guarantee and Liability Insurance Co. It should have. But my mistake is more than just overlooking a case. I even went so far as to include a note, specifically explaining why K2 was not included on the list. That makes it so much worse than simply failing to include a case that I didn’t know about.

In K2, the New York high court held that an insurer that breaches its duty to defend does not forfeit the right to apply otherwise applicable coverage defenses to any determination of its duty to indemnify. This 2014 decision was a do-over of the Court of Appeals’s 2013 decision in K2 that held otherwise.

The court reached its “no forfeiture” decision on the basis that this was already the law in New York under its 1985 decision in Servidone Construction Corp. v. Security Ins. Co. of Hartford. Simply put, Servidone was overlooked by the court in its earlier decision. Now, acknowledging Servidone, and the weight of stare decisis, the court was left to conclude that an insurer that breaches its duty to defend does not forfeit the right to apply otherwise applicable coverage defenses to any determination of its duty to indemnify.

K2, both I and II, was the subject of tremendous attention and commentary in coverage circles. But, despite all of this, when all was said and done, the decision did nothing to alter New York law. Servidone was the law in New York before K2. Servidone is the law in New York after K2. In essence you could say that the case never even existed. That’s why I chose not to include it as one of the year’s ten most significant coverage decisions.

But then I went to the DRI Insurance Coverage conference in New York in early December. One of the presenters was Kevin Coughlin, of Coughlin Duffy, LLP, who represented American Guarantee in K2. I listened as Kevin explained why K2-II was so significant. And as I sat there it didn’t take long to realize that I goofed when I excluded it from the list of the year’s top ten most significant coverage decisions. My reason, that K2 didn’t represent any change in New York law, was simply too narrow-minded. I missed the big picture. Kevin did a tremendous job of painting that portrait of K2. And I was sold.

The frustration of my miscue is that nothing Kevin was saying I didn’t know. The irony of my miscue is that Coverage Opinions almost always focuses on the wider impact of decisions beyond simply the matter at hand for the involved parties. But, despite all this, for whatever reason, I got it in my head that K2 was just a case about an unchanged New York rule. Nothing to see here folks. Move along. Kevin cured my tunnel vision.

Kevin explained K2’s significance like this. After K2-I was decided, policyholders celebrated the victory. And that’s not surprising. It was unquestionably a significant decision as the forfeiture rule is a harsh sanction for an insurer that breaches the duty to defend. Policyholders were poised to hold up K2 – not to mention coming from the venerable New York Court of Appeals – as part of an effort to convince other courts nationally to also adopt the forfeiture rule. And the ammunition didn’t end there. Policyholders also had the benefit of the ALI’s adoption of the forfeiture rule in its Principles of the Law of Liability Insurance. [The Principles project is now a Restatement and it remains to be seen how the drafters will address the forfeiture rule in this new environment.]

Then, along came K2-II. K2-I was vacated. And with that the air came out of policyholders’ ability to float New York’s forfeiture rule to other states. But it wasn’t just that K2-I was vacated, because Servidone was the law, and the court’s hands were tied by stare decisis. If K2-II had been just that, then policyholders may have been able to argue that, based on K2-I, if the New York high court had been writing on a clean slate, it would have adopted the forfeiture rule. But the New York Court of Appeals in K2-II did more than just point to Servidone, the principle of stare decisis, and say end of story. The court also addressed the substance of the no forfeiture rule, noting that there is “much to be said” for it, several states follow it and the court was not presented with “any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985.”

For these reasons, K2-II deserved to be in the 2014 rendition of the Top Ten Coverage Cases of the Year. I coughed up a fur ball here. Kevin Coughlin set me straight. For the record, I told him as much after his DRI presentation.



Vol. 4, Iss. 1
January 14, 2015

Oh My.
Look Who I Spotted Reading
Coverage Opinions



In early December I was at the DRI Insurance Coverage Conference at New York’s Marriott Marquis. I stepped out to grab lunch and could not believe what I saw – Times Square’s iconic Naked Cowboy, and, get this, reading Coverage Opinions! Of course I went up to him and thanked him for being a reader. We chatted about the K2 decision and the ALI’s recent decision to change the Principles project to a Restatement.

By the way, if you are unfamiliar with this fixture of Times Square, the Naked Cowboy’s story is an interesting one. He has his bachelor’s degree in political science from the University of Cincinnati, has been performing on Times Square for twelve years, has an endorsement deal with Fruit of the Loom and declared himself a Presidential candidate in 2010.

And the Naked Cowboy has been a friend to lawyers. According to Wikipedia, Mars created a short animation of a Blue M&M’s character playing a guitar while dressed in a white cowboy hat, cowboy boots and underpants. The company displayed it on the outside of the M&M’S store in Times Square. The Naked Cowboy, who owns registered trademarks to the Naked Cowboy name and likeness, was not pleased. He filed a trademark infringement suit against Mars. A settlement was reached. The terms were not disclosed.

Also according to Wikipedia, the Naked Cowboy filed a trademark infringement suit against CBS, claiming that the network’s use of a “Naked Cowboy”-like figure, in an ad for a television show, demeaned his image with its ‘drunk and sexually charged portrayal.’ I don’t know what happened with that one.

So the next time you are in Times Square say hello to the Naked Cowboy and let him know that you also read Coverage Opinions.


Vol. 4, Iss. 1
January 14, 2015

Remembrance: A Tribute To Don Malecki



The insurance industry lost a giant on December 12th. Don Malecki passed away after a hard-fought battle against Acute Myeloid Leukemia. Diagnosed in February and given just weeks to live, Don proved the doctors wrong. In over a half a century in the property-casualty world Don served as a broker, underwriter, risk manager, claims consultant, prolific author (including twelve books), editor, publisher, educator and expert witness in 500 cases. In a world where the term legend gets tossed around a lot, and it’s not always appropriate, Don Malecki truly was one. I have three of Don’s books on my shelf. I will have very fond memories of him each time I open one. Don is gone but not his guidance to the insurance industry.

I had the privilege of interviewing Don for the January 30, 2013 issue of Coverage Opinions. He talked about his long career, how things have changed, his incredible insurance library, the role that history can play in coverage disputes and his best advice. I reprint my interview here.

Don, thank you for taking the time to speak with Coverage Opinions. I know it is impossible to summarize a 53-year career in just a few words, but please try. What are some of the highlights?

During my senior year at Syracuse University, I was employed by the Fireman’s Insurance Company of Newark, N.J. It provided a solid foundation in insurance. This was followed by a one-year training program with Continental Insurance Company, including taking courses at the College of Insurance in New York City.

I then became an editor of the Fire, Casualty & Surety Bulletins (FC&S) at the National Underwriter Company in Cincinnati, where I learned how to research and write for that publication and others. This provided a great foundation for my later work.

My “baptism by fire” in risk management came when I was hired by a firm in California, owned in part by the esteemed Dave Warren and Donn McVeigh. I worked on a huge bank in Phoenix and the City of Anaheim.

Shortly thereafter, I wrote my first textbook used in the CPCU curriculum, and was influenced by such insurance giants as the late James Donaldson, William Rodda, and Ronald Horn, who was a professor at various colleges. That one book led to another and the number of published books stands at twelve and counting.

Still working with some nice, knowledgeable partners and staff, still in demand and continuing to have the opportunity to meet (and sometimes help) others around the world is quite an achievement for someone who will be 80 years young this year.

Of course this question has to be asked. How have things changed in the P&C world in the half a century in which you’ve been a participant and observer?

Well, I still have the L.C. Corona typewriter and some carbon paper, but it is rather unlikely I will ever put them to use again. When I started in the business, the SMP (special multi-peril package) concept was one year old. Umbrella policies, which I underwrote, offered many broad coverages. In fact, virtually all policies were broader than today and rating them was much simpler. Policy revisions were infrequent and not being pushed so hard by today’s aggressive litigation. Directors and officers liability insurance was unheard of back then, and so too were many of the E&O and professional liability policies and coverages we see today. “Cyber” insurance was not even a gleam in the eye of insurance underwriters.

Another interesting observation was that the industry was divided and everyone knew his or her place. Members of stock company-related organizations, such as the Big I, viewed members of mutual company-related organizations, such as the PIA, as mortal enemies. Nowadays, producers handle insurance from both stock and mutual companies.

I know you have amassed a huge collection of insurance policies and documents over your career. What are some of the most interesting things in your library?

My insurance library includes old and new insurance company underwriting and claims manuals. It also has over 500 subject categories of documents packed with old articles, speeches, correspondence dealing with coverage questions and old policies and endorsements of all kinds. This includes the original umbrella policies of Lloyds, INA and many other industry pioneers. I have Best’s P&C magazines since 1958 (which is when I was taking insurance courses in college), Business Insurance, including the first copy produced in 1968 and National Underwriter magazine since 1966.

We have been very successful in locating old documents that are germane to current issues particularly those involved in litigation. I am certainly not Indiana Jones, but insurance archeology is a passion minus the whip and hat.

You’ve talked to me about the importance that history should play in insurance coverage disputes. Can you please describe that?

When I talk to insurance people about history, they are not usually interested in that subject. What they may not know, however, is that insurance history, like all history, has a tendency to repeat itself. In fact, not knowing history can be harmful. Many of the old provisions that have been held to be ambiguous and, thus, eliminated, are often resurrected by agents and brokers. One example is the product liability batch clause that was introduced in the standard liability policies of the National Bureau of Casualty and Surety Underwriters in 1941, for purposes of serving as an aggregate limit. It was explained as being troublesome and eliminated. Apparently, those still using that same language are not aware, as drafters of those provisions, of the potential problems they have created for themselves.

You have been retained as an expert in 500 cases. To what do you owe that success?

The first thing I would like to say is that I have turned down just as many cases, if not more, than I have accepted. I used to keep a list of the ones that I also turned down, to prove that I do not take all of them offered.

Second, my success is attributable, in part, to three lawyers. Two from Houston and one from Kentucky. Early on, they put me through their fact witness and expert witness classes and taught me the ropes, including how to breath in depositions.

Third, I realized that in the event of a coverage dispute, it is up to the court to decide whether coverage applies or not. Most courts, however, have permitted me to testify on the genesis of policy language and its evolution.

One difference between other experts and myself is that I am a prolific writer and, therefore, subject to attack on what I have written. I have written hundreds of articles and have managed to remain a desired expert. What I have to sometimes explain, via depositions and trials, is that my opinions as expressed in articles change over time in response to legal and policy changes. What I may have said ten years ago is not necessarily imbedded in concrete today.

There must be some claims you will never forget. Can you share a couple of those.

Out of over 500 cases, I have only testified 55 times in court. I also can remember that only five of the judges were ones I would not care to meet again. I probably have outlived them anyway.

I remember the 1999 case of Great Lakes Dredge & Dock Company v. Commercial Union Assurance Company and the Honorable Joan Gottschall of the U.S. District Court. My testimony was like two friends who were drinking coffee and discussing matters. Another memorable case was the Dow Corning Corporation case before the U.S. Bankruptcy Court in 1996 in Michigan. The judge referred to me as “the father of many of the insurance policies’ forms—or at least many of clauses and paragraphs therein—which are in litigation here.” He must have thought I was a lot older than I was at the time.

What keeps you going after all these years and what things are keeping you most busy.

I believe insurance is a continuous learning classroom and have worked so hard to learn all I can. I now enjoy helping others through speaking engagements, open discussions and writing articles and books. The word “retirement” is not in my vocabulary.

What is the best advice that you can give someone starting out in the P&C business?

What I tell people is to continue to learn and increase your knowledge of the subject matter, not only your job but everyone else’s. Don’t believe everything you read on the internet. A lot is misleading. Do your own research and ask others when there is no other alternative. Attend seminars and workshops and meet others for purposes of networking, even if you have to foot the bill. View matters as an investment. Also work toward CPCU and other designations.

What do you enjoy doing when you are not sitting in front of a computer?

My main hobby is my kids and grandkids. I love helping them in their work and play activities. Personally, I like to golf. I started it late in life so I will never turn pro. I combined my interest in golf and hired a pro for my granddaughter who, at the time, was 13. She is now 16 and will be playing varsity at her all-girls school. I am hopeful she will earn a college scholarship for her level of play.


Vol. 4, Iss. 1
January 14, 2015

High Court Hands Excess Insurers A Big Bad Faith Stick Against Primaries

There is nothing out of the ordinary about suits by excess insurers, against an underlying primary insurer, alleging that the primary had an opportunity to settle a claim within its limit, did not do so, and, as a consequence, there was later a verdict that reached, but should not have, the excess insurer’s policy. Such a suit is conceptually the same as one by an insured, against its insurer, for failure to settle a claim when it could have, and should have, and the result of such failure is an excess verdict for which the insured is now personally liable.

The Missouri Supreme Court’s decision in Scottsdale Ins. Co. v. Addison Ins. Co., No. SC 93792 (Mo. Dec. 9, 2014) involves a dispute between an excess and primary insurer over a primary’s failure to settle a claim. But what makes it different from most primary-excess cases is that the excess insurer’s liability arose out of a settlement that it was forced to make, following a primary insurer’s failure to settle. In other words, the excess insurer’s liability did not stem from a verdict. And since the vast majority of cases settle, the decision is one the other courts may look to for guidance on the issue, asking the Missouri Supreme Court to Show Me how you addressed it.

The dispute in Scottsdale v. Addison grew out of an accident by a Wells Trucking employee that resulted in the death of another motorist. Wells was insured under a $1 million primary policy issued by United Fire and a $2 million excess policy issued by Scottsdale. The decedent’s family and United Fire entered into settlement negotiations. While the decedent’s family also filed suit against Wells, settlement negotiations continued. A mediation took place and the claim was settled for $2 million – United Fire paid $1 million and Scottsdale paid $1 million. Wells Trucking then assigned to Scottsdale its rights to pursue a bad faith refusal to settle claim against United Fire.

These facts don’t sound like the stuff of bad faith failure to settle cases. But here’s the rub. Among other factors, notably, the decedent’s family provided several opportunities to United Fire to settle the case for its $1 million limit. At some point, the decedent’s family withdrew its $1 million demand, raised its demand to $3 million and refused to accept $1 million to settle. When United Fire ultimately agreed to pay its $1 million limit, it knew that the amount was not sufficient to achieve a settlement and that Wells and/or Scottsdale would have to pay additional sums to settle. Scottsdale achieved a $2 million settlement by contributing $1 million under its excess policy and then pursued United Fire for bad faith failure to settle.

United Fire responded to the claim, with the following argument: “Wells Trucking and Scottsdale could not prove a bad faith refusal to settle claim because the essential elements of the claim were not met. Specifically, United Fire asserted that because it ultimately tendered its $1 million policy limits to settle the claim against Wells Trucking, Wells Trucking and Scottsdale could not prove that United Fire refused to settle or that it acted in bad faith and, because the wrongful death action was settled, United Fire and Scottsdale could not prove that Wells Trucking suffered an excess judgment.” The trial court agreed with this. The Missouri Supreme Court did not.

While the court had much to say about bad faith refusal to settle, how it works and why it exists, the most important point of the case is this. Scottsdale and Wells argued that: “Wells Trucking and Scottsdale have claimed that it was not until after United Fire acted in bad faith in refusing to settle that United Fire finally agreed to tender its $1 million policy limits. By that time, however, the decedent’s family would not settle for $1 million, and United Fire’s $1 million policy limits could no longer fully settle the wrongful death claim. If, as Wells Trucking and Scottsdale allege, United Fire’s failure to act on the decedent’s family’s earlier settlement demands was in bad faith and caused Wells Trucking to lose its opportunity to fully settle the claim within United Fire’s policy limits, United Fire should not be able to evade liability by later agreeing to pay its policy limits. United Fire’s mere payment up to the policy limits does not make Wells Trucking whole or put Wells Trucking in the same position as if United Fire had performed its obligations to settle in good faith.”

The court concluded that United Fire was not entitled to summary judgment because it was unable to show that the essential elements of a bad faith refusal to settle claim could not be proven.

As we all know, despite all kinds of protracted negotiations between parties, and threats to go to trial, just about all cases are eventually resolved by settlement. During the lead-up to that, and especially in the early stages, it is not usual for an insurer to fail to accept a settle demand within limits, on the basis that, if they don’t, they can always do so later. The primary insurer may also decline to settle within the limit when there is an excess insurer, as it gives the primary some assurance that the insured is not personally exposed. In the insurer’s defense, at the time of the limits demand, it may simply not know if the case justifies such a settlement. But sometimes the writing is on the wall -- even if you don’t know every detail.

Scottsdale v. Addison illustrates the risk for primary insurers who fail to accept a limits demand, believing that there’s always time to do so later. As time goes on, and the plaintiff spends more money on the case, and perhaps acrimony grows between the parties, the limits demand may be pulled off the table. But because cases almost always have a way of settling, the plaintiff may still eventually accept the primary limit. But now one thing has changed -- the excess insurer must also contribute to achieve a settlement.

Scottsdale v. Addison demonstrates the risk for primary insurers who go down this road. Despite paying its limit, and the insured itself having no personal liability – things that should prevent a bad faith failure to settle claim – the primary insurer still faces exposure over its limits – and perhaps by a lot – by delaying what it figured all along would be a limits settlement.




Vol. 4, Iss. 1
January 14, 2015

The Vexing “Employee Exclusion” Issue: Is The Occasional Helper An “Employee”?

We’ve all seen this one. A person is injured at a work place and brings a claim against the party that hired him. However, the injured person is not an “employee” in the ordinary sense of the word. He is not someone who comes to work on a regularly scheduled basis, either full-time or part-time, with an expectation that his position is indefinite, until he voluntarily leaves or is involuntarily let go. Rather, he is someone who comes around, now and then, and is paid, probably under the table, to perform random tasks or help out on a certain project. When the task or project is done so is his job.

When this injured person’s claim reaches his employer’s commercial general liability insurer, it may seek to disclaim coverage on the basis of the Employer’s Liability exclusion, which applies, in general, to “bodily injury” to an “employee” of the insured arising out of and in the course of employment by the insured or performing duties related to the conduct of the insured’s business. But the “employer” says not so fast -- the injured person was not my “employee.” He was just someone who came around who I was paying for a day or two to help out with such and such task. So the question becomes this – was the injured person an “employee” at the time he was injured? The answer may have very serious implications. The “employer’s” CGL policy may be the only realistic source of recovery for the injured party – especially if worker’s compensation insurance is unavailable. That opens up a whole other can of worms.

Of course, the first place to look for the answer to the question, whether the injured person was an “employee” of the insured, are the terms of its commercial general liability policy. But, under facts like these, you are unlikely to find the answer in there. The typical CGL policy offers this by way of the definition of “employee”: “‘Employee’ includes a ‘leased worker.’ ‘Employee’ does not include a ‘temporary worker.’”

In situations like this, the injured person is not likely going to qualify as a “temporary worker,” defined as “a person who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.” Even though the person sounds just like a “temporary worker” -- they were there helping out temporarily -- such person was very likely not “furnished” by anyone to the insured. The injured person is also not likely going to qualify as a “leased worker,” defined as “a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business. ‘Leased worker’ does not include a ‘temporary worker.’” Just as the injured person was not, in all likelihood, “furnished” by anyone to the insured, he was also not likely “leased” to the insured by a labor leasing firm.

So with the terms of the commercial general liability policy not providing any help with the question whether the injured person was an “employee” of the insured, it is necessary to proceed to step two – how have courts in the relevant state defined “employee”? And while courts in every state have undoubtedly defined “employee” for some purpose(s), have they done so for determining the applicability of a CGL policy’s Employer’s Liability exclusion?

This lengthy introduction was all to get to the Sixth Circuit’s decision in Western World Insurance Company v. Hoey, No. 13-2388 (6th Cir. Dec. 8, 2014). It goes like this.

Burt Hoey owned a farmers’ market that offered hay rides, pony rides and pumpkin picking. He hired Mary Armbruster to run the hay wagon for eight weekends. An accident with the wagon crushed Armbruster’s spine, leaving her a paraplegic. Litigation ensued against Hoey, as well as against Hoey’s General Commercial Liability insurer, Western World. At issue was whether Armbruster was an “employee” as defined by the CGL policy. The relevance of this was significant -- the policy contained an exclusion for bodily injury to an “employee,” “temporary worker,” or “independent contractor” (among other classifications). The policy defined “employee” to include a “leased worker” but not a “temporary worker.” “Temporary worker” was defined as “a person who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

Nobody disputed that Armbruster did not fall under the definition of “temporary worker” because she was not “furnished” to Hoey by a third party. Western World argued that Armbruster was therefore an “employee” and not covered. Armbruster countered that she was “covered by the policy because the policy uses ‘temporary worker’ in two different ways—in a broader sense in the definition of ‘employee’ and in a narrower sense in the explicit definition of ‘temporary worker.’” Armbruster argued that, although “she does not meet the explicit definition of ‘temporary worker’ because she was not furnished,” she is nonetheless a temporary worker for purposes of falling outside the definition of “employee.” [Admittedly, this is confusing, but we can get past it to make the point.]

The court sided with Western World: “The contract makes clear that ‘employee’ is the default status for anyone who works for the insured.” So the court next turned to the question -- how to define employee? The appeals court adopted the District Court’s “economic-reality test” – “a multi-factor balancing test that asks whether the employer (1) had control of the worker’s duties; (2) paid her wages; (3) could hire, fire, and discipline her; and (4) whether the worker performed her duties in order to accomplish a goal she shared with the employer. . . . The district court noted that ‘[a]ccording to Armbruster’s deposition, it was Hoey who (1) personally hired her, (2) paid her in cash for her work, (3) directed and controlled her work activities, and (4) had the authority to fire her.’ Thus, the district court concluded, ‘it appears that she fits the common understanding of an employee, albeit a temporary one.’”

The Sixth Circuit agreed: “The language of the contract, though perhaps clumsy, is clear, as is the result: Armbruster is an ‘employee’ and her injuries are not covered by the policy.” The court also noted that its conclusion “comports with the normal purpose of a commercial general liability policy,” which usually do not cover injuries to a businesses’ workers. Instead, the court observed, businesses are required to maintain workers’ compensation insurance and the sole purpose of commercial general liability insurance is to provide coverage for injuries that occur to the public-at-large.”

To summarize -- Armbruster was not a “temporary worker” because she was not “furnished.” On the other hand, she was an “employee, albeit a temporary one.” Therefore she was within the Employer’s Liability exclusion.

Notwithstanding the somewhat unusual policy language here (it is not ISO CGL on this issue), there is a take-away. While there may be some state law variance on this issue, the relationship between the worker, and the party that hires him or her, need not be formal or long-term for the worker to qualify as an “employee” for purposes of the Employer’s Liability exclusion. And the fact that Hoey was paying Armbruster in cash didn’t change this result.


Vol. 4, Iss. 1
January 14, 2015

Court Provides A Clinic In Sometimes Overlooked Coverage Issue

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: having to pay the policyholder’s attorney’s fees. I sometimes see this consideration overlooked, or not given enough weight, in the calculus.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is often-times an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim. In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim. Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith. Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured. Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute. And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases an insurer that is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

A recent decision from an Oregon federal court demonstrates in stark terms how significant the attorney’s fees issue can be for an insurer that is unsuccessful in coverage litigation.

In Schnitzer Steel Industries v. Continental Casualty Company, No. 10-1174 (D. Or. Nov. 12, 2014), Schnitzer sought coverage from Continental for defense costs incurred with respect to claims for contamination of sites in the vicinity of Portland Harbor.

Following protracted litigation the case went to trial and the jury awarded Schnitzer all of the defense costs it sought -- $8,601,700 (plus $2.4 million in pre-judgment interest). [According to Continental, some of these defense fees eventually clocked in at $900/hr. for some partners and $375/hr. for paralegal work.] But the legal fees didn’t end there. Schnitzer then sought to recover $3,483,878 in attorney’s fees incurred for recovering the $8.6 million in defense fees, as well as $49,681 for its attorney’s fees for preparation of the fee petition. The authority for all of this was an Oregon statute.

The Oregon statute -- ORS § 742.061(1) – reads like this in relevant part: “[I]f settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff’s recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.”

The court had this to say about the statute: It is “intended to ‘encourage the settlement’ of insurance claims and to ‘reimburse successful plaintiffs reasonably for moneys expended for attorneys fees in suits to enforce insurance contracts.’ When the conditions enumerated in [the statute] are met, attorney fees must be awarded.”

Having concluded that the conditions in the statute were satisfied, the court then turned to another statute - ORS § 20.075 -- that lists factors the court must consider in determining the amount of an award of attorney fees. There are a staggering sixteen of them.

Despite all of these considerations, the court described what’s generally to be examined: “[T]here are two main components in any attorney fees award: (1) determining whether or not the hourly rates claimed by the attorneys and their staff are reasonable; and (2) determining whether or not the total number of hours claimed by the attorneys and their staff is reasonable. [The statute] contains several factors that are relevant to determining the appropriate hourly rate for each timekeeper. The most relevant factors are those that require the court to consider the complexity of the case, the rates charged in the locality for similar legal services, the time limitations imposed by the client or the case, and the experience, reputation, and ability of the attorney performing the services.”

In general, Continental argued that the coverage rates sought were unreasonably high for the Portland market. It is beyond the scope here to address the court’s very detailed analysis in arriving at its conclusion that all of the fees sought would be awarded. But that’s what it did by concluding that the rates, as well as hours worked, were reasonable.

The take away here is easy. States differ widely in how they address the recovery of prevailing party attorney’s fees in coverage litigation. The outcome of Schnitzer certainly would not have been the same in all states. Nonetheless, it must be remembered that there is sometimes more to the calculus, whether to engage in coverage litigation, than simply the chances of prevailing on the merits.


Vol. 4, Iss. 1
January 14, 2015

More On The Duty To Defend -- And When It Might Never End

Whether an insurer’s duty to defend attaches arises in every liability claim. In the November 5, 2014 issue of Coverage Opinions I addressed the less-frequent issue -- when an insurer’s duty to defend un-attaches.

The rule in the great majority of states is that the duty to defend ends after all potentially covered claims have been dismissed. However, in a few states, an insurer can’t leave so fast. For example, in Well’s Dairy, Inc. v. Travelers Indemnity Co., 336 F. Supp. 2d 906 (N.D. Iowa 2004), the Iowa federal court addressed whether an insurer was obligated to continue to defend an insured where summary judgment on a breach of contract claim was denied -- but granted on a negligence claim. So with only a non-covered breach of contract claim at issue in the case, the insurer maintained that it no longer owed a defense. With no Iowa decisions on point, the court adopted the rule from the Minnesota and Hawaii Supreme Courts: “An insurer is not relieved of its duty to defend as a result of the granting of a partial summary judgment until no further rights to appeal arguably covered claims exist.”

Given that almost all cases settle, a rule that the duty to defend continues on, until no further rights to appeal potentially covered claims exist, is, in essence, a rule that the duty to defend goes to the end of the case, despite what happens along the way.

After writing this article I was contacted by a CO reader who told me about an on-going case involving this issue – Southern Snow Mfg. Co. v. SnoWizard Holdings, Inc. Interestingly, the case is currently before the United States Court of Appeals for the Federal Circuit. This is not the same as the U.S. Court of Appeals for the District of Columbia Circuit. I read a lot of coverage cases and I have never come across one from the Court of Appeals for the Federal Circuit.

The Federal Court of Appeals was formed on October 1, 1982, as the merger of the United States Court of Customs and Patent Appeals and the appellate division of the United States Court of Claims. The Federal Circuit has nationwide jurisdiction in a variety of subject areas, including international trade, government contracts, patents, certain money claims against the United States government, federal personnel, veterans’ benefits, and public safety officers’ benefits claims. [Believe me. I had to look that up.]

SnoWizard involves coverage issues arising out of litigation between competitors in the business of manufacturing and selling snowball ice-shaving machines and snowball flavor concentrates. The case involves an intellectual property dispute. Some patent issues got an appeal to the Federal Circuit. I read a lot of coverage cases and I have never come across one involving snow cones.

SnoWizard is complex and protracted. And some of the duty to defend issues in SnoWizard are unique to it. My objective is to discuss the when the duty to defend ends issue in terms that make it relevant beyond the dispute here.

Hanover Insurance agreed to provide a defense to SnoWizard, under a reservations of rights, pursuant to the terms of its policy and with a settlement agreement memorializing it. In the settlement agreement, SnoWizard released Hanover from all claims asserted in a third-party complaint for Hanover’s refusal to defend. Subsequent discovery showed that Southern Snow could not support a claim covered by Hanover’s policy. The judge in the Louisiana District Court concluded: “It is now undisputed that Southern Snow lacks evidence to sustain any type of defamation tort claim, whether in slander, libel, or disparagement” and that Hanover’s policy “does not afford coverage for the claims” asserted against SnoWizard.

That it was judicially determined that Hanover’s policy did not afford coverage was still not enough to terminate its defense obligation. It would have been, except the court held that the settlement agreement prohibited Hanover from withdrawing its defense. The settlement agreement is an aspect of the case that may make it different from many situations where an insurer agrees to defend and then seeks to end its defense. But the District Court’s decision (February 16, 2013; there are several of them) still offers a take-away.

In reaching its decision that a defense was still owed, despite the absence of any type of defamation tort claim, the court noted that the settlement agreement stated: “Hanover’s agreement to defend SnoWizard in the Consolidated Suits subject to Hanover’s three July 12, 2010, Reservation of Rights letters to SnoWizard concerning SnoWizard’s tender of defense and indemnification in the Consolidated Suits...and subject to Hanover’s stipulations and affirmative defenses set forth by Hanover in its response to the Third-Party Complaint.”

The court examined the rights reserved by Hanover and concluded that they “all relate to Hanover’s position on the issue of coverage, which is a separate and distinct issue from the obligation to furnish a defense. … [T]he Settlement Agreement clearly expresses that Hanover will furnish SnoWizard with a defense in recognition of the vague allegations of ‘disparagement’ in the Second Amended Complaint. However, Hanover unambiguously reserves all of its coverage defenses set forth in the policy itself, the answer to the third party complaint, and the Reservation of Rights letters, and it reserves the right to alter its position on coverage if circumstances change.”

I disagree with the court that the use of the term “coverage” here was limited to an indemnity obligation and did not also include a defense. Hanover’s reservation of rights letter stated: “Hanover Insurance Company’s position on coverage in this matter and its undertaking to defend SnoWizard, Inc. does not waive any other policy defense or legal rights available to Hanover Insurance Company, and Hanover Insurance Company reserves the right to amend or alter its position on coverage at any time should additional information come to light, should circumstances change.” To me, that’s pretty clearly: If circumstances change – and they sure did here when the court found the absence of any type of defamation tort claim – then Hanover was entitled to cease defending.

But the court held the way it did. Given that withdrawing a defense, after it has attached, can have significant implications, the lesson here, if there is even one, is for an insurer to draw a distinction between defense and indemnity when agreeing to undertake a defense, subject to a reservation of the right to amend or alter its position at any time should additional information come to light or circumstances change.


Vol. 4, Iss. 1
January 14, 2015

Siblings Who Hate Each Other and Insurance Coverage

In Peerless Indem. Ins. Co. v. Moshe & Stimson LLP, the court held that no coverage was owed to a law partner, under a liability policy, for a claim that he defamed his law partner – who also happened to be his sister. [Can you imagine Thanksgiving dinner. Pass the stuffing. *&%$#@.] The appeals court concluded that the employment practices exclusion precluded coverage.

The trial court had determined that the exclusion did not apply, because the suit did not involve employer-employee conduct, since one partner is not the employee of the other. The appeals court disagreed: “[W]e need not determine in what capacity Sarah was employed by the firm. Instead, the issue is whether Justin’s alleged actions, particularly his alleged defamation of his sister, were ‘employment-related.’” The court concluded that they were and, therefore, the employment practices exclusion precluded coverage.

Neighbors Who Hate Each Other and Insurance Coverage

In Lawellin v. Kemper Independence Ins. Co., No. 14-315 (C.D. Cal. Nov. 21, 2014) the California federal court held that no coverage was owed to a resident of the City of Indian Wells, under a liability policy, for damages arising out of a Warrant Application Case filed against him by the City. The issue – he refused to trim his ficus trees, despite ordinances banning hedges taller than nine tree, and a neighbor complained because it blocked his view. Ficus Man sought coverage from his insurer; it denied; and he lost the case against the City – leaving him liable for the City’s attorney’s fees in the amount of $97,000. He filed suit against his insurer for lots of things.

The court held that no coverage was owed based on “no occurrence:” “There is no dispute in this case that Lawellin knew about the hedge-height ordinance, or that he knew his ficus hedge exceeded the ordinance’s limit. It may well have been the case that Lawellin did not intend to harm his neighbor, but his subjective intent is irrelevant to whether Kemper had to pay for his legal defense. . . . [T]the record evidence shows that Lawellin knew his omission (not cutting the hedge) would harm his neighbor or violate the ordinance or both. He received multiple warnings and citations, and knew he was in continuous violation of Indian Wells’s ordinance, yet failed to act.”