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Vol. 5, Iss. 1
January 13, 2016

 

Top 10 Coverage Cases Of The Year: CliffsNotes Version

My Letter To Cliff Hillegass -- Founder of Cliff’s Notes

 

 

You may have missed my 15th edition of the “Ten Most Significant Coverage Decisions of the Year” in the last issue of CO. Perhaps you just had something better to do or perhaps you didn’t feel like reading 47,000 words. Well, your decision to ignore the article has paid off. Below is the CliffsNotes version.

By the way, in the interesting factoid category, there really is (or was) a Cliff at CliffsNotes. According to the all-knowing Wikipedia – which we all love to use but don’t donate the requested $3 to the funding campaign – CliffsNotes (originally Cliff’s Notes) was started by Cliff Hillegass in his Lincoln, Nebraska basement in 1958. I bet you didn’t know that.

When I was in college I sent a letter to Cliff Hillegass thanking him for all he did and letting him know that he was my favorite author. I asked him for his autograph and he kindly sent back the photo that you see nearby. It’s been nearly 30 years since Cliff sent me that photo and I still keep it, along with the cool envelope that it came in, in a safe place.

Cliff Hillegass died in 2001. I assume someone wrote a 50 page eulogy and then read a one-page summary. I dedicate this CliffsNotes Version of the Top 10 Coverage Cases Of The Year to the memory of Cliff Hillegass.

For the fifteenth year in a row I have taken a crack at listing the ten most significant liability insurance coverage cases of the year. Admittedly, it is a highly subjective exercise and in no way scientific. The list is subject to as much debate and disagreement as that of the ten best pizza places in New York City.

But that the list is not unscientific, and devoid of any checks and balances, is not to say that the selection process is without serious consideration, criteria and hand-wringing. The cases are chosen based on numerous selection factors that I have developed over the years. In general, the selected cases (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. Putting aside all of the details of how this operates, including why seemingly important cases are not chosen, 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.

One curiosity of this year’s list is that five of the cases involve an issue, in some manner, concerning an insurer’s handling of the settlement of an underlying action. In fifteen years of creating the list there has never been one issue that so predominated the ten selections.

The following cases are listed in the order that they were decided.

American Western Home Insurance Co. v. Donnelly Distribution, No. 14–797, 2015 WL 505407 (E.D. Pa. Feb. 6, 2015)

It is one of the toughest issues of them all for insurers, not to mention one sorely lacking in guidance. The insurer is defending its insured under a reservation of rights. There are strong coverage defenses. The underlying case is getting close to trial. There is a demand to settle within limits. It is a settlement that should be accepted based on liability and damages considerations. But the insurer does not believe that coverage is owed. So it is not pleased at the prospect of settling. But if it accepts the demand, it could lose its coverage defenses. If it does not accept the demand, because of the coverage defenses, it may be liable for the verdict – excess or otherwise. And, of course, a declaratory judgment is unlikely to solve the problem as trial is probably approaching and it could never be resolved in time.

An issue along these lines played out in the Eastern District of Pennsylvania in American Western Home Insurance Co. v. Donnelly Distribution, Inc. and the court provided real guidance to an insurer confronting this challenge. The take-away here is that an insurer that is undertaking its insured’s defense, under a reservation of rights, and has filed a coverage action, but that is not resolved before a demand to settle is made, has an argument that any settlement it makes is one for which it is entitled to reimbursement, following any judicial determination that no coverage was owed for such settlement.

Mid-Continent Casualty Co. v. Kipp Flores Architects, LLC, 602 Fed. Appx. 985 (5th Cir. 2015)


By Joshua Mooney – White and Williams, LLP
In Mid-Continental Cas. Co. v. Kipp Flores Architects, LLC, the United States Court of Appeals for the Fifth Circuit held that a house is an “advertisement” for purposes of the duty to indemnify under Coverage Part B of a commercial general liability policy. The insured, a builder, built homes using an architect’s design, but without a license. The architect sued for copyright infringement.

The Court concluded that the underlying action alleged infringement of copyright in the insured’s advertisement. Traditionally, courts recognized that advertising injury coverage only covered copyright infringement in an advertisement, not in the product itself. Here, because the homes in question were deemed to be the best means to market the builder’s work, the homes – the infringing products themselves – were converted into advertisements for purposes of insurance coverage. By logical extension, an insured need only contend that an infringing product sells itself in order to qualify for “personal and advertising injury” coverage.

C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co., 347 P.3d 163 (Hawaii 2015)

The Hawaii Supreme Court’s decision in C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co. provides a very broad interpretation of a Designated Premises Endorsement. A large portion of a dam in Hawaii collapsed, releasing over three million gallons of water. The insured was the seller of the dam and the purchaser alleged that the insured was aware of the dam’s questionable structural stability. The insured’s commercial general liability policy had a Designated Premises Endorsement that limited coverage to liability “arising out of the ownership, maintenance, and use of the [designated] premises.” And, most importantly, the dam site was not listed as a designated premises.

The court concluded that the “policy provides coverage for injury and damage arising out of [the insured’s] ‘use’ of its corporate headquarters to make negligent corporate decisions [the headquarters was a designated premise] even though the resulting damage happened at the unlisted Dam site.” C. Brewer provides an important policy drafting lesson for insurers that seek to limit their CGL coverage to liability on designated premises.

Erie Insurance Exchange v. Lobenthal, 114 A.3d 832 (Pa. Super. Ct. 2015)

The Pennsylvania Superior Court held in Erie Insurance Exchange v. Lobenthal that a reservation of rights letter was never provided to an adult-defendant, who was a resident in her parents’ home, because the letter -- that was intended to be a reservation of rights -- was addressed to her parents. The court held: “[W]e refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time. Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter. Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”

Thus, despite that the insurer should have owed no coverage to the insured, on account of an exclusion, such was not to be the case, as no reservation of rights letter was ever sent to her. The overarching take-away from Lobenthal is that, when an insurer sends a reservation of rights letter, no matter how well-drafted it is, it must address coverage for all insureds and be sent to or on behalf of them.

Kelly v. State Farm Fire & Casualty Co. 169 So. 3d 328 (La. 2015)

Insurers generally see themselves as relieved of any risk of exposure for an excess verdict if there is no demand to settle within limits. After all, even if the insured has a legitimate risk of personal liability for a verdict above its policy limit, the opportunity to settle just isn’t there.

The Louisiana Supreme Court held in Kelly v. State Farm Fire & Casualty Co. that an insurer can be found liable for a bad-faith failure-to-settle claim, under Louisiana’s version of the Unfair Claims Settlement Practices Act, notwithstanding that the insurer never received a firm settlement offer. The court pointed to the statute’s language that an “insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both.”

By relying on this Louisiana statute to reach its decision it sounds like Kelly may not be felt outside the Pelican State. But here’s the rub. The Louisiana statute is in fact based on the National Association of Insurance Commissioner’s Unfair Claims Settlement Practices Act. And just about every state in the country has adopted some version of the NAIC’s Act. Therefore, the Kelly court’s rationale may be there for the talking by courts in other states. If so, insurers may not be able to consider themselves without risk of exposure for an excess verdict because a demand to settle within the insured’s limit of liability was never made.

Wolfe v. Allstate Property & Casualty Company, 790 F.3d 487 (3rd Cir. 2015)

When considering whether an insurer is obligated to settle a case, based on the possibility of a verdict in excess of limits, it may be the potential for a punitive damages award that has a lot to do with pushing the case into that category – especially one that is relatively small or has fixed damages that do not exceed the policy limit.

The Third Circuit held in Wolfe v. Allstate that, if punitive damages are uninsurable, then an insurer does not have to consider the potential for the jury to award punitive damages, when confronted with a settlement demand within policy limits, and assessing whether a verdict can potentially exceed such limits. Thus, the Wolfe court has given insurers justification for taking cases to trial, and then avoiding liability for a verdict in excess of limits, if that’s how it turns out.

The Babcock & Wilcox Company v. American Nuclear Insurers, 2015 WL 4430352, -- A.3d -- (Pa. 2015)

The Pennsylvania Supreme Court held in Babcock & Wilcox Company v. American Nuclear Insurers that an insured did not forfeit “insurance coverage by settling a tort claim without the consent of its insurer [for $80 million], when the insurer defended the insured subject to a reservation of rights [to the tune of $40 million], asserting that the claims may not be covered by the policy.”

The story of B&W is that the Pennsylvania high court adopted a variation of the Arizona Supreme Court’s decision in United States Auto Ass’n. v. Morris, 741 P.2d 246 (Ariz. 1987). In general, under Morris, the insured will not be deemed to have violated the cooperation clause’s prohibition against the insured settling a case without the insurer’s consent. The insurer must be made aware that it may waive its reservation of rights and provide an unqualified defense. If the insurer declines, it can defend against the judgment resulting from the Morris agreement on the basis that it is unreasonable and/or not covered.

As discussed above in Donnelly Distribution, there may be no harder issue than an insurer confronted with a settlement demand but which has defenses to coverage for any verdict against the insured. The Pennsylvania Supreme Court’s decision in Babcock & Wilcox Company may find an important place in addressing this complex situation. This challenging issue is also sorely lacking in guidance. For that reason, B&W’s reach may extend beyond The Keystone State.

[Disclosure: White and Williams filed an amicus brief, on behalf of an insurance industry trade association, in support of ANI’s position.]

United States Liability Insurance Company v. Benchmark Insurance Services, 797 F.3d 116 (1st Cir. 2015)

Insurers have been attempting to reduce their exposure for bodily injuries at construction sites. The effort has come about in the form of endorsements that preclude coverage for bodily injury sustained by an employee of a contractor or subcontractor. However, under some of these endorsements, the injured party need not have been working for a subcontractor that was retained by the insured. Rather, the exclusion applies if the injured party was employed by any contractor or subcontractor on the project.

The First Circuit in United States Liability Insurance Company v. Benchmark Insurance Services declined to uphold an exclusion where the injured person was employed by a contractor that had no relationship to the insured. The court’s rationale was that the term “contractor” is ambiguous: “Anyone with a contract is surely a reasonable definition of the word ‘contractor,’ as the district court found, but so is a more narrow definition focused on the contractual relationship of the injured party and the insured.”

Benchmark does not mean that insurers are never going to win cases based on exclusions that apply if an injured party was employed by any contractor or subcontractor on the project – even ones with no relationship to the insured. But the thoroughness of the opinion is likely to give more courts pause before applying such exclusions – no matter how clearly they may apply on their face.

SRM, Inc. v. Great American Insurance Co., 798 F.3d 1322 (10th Cir. 2015)

As discussed above, in the context of the Louisiana Supreme Court’s decision in Kelly v. State Farm, when a demand to settle within the insured’s limit of liability is never made, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. Granted, that’s not always true. In some states, such as Oklahoma, “if an insured’s liability is clear and the injuries of a claimant are so severe that a judgment in excess of policy limits is likely, a primary insurer has an affirmative duty to initiate settlement negotiations.” SRM, Inc. v. Great American Insurance Co., 798 F.3d 1322 (10th Cir. 2015).

In SRM, Inc. v. Great American, the Tenth Circuit held that Oklahoma’s rule, applicable to primary policies, does not require excess insurers to take that same affirmative step. The court place strong reliance on the language in the excess policy, noting that the excess insurer’s contractual duties to investigate, settle, or defend claims did not arise until the primary insurer exhausted its policy limits by actually paying claims.

The SRM court’s decision is entirely justifiable based on the policy language rationale. However, it is not difficult to imagine a court, in a state that imposes an affirmative duty on a primary insurer to initiate settlement negotiations, when an insured’s liability is clear, and a judgment in excess of policy limits is likely, to turn around and impose the same affirmative duty on an excess insurer. A court may conclude that, to have the duty apply to the primary insurer, but not the excess insurer, may not achieve the objective being sought.

U.S. Metals, Inc. v. Liberty Mutual Group, No. 14-0753 (Tex. Dec. 4, 2015)

In U.S. Metals, Inc. v. Liberty Mutual, the Texas Supreme Court addressed the applicability of the “impaired property” exclusion for damages for loss of use of refinery units on account of the insured’s defective flanges that had been installed in them. Most significantly, the process of replacing the flanges damaged the units. In other words, the replacement process did not involve simply unscrewing the defective flanges and screwing in new ones. U.S. Metals argued that, for this reason, the impaired property exclusion did not apply. Texas’s top court was not persuaded, noting that the policy definition of “impaired property” does not restrict how the defective product is to be replaced.

Insurers have sometimes shied away from asserting the “impaired property” exclusion for the very reason that U.S. Metals provided: since the flanges had to be cut out and welded back in, the diesel units could not be restored to use simply by replacement of the flanges. U.S. Metals is likely to cause some insurers to take another look at the impaired property exclusion in these types of product liability situations.

 
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