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Coverage Opinions
Effective Date: December 7, 2016
Vol. 5 - Issue 12

Declarations: The Coverage Opinions Interview With Philip Hirschkop
The Lawyer Quietly Making Noise For 50 Years
Loving: Just A Spoonful Of His Career

Philip Hirschkop was just one month out of Georgetown when he signed on to represent Richard and Mildred Loving, seeking to invalidate a Virginia statute that criminalized their inter-racial marriage. Three years later Hirschkop argued and won the case before the U.S. Supreme Court. Loving v. Virginia is now the subject of a major motion picture. Hirschkop’s career went on for 50 years and is astounding. I had the privilege of interviewing him about it.

Randy Spencer’s Open Mic
Court Holds A Mall Santa Liable: Damages Owed For Failure To Deliver A Toy Fire Truck

Encore: Declarations: The Coverage Opinions Interview With The Grinch Who Stole Insurance

My Hometown: Brian Roof: Practicing Insurance Coverage Law In Ohio

Great Stocking Stuffer:
General Liability Insurance Coverage: Key Issues In Every State

Top 10 Coverage Cases:

16th Annual Ten Most Significant Coverage Decisions Of The Year
Top 10 Coverage Cases: The Selection Process

1. Skolnik v. Allied Property and Casualty Ins. Co. (App. Ct. Ill.)
Court Provides Roadmap For Policyholders To Navigate Around Numerous Exclusions

2. Westchester Surplus Lines Inc. Co. v. Keller Transport, Inc. (Mont.)
“General Aggregate” Not Defined: Supreme Court Says Insurer Obligated To Pay Its Limit--Twice

3. Templo Fuente De Vida Corp. v. National Union Fire Insurance Company (N.J.)
Late Notice: A Tale Of Two Cites: Supreme Court Adds A Third

4. Ramara, Inc. v. Westfield Ins. Co. (3d Cir.)
Four Corners…Yeah, But, There’s More To The Story

5. Southern Cleaning Service, Inc. v. Essex Insurance Company (Ala.)
Late Notice: Supreme Court Says Notice To Broker Could Be Notice To Insurer

6. General Insurance Company of America v. Walter E. Campbell Co. (D. Md.)
Court Disallows Insured’s (Yes, Insured’s) Personal Counsel: Could “Slant” Cases…Toward Coverage

7. Bamford, Inc. v. Regent Insurance Co. (8th Cir.)
What Drove This Appeals Court To Find Bad Faith Failure To Settle?

8. Harwell v. Firemen’s Fund Insurance Co. (Ill. Ct. App.)
Defense Counsel Does His Job -- And All Coverage Defenses Lost

9. ISO Adopts A New Designated Premises Endorsement To Respond To Recent Insurer Losses

10. J&C Moodie Props. v. V. (Mont.)
Not My Brother’s Keeper: Supreme Court Says One Insurer’s Defense Does Not Preclude Another’s Breach

Tapas: Small Dishes Of Insurance Coverage
· West Virginia High Court: No Coverage For Innocent Co-Insureds
· Arkansas Federal Court: Insurer’s Punitive Damages Exclusion Not Valid

Back Issues:


Vol. 5, Iss. 12
December 7, 2016


Court Holds A Mall Santa Liable:
Damages Owed For Failure To Deliver A Toy Fire Truck



There are certain lawsuits that reflexively get tort reform advocates into a tizzy. The McDonald’s “hot coffee case” is likely at the top of any list. [Actually there is another side to that story that is often not reported – but that’s for another day.] Those who blow a gasket over the McDonald’s case now have another reason to get stirred up and claim that the legal system is broken.

A Montana trial court not long ago found a mall Santa Claus liable for damages for not delivering a toy that had been requested from him. The decision came down over the summer. Despite wanting to share it here earlier – especially with my writer’s block over the past two columns – I resisted the temptation. It is only appropriate that a decision about Santa Claus be addressed in the December issue.

Marcia and Richard Leon, as parents and natural guardians of Timothy Leon v. Shining Mountains Mall, et al., District Court of Montana, 17th Judicial District, No. 15-0253, involves emotional injuries sustained by Timothy Leon, a minor. In December 2014, Timothy’s parents took him to the Shining Mountains Mall, in Chinook, Montana, to tell Santa Claus what he wanted for Christmas. Perched on Santa’s lap in the mall rotunda, a huge Christmas tree in the background and his mother snapping pictures, five year old Timothy told Paul Rose, dressed as Santa Claus, that he wished for Santa to bring him a “fire truck with a long ladder attached to it.” Rose put Timothy down and moved on to greet the next toddler. Significantly, Rose did not tell either of Timothy’s parents what Timothy had asked him for.

On Christmas day Timothy awoke to find a police car with lights and a siren under the tree. Timothy became hysterical that he did not receive a fire truck with a long ladder attached to it. He repeatedly screamed that Santa promised to bring him a fire truck. Timothy’s disappointment did not abate. A month later he was still crying about it and having nightmares about sitting on Santa’s lap. His parents sought psychiatric attention for their son. Some days Timothy was too upset to attend kindergarten.

Timothy’s parents sought legal counsel and filed suit in Montana District Court (state court) against Shining Mountains Mall and Paul Rose, seeking damages for Timothy’s emotional injuries. Their theory of liability was that, when Timothy asked Santa Claus for a fire truck with a long ladder attached to it, Santa provided an implicit promise to Timothy that he would receive the fire truck. Therefore, Santa had a duty to tell (surreptitiously) one of Timothy’s parents what the boy had asked for. By failing to do so, it was foreseeable that Timothy would not receive the fire truck and sustain emotional injuries as a result.

Incredibly, the court found for Timothy. Noting the obvious, that there was no prior case law -- anywhere in the country, for that matter -- addressing these unique circumstances, the court looked for guidance as best it could. It turned to the Montana Supreme Court’s decision in Nelson v. Driscoll, 983 P.2d 972 (Mont. 1999).

In Nelson, the Montana high court addressed a police officer’s liability for stopping Trina Nelson, a suspected intoxicated motorist, not realizing that she was intoxicated (her blood alcohol content was .25) and then failing to prevent her from walking home. She was struck and killed while walking on a highway.

The trial court rejected the claims brought by Trina’s husband. The court concluded that the police officer lacked probable cause to place Trina under arrest. Therefore, no special relationship existed between the police office and Trina which would give rise to a duty to protect her from harm.

The case went to the Montana Supreme Court, which explained that a police officer has no duty to protect a particular individual absent a special relationship. “This rule is derived from the ‘public duty doctrine’ which expresses the policy that a police officer’s duty to protect and preserve the peace is owed to the public at large and not to individual members of the public.” However, “[a]n exception to the public duty doctrine arises when there exists a special relationship between the police officer and an individual. … A special relationship can be established (1) by a statute intended to protect a specific class of persons of which the plaintiff is a member from a particular type of harm; (2) when a government agent undertakes specific action to protect a person or property; (3) by governmental actions that reasonably induce detrimental reliance by a member of the public; and (4) under certain circumstances, when the agency has actual custody of the plaintiff or of a third person who causes harm to the plaintiff.”

For a host of reasons, the Montana Supreme Court found against Trina’s husband on the special relationship issue (but found in his favor based on other theories of liability). However, despite the fact that the Nelson court found that no special relationship existed between the police officer and Trina, the judge in Leon distinguished it, and held that the mall Santa had a special relationship with Timothy – on account of Timothy’s age and lack of appreciation that Santa Claus is not real. [The court took judicial notice that Santa Claus is not real and concluded that there was no need for the presentment of evidence.] Under these circumstances, and stressing the court’s special role to protect children, the court held that Santa’s actions “reasonably induce[d] detrimental reliance” on the part of Timothy that he would be receiving a fire truck with a long ladder attached to it. Therefore, the court found the mall and its Santa liable for the emotional injuries that Timothy sustained. Following a damages trial the court awarded $95,000.

The court was not unmindful of the potential Pandora’s box that its decision was opening. The mall argued, sarcastically, that a child could ask Santa for a Mercedes for Christmas. And, when it does not appear in the driveway on Christmas morning, the mall would be liable for the child’s emotional injuries, based on the child’s detrimental reliance. The court dismissed this slippery slope argument by noting that the mall would be relieved of liability by simply having its Santa whisper the child’s wishes to a parent or guardian. Upon doing so, any unfulfilled expectation of the child is now on account of the actions of its parent or guardian. The court suggested that the mall could hire elves to distract the child after getting off Santa’s lap. With the child’s attention focused elsewhere, Santa could have a quick word with the parent or guardian, thereby relieving the mall of liability.

Ho, Ho, Holy cow, what a decision.

That’s my time. I’m Randy Spencer. Contact Randy Spencer at



Vol. 5, Iss. 12
December 7, 2016

Brian Roof:
Practicing Insurance Coverage Law In Ohio

After two installments the new “My Hometown” column is off to a great start. Its objective is (was, at least) for a coverage lawyer, practicing in a lesser-populated state, to describe some of his or her state’s key coverage decisions and aspects of practicing there that may differ from other states. The point being that, when it comes to larger states, we often know the key coverage decisions and things about practicing there that make it unique. California has Cumis. New York has §3420(d). New Jersey has Burd. Arizona has Morris. But what about the lesser-populated states? They have their own DNA too. But it is not as well known.

Brenda Wallrichs, of Lederer Weston Craig, in Cedar Rapids, took the plunge and got “My Hometown” off the ground. Brenda did a wonderful job of discussing how Iowa addresses a number of coverage issues. Next up was Jim Semple, of Cooch and Taylor in Wilmington, who masterfully guided readers through Delaware law on several coverage fronts.


I’ve decided to make a change to the “My Hometown” column. Instead of only lawyers in lesser-populated states discussing the ins and outs of practicing there, lawyers in all states will discuss the key aspects, and peculiarities, of their hometowns. One reason for this change is that next year I want to get the perspective of policyholder lawyers – and I had a hard time locating lawyers in smaller states that focus exclusively on insurance coverage.

Thank you to Brian Roof, of Sutter O’Connell in Cleveland, for agreeing to tackle Ohio – no easy task as the Buckeye state produces a tremendous number of coverage decisions.


Ohio insurance law can be confusing on certain coverage issues because the Ohio Supreme Court has not clearly decided the issue nor provided clear guidance. Therefore, attorneys, appellate courts, and trial courts are sometimes left to grapple, which can lead to inconsistent results. I will address some of these issues.

For a bad faith claim, the Ohio Supreme Court has concluded that “[a]n insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefor.” Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552 (1994) (syllabus, ¶ 1). The Ohio Supreme Court, however, has not answered the question of whether an insured can pursue a bad faith claim against an insurer, despite the insurer correctly denying coverage. In this vacuum, state and federal courts have developed two lines of authority. Compare Bullet Trucking, Inc. v. Glen Falls Ins. Co., 84 Ohio App.3d 327, 333-34 (2nd Dist. 1992) (concluding that an insured does not need to succeed on its breach of contract claim to pursue a bad faith claim), with Pasco v. State Automobile Mut. Ins. Co., 10th Dist. No. 99AP-430, 1999 Ohio App. LEXIS 6492, *17 (Dec. 21, 1999) (denial of coverage is per se reasonable if the reason for the denial was correct).

In an attempt to reconcile these two contrasting decisions, one federal court contends there is no split of authority because, whether an insured must be successful on its breach of contract claim to recover on its bad faith claim is distinct from whether there must be coverage to maintain a bad faith claim. See Toledo-Lucas County Port Authority v. Axa Marine & Aviation Ins. (UK) Ltd., 220 F. Supp. 2d 868, 873 (N.D. Ohio 2002), rev’d on other grounds, 368 F.3d 524 (6th Cir. 2004). An Ohio appellate court also tried to reconcile this split, contending that there were two types of bad faith claims – one where the insurer had no lawful basis to deny coverage, which is based on proving the contract claim, and the other where the insurer had no reasonable justification to fail to determine whether its refusal had a lawful basis, which does not require success on the coverage claim. Ballard v. Nationwide Ins. Co., 7th Dist. No. 14 MA 85, 2015-Ohio-4474, ¶18. The issue is still up in the air.

The Ohio Supreme Court also has not decided whether Ohio’s anti-indemnity statute, R.C. 2305.31, applies to additional insured provisions of policies. Ohio appellate courts generally have concluded that an additional insured provision will not violate R.C. 2305.31, as long as the additional insured provision in the contract and the additional insured language in the policy do not require coverage for the additional insured’s own negligence. See The Dayton Power and Light Co. v. Enerfab, Inc., 2nd Dist. No. 21512, 2007-Ohio-432, ¶¶ 20, 23; Liberty Mut. Ins. Group v. Travelers Property Cas., 8th Dist. No. 80560, 2002-Ohio-4280, ¶ 16; Buckeye Union Ins. Co. v. Zavarella Bros. Constr. Co., 121 Ohio App. 3d 147 (8th Dist. 1997). Other courts have not agreed and noted the confusion in Ohio law on this issue. See Brzeczek v. Standard Oil Co., 4 Ohio App. 3d 209, 213 (1986); Toledo Edison Co. v. ABC Supply Co., 46 Fed. Appx. 757, 763 (6th Cir. 2002). The lack of clarity from the Ohio Supreme Court has resulted in policyholders and insurers continuing to dispute the application of the additional insured provisions.

Another issue without guidance from the Supreme Court is whether an insurer can recoup defense costs if successful on indemnification. But the Sixth Circuit, in applying Ohio law, concluded that an insurer can recoup defense costs with a properly worded reservation of rights letter based on the implied in contract theory. See United Nat’l Ins. v. SST Fitness Corp., 309 F.3d 914, 921 (6th Cir. 2002). Adding to the confusion, one Ohio appellate court allowed for the insurer to recover defense costs under the theory of restitution. Chiquita Brands Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh PA, 1st Dist. No. C-140492, 2015-Ohio-5477, ¶24.

The Ohio Supreme Court and the Ohio Legislature have created confusion on a different coverage issue. Ohio was one of the earlier states to weigh in on whether a policyholder could obtain an insurer’s privileged documents in a claims file. In Boone v. Vanliner Ins. Co. (2001), 91 Ohio St. 3d 209, 213, the Ohio Supreme Court allowed a plaintiff in a bad faith claim against an insurer to discover privileged information in the insurer’s claims files that existed prior to the denial of coverage because the “claims file materials that show an insurer’s lack of good faith in denying coverage are unworthy of protection.” The Ohio Legislature attempted to limit the impact of the Boone decision by adding Subpart (2) to R.C. 2317.02. The new subpart requires that the insured must first establish a prima facie showing of bad faith, fraud, or criminal conduct before the insurer’s attorney can be compelled to testify regarding attorney-client communications. Courts are now left with reconciling R.C. 2317.02 (testimony) and Boone (documents) on whether policyholders are entitled to privileged communications in a bad faith action. See Little Italy Development, LLC v. Chicago Title Insurance Co., Case No. 1: 11CV112, 2011 U.S. Dist. Lexis 119698 (N.D. Ohio Oct. 17, 2011).

Although Ohio is one of the jurisdictions that have concluded that the inferred-intent doctrine, which is applicable to the intentional-acts exclusion, is not limited to just sexual molestation and murder, there are still many unanswered questions on its application. See Allstate Ins. Co. v. Campbell (2010), 128 Ohio St. 3d 186. For example, the Ohio Supreme Court did not broadly expand the doctrine, and instead vaguely concluded that the inferred-intent doctrine “applies only in cases in which the insured’s intentional act and the harm caused are intrinsically tied so that the act has necessarily resulted in the harm.” Id. at 197. Therefore, Ohio lower courts and attorneys are left with the issue of how broadly to apply the inferred-intent doctrine.

Hopefully the above summary of some these insurance coverage issues will help you in your analysis and legal research when faced with one of them in Ohio.

Brian Roof practices in Cleveland and is Chair of Sutter O’Connell’s Insurance Coverage practice with over 17 years of experience working in insurance coverage litigation. His insurance coverage practice is devoted to first-party and third-party coverage disputes involving CGL, professional liability, D&O and E&O policies. He is a member of DRI and the Professional Liability Underwriting Society and serves on the Advisory Group of the U.S. District Court, Northern District of Ohio. He also is a Delegate to the Eighth Judicial Conference. Brian is a frequent author and presenter on insurance coverage matters. Finally, Brian is very active in his community serving as President of the Board of Directors of the non-profit organization Linking Employment, Ability and Potential and serving on the Board of Directors of Citizens Academy.



Vol. 5, Iss. 12
December 7, 2016

Great Stocking Stuffer: General Liability Insurance Coverage: Key Issues In Every State

See for yourself why so many find it useful to have, at their fingertips, a nearly 800-page book with just one single objective -- Providing the rule of law, clearly and in detail, in every state (and D.C.), on the liability coverage issues that matter most.








Vol. 5, Iss. 12
December 7, 2016

Skolnik v. Allied Property and Casualty Ins. Co., 45 N.E.3d 1161 (App. Ct. Ill. 2015)

Court Provides Roadmap For Policyholders To Navigate Around Numerous Exclusions


Skolnik v. Allied Property and Casualty Ins. Co. was decided a few days before Christmas in 2015. If the Illinois Appeals Court opinion had been issued just a few weeks earlier -- before the 2015 Top Ten Coverage Cases article had been finished -- I would have given it serious consideration for the list. Therein lies an inherent flaw in publishing a year-end review before year-end – cases that are decided in the last few weeks of the year are not available for consideration. I have often thought about including them in the next year’s edition if warranted. But I have always resisted the temptation on grounds of purity.

For the first time I have made an exception and include a late-2015 case on the 2016 list. The case is potentially too significant not to do so. And, since the Illinois Supreme Court denied review of Skolnik in 2016, it kinda, sorta, is a 2016 case (not really, but you know what I’m saying).

There are a host of exclusions that preclude coverage for injury arising out of some specified conduct on the part of an insured: assault and battery, furnishing alcohol, criminal acts, etc. These exclusions are often interpreted broadly on account of being expressed in “arising out of” language. Skolnik demonstrates that a plaintiff may be able to trigger a defense obligation, in a case that would otherwise be subject to a broad “specified conduct exclusion,” by simply alleging (provable or not) that, after the insured committed the excluded conduct, it failed to summon help for the victim. And such failure was also a cause of the plaintiff’s injuries.

Given the frequency in which underlying litigation is possibly subject to a “specified conduct” exclusion, the significant exposure for an insurer that can attach to providing a defense and the ease in which a plaintiff’s lawyer can apply the lesson of the case, I selected it for inclusion.

Haley Johnson died of methadone intoxication in the bedroom of Joshua Skolnik, who lived with his parents. The night before, Johnson and Skolniok, and others, had been out drinking. Skolnik had a prescription for methadone. I’ll let the court take over the facts from here. Be sure you are sitting down. “After Johnson had another drink that Skolnik provided, she told him that she thought ‘something’ had been put into it, and needed assistance to walk. Skolnik took Johnson to his parents’ home where they had sex in his bedroom. Skolnik had abused drugs in the past and used methadone; Skolnik’s parents knew of his drug history and of the methadone in the house. Skolnik’s parents heard voices in his bedroom at 4 a.m. Around 9 a.m., Skolnik’s mother checked on Skolnik and he told her that Johnson passed out in the bedroom. Between 11:30 a.m. and 1 p.m., two of Johnson’s friends came to the Skolniks’ home to check on her but Skolnik did not let them see her, telling them that Johnson was passed out naked in his bedroom.

At 3:30 p.m., Skolnik told his parents Johnson was unconscious. Three hours later, his parents left for dinner and another six-and-a-half hours later, Skolnik pulled Johnson off his bed and called his parents who had not yet returned. He told them Johnson felt cold to the touch. The Skolniks instructed their son to dress Johnson and call 911. At 10:11 p.m., Skolnik called 911. When the police arrived at 10:14 p.m., Johnson was not breathing. She was pronounced dead at the Skolniks’ home at 11:31 p.m.”

Johnson’s father sued Joshua Skolnik and his parents for wrongful death, false imprisonment and a host of other causes of action. Coverage was sought under homeowner’s and personal and umbrella policies issued by Allied Property and Casualty. The policies contained an exclusion for bodily injury “arising out of the use” of controlled substances, with an exception for “the legitimate use of prescription drugs by a person following the orders of a licensed physician.”

The applicability of this exclusion, for purposes of a duty to defend, was the crux of the case before the Illinois Court of Appeals. Allied argued that the complaint alleged that Johnson’s death resulted from controlled substances. This is not an unreasonable argument, especially when you consider that the term “arising out of,” as contained in an exclusion, is usually interpreted broadly. The trial court concluded that the exclusion applied to relieve Allied from a duty to defend.

But as the appeals court saw it, there was more to it. In addition to allegations that Skolnik caused Johnson’s death, the complaint also alleged that “Skolnik and his parents negligently, carelessly, and improperly failed to request emergency medical assistance for Johnson within a reasonable period of time after knowing she was physically incapacitated or unconscious or both; and knowing or discovering she ingested or unknowingly consumed methadone or other illegal substances in the Skolnik home. Further, count I alleges that Skolnik and his parents refused to allow Johnson’s two friends to check on, talk to, see, or render aid to Johnson upon their request; and that they ‘took affirmative actions to Johnson’s detriment and acted in concert’ after discovering she was ‘dead, unconscious, and/or unresponsive in their home.’”

The court used these allegations to conclude that, at least for purposes of the duty to defend, the controlled substances exclusion did not apply: “Here, despite the autopsy notation regarding cause of death [methadone intoxication], a genuine issue of material fact exists as to whether Johnson’s death was caused solely by her methadone ingestion. The four corners of the complaint contain details that, if true, describe a lengthy and protracted period of time during which Skolnik could have sought assistance. The unknown is whether Johnson would have died if he had allowed Johnson’s friends to see her, or called 911, or truthfully informed his parents earlier about Johnson’s condition. Other potential causes include a genetic predisposition and a prior history of drug abuse.”

Thus, the court held that Allied had a duty to defend. But whether Allied would have a duty to indemnify was still an open issue. It was tied to a determination whether, in fact, there was “an independent basis for liability in that Skolnik could have saved Johnson but he did not summon help?”


Vol. 5, Iss. 12
December 7, 2016

Westchester Surplus Lines Inc. Co. v. Keller Transport, Inc., 365 P.3d 465 (Mont. 2016)

“General Aggregate” Not Defined: Supreme Court Says Insurer Obligated To Pay Its Limit--Twice


Insurers issue policies with an understanding that they could be required to pay the limits of liability. They know that going in and it’s at the heart of their pricing and other aspects of their business. But they do not enter into an insurance transaction with the possibility that, without any fault in their claim handling, they could be obligated to pay multiples of a policy’s limit of liability. That’s what happened in Westchester Surplus Lines Inc. Co. v. Keller Transport, Inc. Given that the decision is so counter to the fundamental insurance transaction, and that the facts are not so unusual that the outcome couldn’t happen again, I selected it for inclusion.

At the outset of Keller Transport, the Montana Supreme Court noted that the term “General Aggregate” was not defined in the policy before it. At that point, even knowing nothing about the story to come, I was pretty certain that it was not going to end well for the insurer. Courts intent on finding coverage, that otherwise should not exist, have a few ways to make this happen. One of them is to declare that, if the insurer meant for a policy term to have a certain meaning, then it could have, and should have, defined it as such. But since it didn’t, the court is left to grapple with two (or more) possible meanings of the term. And we all know what happens when courts find themselves so grappling. So, when the Keller Transport court made the point, right from the get-go, that the term “General Aggregate” was not defined in the policy, I put the insurer’s chances, for a happy ending, at about the same as an unknown character in Star Trek -- who finds himself in the landing party in the opening scene.

While the specific circumstances involved in Keller Transport do not happen every day, the court’s decision, that the undefined term “General Aggregate” is ambiguous, therefore requiring that it be paid twice, has widespread relevance.

At issue in Keller Transport was coverage for damages caused by an overturned tanker truck that spilled over 6,000 gallons of gasoline. The gasoline flowed under the highway and beneath several homeowners’ properties.

Keller Transport had leased the tanker truck from Wagner Enterprises. Keller and Wagner were insured under a primary policy that contained two coverage parts: Auto ($1 million Per Accident) and General Liability ($1 million Each Occurrence). The policy was subject to a $2 million General Aggregate. Keller and Wagner were insured under a follow form excess policy subject to a $4 million Occurrence limit and a $4 million General Aggregate.

In simple terms, following the spill, the primary policy paid $1 million for clean-up expenses and exhausted the Auto limit. The excess insurer paid $4 million and exhausted its limit. However, additional claims were made by homeowners, alleging that Keller and Wagner engaged in negligent conduct after the truck had overturned. These claims were alleged to trigger the General Liability coverage part of the primary policy. Thus, the homeowners sought an additional $5 million -- $1 million under the General Liability portion of the primary policy and $4 million under the excess policy. Never mind that the excess policy, with a $4 million General Aggregate, had already paid $4 million on account of the Auto claims.

Putting aside some other factors, and following a stipulated judgment and assignment of policy rights, the issue that made its way to the Supreme Court of Montana was whether the excess policy’s “General Aggregate” afforded $4 million for each type of coverage in the primary policy OR a $4 million limit for the entire excess policy.

The court held that the term “General Aggregate” was ambiguous, and, therefore, the excess insurer was obligated to provide an additional $4 million in CGL coverage. On one hand, the court went through a complex analysis to demonstrate that its decision was justified by the interplay between the primary and excess policies’ various limits, on account of the excess policy’s “follow-form” language: “the insurance afforded by this policy shall apply in like manner as the underlying insurance.”

But the Supreme Court’s rationale for its decision was much simpler: “The District Court reasoned that, given that Schedule A [Schedule of Underlying Insurance] makes clear that the Westchester policy provides excess insurance for both the Auto and CGL coverages, and that Item 6 [Limit of the Excess Policy] makes clear there is a $4 million aggregate limit on something, a reasonable insurance consumer might draw two different, but plausible, interpretations. On one hand, the $4 million general aggregate limit might represent the maximum liability of the entire excess policy, so that $4 million exhausted under one coverage would mean there was nothing available under the other coverage. On the other hand, the $4 million general aggregate limit might represent the maximum liability under each coverage, so that $4 million exhausted under one coverage had no bearing on the limits available under the other coverage. The District Court stated that Westchester’s failure to define ‘general aggregate’ makes one no more plausible than the other.” (emphasis in original).

On one hand, Keller Transport is a unique case. The accident at issue impacted both the Auto and CGL coverage parts of a primary policy. You don’t see that every day. On the other hand, the lesson from Keller Transport is hardly so limited. To the contrary, excess policies often provide coverage over more than one type of primary policy. And a single claim, that impacts two types of primary policies (such as in Keller Transport), is no different than two unrelated claims, where one impacts one type of primary policy and the second impacts another type. In both cases, following Keller Transport, the excess insurer’s undefined “General Aggregate” limit can be called upon to pay twice (or three times, if the excess policy provides coverage over three types of primary policies).

Cases like Keller Transport are frustrating for insurers. If insurers define more terms in a policy, they subject themselves to criticism by some courts that their policies are too long or cumbersome, on account of requiring the reader to incorporate definitions. But when a coverage dispute centers around an undefined term, some courts are quick to say that, if the insurer meant for the term to have a certain meaning, then the insurer could have, and should have, defined it as such.

While Keller Transport was wrongly decided, it can’t be ignored. Insurers are advised to take note of it and proceed accordingly. With CGL policies generally defining the term “General Aggregate” (or explaining its operation), Keller Transport is more relevant for excess policy scriveners. But, nonetheless, it is an important cautionary tale.

Vol. 5, Iss. 12
December 7, 2016

Templo Fuente De Vida Corp. v. National Union Fire Insurance Company, 129 A.3d 1069 (N.J. 2016)

Late Notice: A Tale Of Two Cites: Supreme Court Adds A Third


In many states, late notice law can be characterized as a tale of two cites: One involving “occurrence” policies, which require an insurer to prove that it was prejudiced, by an insured’s failure to provide notice of a claim as soon as practicable (or something along those lines), to be able to disclaim coverage. This can be a high burden for the insurer to meet. The other cite involves “claims made” policies, which do not require an insurer to prove that it was prejudiced, by an insured’s failure to satisfy the reporting requirement – such as, a claim must be made and reported during the policy period -- to be able to disclaim coverage. This is an easy burden. Just look at the calendar.

There may be no better example of this dichotomy of rules than New Jersey. There, an insurer seeking to disclaim coverage, under an “occurrence” policy, based on an insured’s failure to provide notice of a claim as soon as practicable, has a high burden: proof of a likelihood of appreciable prejudice from such untimely notice. Conversely, an insurer in the Garden State, seeking to disclaim coverage, under a “claims made” policy, based on the insured’s failure to satisfy the reporting requirement, has it easy: simply prove that the reporting requirement was not satisfied and there is no additional need for the insurer to prove that it was prejudiced by such failure.

These two general rules have been staked out nationally for a long time. But what happens when an insurance policy’s notice obligation contains both requirements – a claim must be reported to the insurer as soon as practicable (“occurrence” policy requirement) and within the policy period (“claims made” policy requirement)? What’s more, what happens when the state at issue is New Jersey, with such a high burden to disclaim coverage under an “occurrence” policy.

It is not surprising that an insurer would issue a policy containing such a hybrid or two-part notice provision. After all, simply because a claim is made and reported during the policy period does not mean that it was reported timely. A claim can be made against the insured during the first month of a one year claims made policy and reported to the insurer during the last month. While the claims made and reported requirement has been satisfied, the claim was still reported ten months late. A lot can happen in a case in ten months. Thus, because insurers may still want to disclaim coverage based on late notice, a policy of this type may be attractive to them. But that attractiveness is lost if the “as soon as practicable” portion of the notice provision requires that the insurer prove that it was prejudiced – which is often-times cannot do.

This was the issue before the New Jersey Supreme Court in Templo Fuente De Vida Corp. v. National Union. The court held that the “as soon as practicable” portion of the notice provision did not require the insurer to prove that it was prejudiced to disclaim coverage. Having done so, and especially against the backdrop of New Jersey law, with its high burden to disclaim coverage, under an “occurrence” policy, based on late notice, Templo Fuente may serve as encouragement for insurers to adopt policies with a hybrid or two-step notice provision. For this reason, the case was selected for inclusion here.

In Templo Fuente, an insured provided notice of a suit to its insurer six months after it had been served. Even if that were sufficient to satisfy the requirement, that the claim be made and reported during the policy period, it was conceded that such notice of the claim to the insurer was not “as soon as practicable.” But, as far as the insured was concerned, that should not have been fatal to coverage because, under New Jersey law, the insurer needs to prove that it was prejudiced by the insured’s failure to provide notice “as soon as practicable.”

The crux of the case is that, under New Jersey law, it is in fact clear that, for an insurer to disclaim coverage, under an “occurrence” policy, based on the insured’s failure to provide notice “as soon as practicable,” there must be proof of a likelihood of appreciable prejudice to the insurer. Thus, the issue was whether this rule applied when the “as soon as practicable” notice requirement was not satisfied -- but it was within the context of a “claims made” policy, where the “claims made and reporting” timing requirements have been satisfied.

The court applied the no prejudice rule, i.e., treating the policy as “claims made,” despite containing the “as soon as practicable” notice language that is akin to “occurrence” polices. The basis for the court’s decision was its characterization of the sophistication of insured parties. The insured was a 14 or so employee company, that engaged in complex financial transactions concerning financing, and the policy at issue was D&O.

To this point, the court explained: “We have historically approached ‘claims made’ and ‘occurrence’ policies differently due in large part to the differences between the policyholders themselves. For example, in Cooper, where the ‘occurrence’ policy at issue was a contract of adhesion entered into by parties with unequal bargaining powers, we required the insurer to show prejudice before denying coverage to prevent an unfair result. ... Indeed, in the vast majority of ‘occurrence’ policies, the policy holders are ‘unsophisticated consumer[s] unaware of all of the policy’s requirements.’ As a result, ‘courts have taken special consideration of the fact that the policy holders were consumers unlikely to be conversant with all the fine print of their policies’ and ‘found that strict adherence to the terms of the notice provisions would result too harshly against [such insureds.]’” (citations omitted).

In contrast, the court observed, “[t]hose equitable concerns based on the nature of the parties do not control in our analysis of the ‘as soon as practicable’ notice requirement of the Directors and Officers ‘claims made’ policy here, where the policyholders ‘are particularly knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers[.]’ In this arena, insurers are ‘dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing [.]”

Importantly, for policyholders, the court made the point that, “[i]n this instance we need not make a sweeping statement about the strictness of enforcing the ‘as soon as practicable’ notice requirement in ‘claims made’ policies generally. We need only enforce the plain and unambiguous terms of a negotiated Directors and Officers insurance contract entered into between sophisticated business entities. Its notice conditions contain mutual rights and obligations and a clear and unambiguous requirement that the insured report a claim to the insurer ‘as soon as practicable,’ pursuant to section 7, thereby preserving the insurer’s rights, under section 8, to associate and influence how the litigation proceeds from its inception.” Thus, the court seems to have left the door open to policyholders to attempt to distinguish Templo Fuente De Vida Corp. v. National Union.

Vol. 5, Iss. 12
December 7, 2016

Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660 (3d Cir. 2016)

Four Corners…Yeah, But, There’s More To The Story


The determination whether an insurer has a duty to defend is the most important of all coverage issues. And this shouldn’t be surprising. The question arises in just about every liability claim -- regardless of policy type. No other issue can make that claim. And the consequences for an insurer that breaches its defense obligation are, at best, significant and, at worst, monumental. The underlying plaintiff also has a lot riding on it. If a defense is owed, an insurer, now incurring costs, may be inclined to settle at some point – even if the case is defensible.

Given the importance of the issue, all of the stakeholders in a liability claim are well-served by the tests, for determining if an insurer has a duty to defend, being well-defined. And that is the case–or so it seems. Almost universally a duty to defend is owed if the allegations in the complaint, and nothing else, provide any potential for coverage or such allegations, in conjunction with extrinsic evidence, provide any potential for coverage. It’s one or the other. What’s more, which one of these tests applies was long-ago decided by just about every state in the country. All this said, how a particular state determines if a duty to defend is owed should be as predictable as General Electric paying a dividend.

However, while courts usually have no problem expressing their state’s duty to defend rule, their steadfast adherence to it can be a different matter. This is most surprising in states that have adopted the “four corners” rule for determining if a duty to defend is owed. What could be simpler than that? While an insurer’s obligation to indemnify its insured may require a four week trial to get all the necessary facts, the information for determining an insurer’s duty to defend should be limited to just two documents – the policy and the complaint. The duty to indemnify may require a roomful of documents to figure out; but those needed for determining a duty to defend should fit in an envelope.

This is the way it’s supposed to work in “four corners” states. But exceptions have crept into the duty to defend calculation. Some courts, despite a high court mandate to look no further than the complaint and policy to determine if a defense is owed, are peaking at, or considering, other things. As a result, a “four corners” determination may not be as narrow as advertised.

Sometimes the consideration of information outside the complaint benefits the insurer and sometimes it benefits the insured. But the result is the same for both. Instead of the parties simply disagreeing whether the complaint, when compared to the policy, creates any potential for coverage–the usual basis of a coverage dispute--now add a possible dust up over whether additional information should also be considered.

This presents an interesting dilemma for the parties in a coverage dispute. Even if a prior court has applied a “four corners” exception, a party may be hesitant, and understandably so, to seek it in its own case. The decision to argue against application of a black letter rule of law – not to mention one that has likely existed for decades -- is not an easy one to make. Nor is it an easy task to accomplish.

This was the situation in Ramara, Inc. v. Westfield Ins. Co. Courts in “four corners” states that peek outside the complaint, or consider other factors, to determine the duty to defend, are not, in and of themselves, that significant. It happens fairly often. However, I chose Ramara for inclusion here because the factual situation at issue arises with some frequency.

Ramara, Inc., a garage owner, engaged Sentry Builders Corporation as a general contractor to perform work at its parking garage. Sentry hired Fortress Steel Services, Inc. to install concrete and steel components. As required by its subcontracting agreement with Sentry, Fortress obtained a general liability policy from Westfield Insurance, naming Ramara as an additional insured.

A Fortress employee, Anthony Axe, was injured on the job. Axe filed suit against Ramara and Sentry. He did not sue Fortress. No surprise here since Fortress, as his employer, was immune from suit under the Pennsylvania Workers’ Compensation Act. Ramara sought a defense from Westfield as an additional insured. Westfield declined. Ramara filed a coverage action in Pennsylvania federal court against Westfield. Ramara was successful and Westfield appealed to the Third Circuit.

Following several pages of eye glazing procedural rigmarole, the appeals court turned its attention to the additional insured issue. Ramara’s potential rights as an additional insured were based on the following endorsement contained in the Westfield policy issued to Fortress:

A. Section II —Who Is An Insured
is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for “bodily injury,” “property damage,” or “personal and advertising injury” caused, in whole or in part, by:

1. Your [Fortress] acts or omissions; or

2. The acts or omissions of those acting on your [Fortress] behalf;

in the performance of your [Fortress] ongoing operations for the additional insured.
*** (emphasis added)

The issue was simple – or at least was simple for the court to describe: “At bottom, this case concerns whether the Axe complaint sufficiently alleges, as required by the Additional Insured Endorsement, that Axe’s injuries potentially were ‘caused, in whole or in part’ by Fortress’s acts or omissions or the acts or omissions of someone acting on Fortress’s behalf. If it does, then Ramara is an additional insured under the Policy with respect to the Axe action and is entitled to a defense in that case. If it does not, then Ramara is not an additional insured with respect to the Axe action and Westfield does not have a duty to defend Ramara.”

Putting aside various arguments about how to interpret “caused, in whole or in part,” and applying the phrase to the allegations at issue, the court turned to Westfield’s argument that the complaint makes no mention of Fortress, except to say that it was Axe’s employer. So, as Westfield saw it, the complaint did not allege any acts or omissions of Fortress. Thus, Ramara was not an additional insured.

But the District Court did not see this as a basis to conclude that Ramara was not an additional insured. “Due to the immunity from tort liability afforded to employers for injury to their employees in circumstances in which compensation is provided by the [Workers’ Compensation] Act, the District Court reasoned that Westfield’s narrow interpretation of the underlying complaint ‘ignore[d] the realities of the worksite’ and "the effect of the Pennsylvania Workers’ Compensation Act.’”

The appeals court turned to Pennsylvania’s duty to defend standard in reviewing the lower court’s decision. It noted that, under Pennsylvania law, the duty to defend is determined based solely on the allegations in the complaint – and the court underlined solely. The challenge for the appeals court was that, if it must look solely at the allegations in the complaint, there were none alleging any acts or omissions of Fortress.

Despite the absence of allegations in the complaint of any acts or omissions of Fortress, the appeals court affirmed the District Court: “[I]t is clear that the District Court properly considered the effect of the Workers’ Compensation Act. The four corners rule—even under Pennsylvania’s strict construction—does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts. Quite the opposite, knowledge that an injured employee has a claim under the Workers’ Compensation Act must be factored into a determination of whether his allegations in an underlying tort complaint potentially trigger an obligation on an insurer to provide coverage for a defendant in the underlying case. If an insurer fails to account for the Act it may construe the factual allegations of an underlying complaint too narrowly, and ‘the insurer who refuses to defend at the outset does so at its own peril.’”

The court also made the point that it was not deviating from Pennsylvania’s “four corners” requirement – something it noted it could not do. Instead, the court characterized its decision as providing an “interpretive constraint” on insurers, when determining whether the allegations of a complaint fall outside of coverage under these circumstances. Specifically, “Westfield was certainly aware of the Workers’ Compensation Act’s limitation on the type of allegations that Axe could bring when it decided to deny coverage to Ramara. Westfield also surely knew that despite the circumstance that the Act does not contain pleading limitations in third party actions, the practical effect of its grant of tort immunity to employers was that Axe’s attorney in drawing the complaint neither would explicitly name Fortress nor feature it prominently in the complaint’s allegations. Within this context and applying Pennsylvania law, Westfield could not have determined reasonably that the allegations of the Axe complaint were patently outside the Policy’s coverage.”


Vol. 5, Iss. 12
December 7, 2016

Southern Cleaning Service, Inc. v. Essex Insurance Company, 2016 Ala. LEXIS 23 (Ala. Feb. 19, 2016)

Late Notice: Supreme Court Says Notice To Broker Could Be Notice To Insurer


It is not unusual to see an insured challenge a late notice disclaimer on the basis that its notice wasn’t late at all. To the contrary, the insured says that it provided notice a very short time after the insured became aware of the incident or claim. However, such notice wasn’t provided to the insurer, but, rather, to the insured’s broker. And it turns out that the broker didn’t pass along such notice to the insurer. The insurer’s response to this will likely be that it has no relationship with the broker, so, therefore, notice to the broker does not qualify as notice to the insurer. In other words, the broker is not authorized to accept notice on the insurer’s behalf. Hence, as far as the insurer is concerned, by the time it actually received notice of the claim, a long time had passed and it was not timely, i.e., the notice provision in the policy was breached.

[Of course, with the usual requirement that, for “occurrence” policies, an insurer must prove that it was prejudiced by an insured’s untimely notice, which can be difficult, the significance of notice to a broker is most likely to be relevant in the few “no prejudice” states, in situations where the delay is really long, and in the context of “claims made” policies, where prejudice is not usually a factor to establish a violation of a notice provision.]

In Southern Cleaning Service, Inc. v. Essex Insurance Company, Nos. 1140970 and 1140918 (Ala. Feb. 19, 2016), the court addressed whether an insured could defeat a late notice challenge on the basis that it provided immediate notice of an incident to its insurance agent -- and the fact that the insurer, itself, did not receive notice until much later is not relevant.

Given the frequency in which this issue arises, and that the court held that notice to an entity that had no agency relationship with an insurer – as if often the case -- can still qualify as notice to the insurer, I selected Southern Cleaning Service for inclusion here.

A company called Phase II Maintenance Systems had a subcontract to provide janitorial services to Winn-Dixie grocery stores. As part of the arrangement, Phase II was required to obtain insurance and name Winn-Dixie and Southern Cleaning Service, Inc. (SCSI), the main contractor, as additional insureds. Phase II got in touch with Alabama Auto Insurance Center, an independent insurance agency, to obtain the insurance it needed. Alabama Auto turned to Genesee General Agency, a managing general agent that connects independent agents with insurers. Genesee obtained a quote from Essex Insurance Company for a policy to meet Phase II’s needs. Phase II accepted the quote. Genesee, which had Essex’s authority to do so, issued the Essex policy to Phase II.

On March 5, 2011, “Beverly Paige was shopping at a Phase II-serviced Winn–Dixie in Montgomery when she allegedly slipped on a wet floor, fell, and was injured. A Phase II employee on duty at the store at the time of the fall reported the incident to Phase II’s owner and president, William Wedgeworth, that same day, and Wedgeworth has given sworn testimony indicating that he separately notified both SCSI and Alabama Auto of the incident on Monday, March 7, 2011, and further specifically asked Alabama Auto to notify Genesee of the incident.”

To make a long and winding story short, notice of the claim did not get to Essex until June 2012. Essex disclaimed coverage based on late notice: “Essex had not been notified of the claim until approximately 15 months after Paige’s fall, notwithstanding the fact that the Essex policy obligated the insureds to notify it ‘as soon as practicable’ of any occurrence ‘which may result in a claim.’ … On September 25, 2012, Paige sued Phase II, SCSI, and Winn–Dixie, alleging that their negligence and wantonness was responsible for the injuries she sustained in her March 5, 2011, fall. Phase II, SCSI, and Winn–Dixie again asked Essex to provide them with a defense and indemnity under the terms of the Essex policy; however, their requests were denied.”

A settlement of the Paige action was eventually reached for $540,700. Putting aside a lot of procedural and extraneous issues, the principal issue before the Alabama high court was whether Essex could maintain its late notice defense based on the 15 month delay before it received notice. [Alabama is a no prejudice state.]

The argument against Essex was that “Alabama Auto was notified of Paige’s accident within days of its occurrence and, SCSI argues, Alabama Auto had either real or apparent authority to accept notice of claims on behalf of the insurance defendants [Essex and Genesee].”

It was not disputed that Alabama Auto was not an agent in fact for Essex and Genesee. The relevant contracts, discussing the parties’ relationships, bore this out. The issue was whether Essex and Genesee “cloaked Alabama Auto with the apparent authority to accept notice of claims on their behalf.” On this point, the court, while making clear that nothing was conclusively established, had little difficulty concluding that substantial evidence of genuine issues of material fact existed. There were three reasons for the court’s conclusion that summary judgment for the insurer defendants was improper.

The declarations page of the Essex policy listed Alabama Auto as “agent” – but with no further description. The court concluded: “[W]e note that a fair-minded person could reasonably understand the Essex policy to be referencing Alabama Auto as a dual agent or as the agent of the insurance defendants in some limited respect.” Further, “the fact that the insurance defendants issued an insurance policy without placing their own contact information on that policy further indicates that Alabama Auto-whose contact information was provided on the policy-had some authority to serve as the proper conduit for communication between the insureds and the insurance defendants.”

Second, Phase II’s owner’s sworn testimony indicated that he never had any direct dealings with Essex or Genesee. All communications, including premium payments, went through Alabama Auto.

Third, the insurance defendants accepted and responded to notices of claims forwarded to them by Alabama Auto on behalf of Phase II in other cases. As the court saw it, “if the insurance defendants had not accepted the notice provided via Alabama Auto in subsequent cases, or had at least told Phase II, SCSI, or Winn–Dixie that notice provided in such manner was improper, that would have apprised those parties that they needed to give notice of claims directly to the insurance defendants in all cases, including Paige’s. They might then have been able to provide direct notice of Paige’s claim more than 15 months before they actually did so, instead of continuing to operate under a belief that Alabama Auto had the authority to accept notice on behalf of the insurance defendants.”

As I see it, the biggest lesson from Southern Cleaning Service for insurers, that do not wish to face an apparent authority argument concerning notice, comes from the Dec Page. Listing Alabama Auto as “agent” – but with no further description – and then providing Alabama Auto’s contact information, but not Essex’s, gave the court an easy opportunity to make hay.

Vol. 5, Iss. 12
December 7, 2016

General Insurance Company of America v. Walter E. Campbell Co., No. 12-3307, 2016 U.S. Dist. LEXIS 62842 (D. Md. May 12, 2016)

Court Disallows Insured’s (Yes, Insured’s) Personal Counsel: Could “Slant” Cases…Toward Coverage


Courts have long been addressing whether an insured is entitled to independent counsel (i.e., not panel counsel), when its insurer is defending it under a reservation of rights. You know the drill. Insured says that the insurer must pay for independent counsel, since the complaint alleges both covered and uncovered claims, and if panel counsel is used he or she might “steer” the case toward a finding of liability for only the uncovered claims, since panel counsel wants to curry favor with the insurer, in hopes of receiving additional assignments. [I’m not sure how you actually “steer” a case in that way, especially without anyone noticing, but that’s neither here nor there.]

General Insurance Company of America v. Walter E. Campbell Co. offers the opposite version of this tale. Here the insured was not permitted to use personal counsel because he or she might steer the case -- toward covered claims. Yes, the insured was denied the opportunity to select counsel of its choice.

I’ve never seen this scenario before. That’s not to say the issue has never arisen. But, if it has, it has eluded me. Despite that fact that Campbell is a federal trial court decision, its uniqueness, surprising outcome and, that it involves asbestos coverage, which is The Mousetrap of insurance coverage, garnered it a spot as one of the ten most significant of the year.

Campbell involves coverage for asbestos bodily injuries. As is so often the case, it has been the subject of lengthy litigation and oodles of coverage issues. The one at hand came about because there was a settlement between Campbell and certain insurers. This resulted in two classes of insurers – Settled Insurers and Non-Settled Insurers.

On account of the settlement, Campbell was now required to participate in defense and indemnity to the same extent as Settled Insurers. But here’s the rub – only so-called “operations” claims were potentially covered under the Non-Settled Insurers policies. [The Non-Settled Insurers disclaimed coverage for “products and completed operations” claims.] At issue was how to handle the defense, between Campbell and the Non-Settled Insurers, of the “operations” claims.

The court concluded that, with Campbell having the largest share of the defense of the operations claims, it was appropriate for Campbell to take the lead in the defense – with certain qualifications.

Campbell unilaterally replaced its long-standing defense counsel, Flax and Spinelli, with the law firm of Morgan Lewis in over 570 pending asbestos suits. However, of note, Morgan Lewis was also representing Campbell in the coverage dispute. The Non-Settled Insurers viewed Morgan’s role, of both defense counsel and coverage counsel, as a clear conflict of interest. The Non-Settled Insurers advocated for the retention of Dehay & Elliston, a law firm with considerable experience defending asbestos cases in Baltimore where most of the cases are pending.

Now, back to those qualifications governing Campbell’s defense, here’s the money paragraph: “One of those qualifications is that [Campbell] cannot continue to retain conflicted counsel to defend these suits and, as long as it does so, Non-Settled Insurers shall have no defense or indemnity obligations with respect to those suits in which Morgan Lewis remains defense counsel. Given the long and protracted efforts of Morgan Lewis to pull cases into coverage under the Non-Settled Insurers’ policies, Morgan Lewis cannot also be placed into the position where it can slant the defense in a manner that could render the claims covered claims.” (emphasis added).

What’s good for the goose…

Vol. 5, Iss. 12
December 7, 2016

Bamford, Inc. v. Regent Insurance Co., 822 F.3d 403 (8th Cir. 2016)

What Drove This Appeals Court To Find Bad Faith Failure To Settle



In most ways, Bamford, Inc. v. Regent Insurance Co., No. 15-1968 (8th Cir. May 13, 2016) is a typical bad faith failure to settle case. There was a demand to settle within the insured’s limit. The insurer did not accept it. The case went to trial. There was an excess verdict. Litigation ensued over whether the insurer’s decision, to allow the case to go to trial, was in bad faith, under the applicable state standard. But despite its typicality, I chose Bamford for inclusion here for a reason -- the court showed its hand, as to what really set it off, in reaching its decision that the insurer’s failure to settle was in bad faith.

The facts giving rise to the claim are tragic. For convenience, I’ll let the court tell them: “In May 2009, Michael Packer, a Bamford employee, was involved in a two-vehicle collision with a vehicle driven by Bobby Davis. During the accident, a steel pipe stored on the roof of Packer’s vehicle became dislodged and ultimately penetrated Bobby’s left thigh, through his abdomen and pelvis, and out his right buttock, pinning him inside his vehicle. Bobby was trapped for between thirty and sixty minutes until paramedics arrived and were able to cut the pipe and extract him. He suffered a number of serious injuries and underwent extensive medical treatment to save his life and treat his injuries. Bobby’s brother, Geoffrey Davis, was a passenger in Bobby’s vehicle and suffered minor injuries. His claims against Bamford were settled and are not relevant to this appeal. Packer burned to death inside his vehicle.”

Bamford had a commercial automobile liability policy with Regent Insurance with a total policy limit of $6 million. While counsel for Bobby believed that the case was worth more than $6 million, he consistently offered to settle for the $6 million policy limit. While Regent’s internal valuations went up over time, Regent never agreed to settle. [The opinion is lengthy and sets out, in detail, the many, many demands and offers that went back and forth between Regent and the plaintiff’s counsel. I’ll skip over as much of this negotiation as possible.]

In addition to its belief that the case was not worth $6 million [“Nothing is worth more than $2 million in Nebraska,” per a Regent executive], Regent was also unwilling to meet the demand because of a belief that it may have had a defense to liability – Bamford’s driver, Packer, may have had a seizure, and lost consciousness, thereby causing the accident. Defense counsel believed that the loss of consciousness defense had a 25% chance of success (subsequently reduced to 10%).

Then something big happened. The court granted Bobby’s request to strike the loss-of-consciousness defense AND, went further, finding Bamford liable as a matter of law. As a result, the only issue at trial would be the amount of damages to which Bobby and his family were entitled.

The closest that the parties ever came to settlement was the day before trial. Plaintiffs demanded $3.9 million and Regent countered with $2.05 million. The case went to trial and the jury returned a verdict for $10.6 million. The case was settled for $8 million during the pendency of the appeal.

Bamford filed an action against Regent, alleging that Regent breached its fiduciary duty and acted in bad faith in refusing to settle the claim. Bamford requested damages in the amount it had contributed to the settlement as well as certain fees. Following a five-day trial, the jury returned a verdict for Bamford, awarding its requested damages of $2,037,754.33.

In affirming the decision, the Eight Circuit made many critical observations about Regent’s handling of the claim. Notably, the court stated:

“Here, the jury could have concluded that Regent—by relying on valuations received from mediators, counsel, and internal adjusters—reasonably embraced a low value for the Davises’ claims early in the case, but ultimately acted in bad faith in failing to reassess the value of the claims in light of case developments and advice from its own players that the low value was inaccurate. Regent’s failure to adjust its valuation following the district court’s grant of partial summary judgment strongly supports such a conclusion.

Again, the district court did not merely grant the Davises’ request to strike the loss-of-consciousness defense. The court went much further and found Bamford liable as a matter of law. For nearly two years, Nolan [defense counsel] and Robin [Regent adjuster] had counted on a tempering of damages when the jury heard the purportedly sympathetic facts that would be introduced to support this defense, such as Packer’s history of seizures and use of seizure medication. They had also believed that the loss-of-consciousness defense, which would have provided Bamford a complete bar to liability, had a slight chance of success. In the wake of the district court’s ruling, the jury would hear neither the purportedly sympathetic facts supporting a medical emergency nor other evidence that could moderate its view of Bamford’s culpability. Rather, the jury would be instructed that Bamford was negligent as a matter of law and liable for the Davises’ injuries. In response to this major development in the case, Nolan and Robin requested authority to make a $3 million settlement offer, both for strategic purposes and because, in Robin’s view, the offer would have led to a settlement in the $3 million range. Not only did Regent deny such authority, it failed to increase its reserve even one penny from the previously-set amount of $2.25 million. A reasonable jury could view Regent’s stark inaction—in the face of this seismic and unforseen development in the case, and contrary to advice from its counsel and primary adjuster—as a complete and total refusal to consider the fiduciary duty it owed Bamford.”

The take-away from this case is easy to see and worth remembering. This was not just a case of an insurer deciding – wrongly -- to take a case to trial. In other words, the excess verdict was not simply the result of the insurer getting its valuation and/or liability assessment wrong. If that were all it was, then the insurer may not have been found to be in bad faith (although it still could have been). Rather, what drove the court’s decision was that the insurer failed to reassess the settlement value of the case, in light of adverse case developments and advice from its own people.

Vol. 5, Iss. 12
December 7, 2016

Harwell v. Firemen’s Fund Insurance Co., 57 N.E.3d 671 (Ill. Ct. App. 2016)

Defense Counsel Does His Job -- And All Coverage Defenses Lost


I have never listed the top ten coverage of the year in order of importance. But, if I did, the Illinois Appellate Court’s decision in Harwell v. Firemen’s Fund Insurance Co. would be at the top. At issue, the potential for an insurer’s panel counsel, just doing his or her job, through no fault of its own, causing an insurer to lose its coverage defenses. Given the frequency in which this scenario could arise – like, all day, every day – the case warrants inclusion here, along with a #1 designation.

The facts of Harwell are simple. I’ll let the court tell them: “In 2006, Kipling [Development Corporation] was building a home in Will County, Illinois. As general contractor, Kipling hired subcontractors to handle specific aspects of the job, including Speed-Drywall and United Floor Covering. When service technician Brian Harwell entered the site to replace a furnace filter, the stairs leading from the first floor to the basement collapsed beneath Harwell, sending him falling into the basement. Harwell sustained injuries and filed suit against Kipling as the general contractor of the building site. He alleged that Kipling was negligent in failing to properly supervise and direct construction and failing to furnish Harwell with a safe workspace and a safe stairway. Harwell also sued Speed-Drywall and United Floor Covering, alleging they had modified or failed to secure the stairwell.”

OK, here’s where it turns from a routine construction site bodily injury case to anything but routine. Kipling was defended in the case by counsel retained by its insurer – Fireman’s Fund. Counsel for Kipling answered an interrogatory from plaintiff Harwell stating that Kipling had a $1 million liability policy with Fireman’s Fund.

However, the Fireman’s Fund policy contained an endorsement providing that, if Kipling did not obtain a certificate of insurance and hold harmless agreement from its subcontractors, then the limit would be reduced to $50,000 (including defense costs) for bodily injury arising out of the acts of a subcontractor. [We’ve all seen endorsements like this – part of the effort by insurers, over the past decade, to limit its exposure for construction site claims.]

After Kipling’s counsel answered the interrogatory, stating that Kipling had a $1 million liability policy with Fireman’s Fund, the insurer sent Kipling a series of letters, stating that the subcontractor endorsement had not been satisfied, and, therefore, the limit of liability under the policy was reduced to $50,000.

The case went to trial against Kipling only. Harwell won. The jury awarded him $255,000 in damages. Kipling went out of business and had no assets to satisfy the judgment. Harwell filed a coverage action against Fireman’s Fund. The insurer maintained that, because the subcontractor endorsement had not been satisfied, the limit of liability under its policy was only $50,000 – and this was exhausted by payment of Kipling’s defense costs. The trial court granted summary judgment for Fireman’s Fund.

The Illinois Court of Appeals reversed – and was none too pleased with what it saw. The appellate court observed that Fireman’s Fund had informed its insured – Kipling – that its policy limit was $50,000. However, Kipling’s lawyers – paid for by Fireman’s Fund, the court was quick to note – informed Harwell that the policy had a $1 million limit of liability. The court saw this as a violation of an Illinois discovery rule, requiring that “[a] party has a duty to seasonably supplement or amend any prior answer or response whenever new or additional information subsequently becomes known to that party.”

The court described the problem this way: “The impact of this violation is obvious: had Harwell known in 2008 that Fireman’s Fund was limiting its liability to only $50,000, he could have sought settlement with Kipling or changed his trial strategy. It does Fireman’s Fund no good to argue that it owed its duty to disclose only to Kipling, its insured; Harwell was the opposing party in the original lawsuit, Fireman’s Fund was controlling Kipling’s defense, and Fireman’s Fund therefore had a duty to be forthcoming under supreme court rules.”

But wait, the court wasn’t done: “Instead of disclosing this information, Fireman’s Fund went forward with trial, handling Kipling’s defense. At oral argument, Fireman’s Fund’s counsel admitted that no matter what the outcome at trial, Fireman’s Fund would not have paid out on the policy (because of the endorsement limiting liability to $50,000 due to subcontractor involvement in Harwell’s injury). In other words, by not supplementing the interrogatory, Kipling and Fireman’s Fund’s counsel fashioned a ‘heads I win, tails I win’ outcome. But, like so many best-laid plans, this one backfired. In his petition for rehearing, Fireman’s Fund’s counsel alleges that following this Court’s ruling would have forced them to withdraw from representing both Kipling and Fireman’s Fund, and in doing so implicitly acknowledges the conflict of interest inherent in our analysis.”

And, finally, the pronouncement: “Fireman’s Fund’s agenda seems clear: deny coverage to Kipling, control the flow of information to Harwell, fight Harwell tooth and nail through the original case, and after losing the trial—reveal the endorsement. This smacks of sandbagging, which we do not condone. Instead, we find that equity demands that Fireman’s Fund be estopped from asserting the endorsement against Harwell. This adheres to a fundamental maxim of the common law, which applies when dealing with improper discovery disclosures—a party should not be permitted to take advantage of a wrong, which he or she has committed.”

The flaw in the decision is obvious – it seems highly unlikely that Fireman’s Fund and its hired defense counsel for Kipling were in cahoots, as the opinion suggests. The opinion reads like the insurer and defense counsel were acting out a John Grisham novel. I just don’t believe that this was the work of an insurer and its counsel conspiring to create a “heads I win, tails I win” outcome. Instead, this was likely the result of defense counsel doing his or her job -- worrying about the defense of Kipling, and leaving coverage issues, like the applicability and impact of the subcontractor endorsement, to Fireman’s Fund.

But, nonetheless, a look into the crystal ball reveals the problems that this decision can cause. Under this court’s rationale, defense counsel answering interrogatories, regarding the amount of his or her client’s insurance, may be obligated to do more than simply provide the limits of liability. Counsel may also be obligated to disclose reasons why the limits of liability may not, in fact, be what is stated on the policy’s Dec Page. And that’s not always because of something as clear cut – at least in this case, apparently – as the applicability of a subcontractor endorsement.

Rather, in most cases, coverage defenses are spelled out in a reservation of rights letter, which, by definition, leaves open the possibility of a denial, in whole or in part, and possibly for several reasons, until after the litigation has been concluded. There is a lot of “it depends” in a reservation of rights letter. But that wasn’t the case in Harwell, where the applicability of a subcontractor endorsement applied without regard to how the underlying litigation played out. In other words, Harwell was an easier case than most.

Based on Harwell, what is defense counsel’s answer when asked in discovery about its client’s limits of liability? They are X, but… Is sending the plaintiff the defendant’s insurer’s reservation of right letter – which shows the reasons why coverage may not be owed, or not owed in full -- enough to prevent a court from concluding that the insurer did not “sandbag” the plaintiff if it disclaims, or limits, coverage post-verdict? And keep in mind that the reservation of rights letter may have been sent at the inception of the case and, therefore, not be as accurate now based on developments throughout the litigation.

In any event, in general, the Harwell decision seems to introduce coverage issues into the context of underlying litigation. If this decision is followed -- and the Appellate Court of Illinois is not a South Dakota small claims court -- it could send defense counsel down roads that they surely would not like to travel.


Vol. 5, Iss. 12
December 7, 2016

ISO Adopts A New Designated Premises Endorsement To Respond
To Recent Insurer Losses


Loyal readers of Coverage Opinions know that I have been harping on some recent cases giving very broad interpretations to a “Designated Premises Endorsement.” In general, the courts concluded that, if the insured’s headquarters are a designated premise, a policy provides coverage for injury or damage at a non-designated premise, if the negligent corporate decision, leading to the injury or damage, was made at the corporate headquarters.

The two decisions that I pointed to, giving this overly broad interpretation, were the Hawaii Supreme Court’s in C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co. (included as a “Top 10” case of 2015) and Western Heritage Ins. Co. v. Cyril Hoover dba Okanogan Valley Transportation (W.D. Wash. Mar. 30, 2016) (which cited to C. Brewer extensively). Newman v. United Fire & Casualty Company (9th Cir. Sept. 16, 2016) also applied this overly broad interpretation of the Designated Premises Endorsement.

In addressing these cases I pointed out that I have never been one of those people who believes that, any time an insurer is told by a court that it must provide coverage, that it didn’t believe was owed, the insurer needs to amend its policy language. However, I concluded that insurers were losing too many cases, involving the DPE, to not take action to ensure that the intent of the policy is achieved.

ISO announced in a September 26, 2016 Circular that it is making state filings to revise the Limitation of Coverage to Designated Premises or Project endorsements. In support of its decision to seek the revisions ISO cited the Hawaii Supreme Court’s decision in C. Brewer [Alo-HA] and the Washington federal court’s decision in Western Heritage. [How do you like them apples?] What’s more, the change is being made in the Insuring Agreement. Yes, the Insuring Agreement. The biggest of all stages in a CGL policy.

While not a judicial “decision,” ISO’s decision will have a significant impact on the coverage landscape going forward. This Designated Premises Endorsement issue arises frequently (as these recent decisions demonstrate and no doubt other instances arise that do not get litigated). And since the potential for impacting the coverage landscape is at the core of judicial decisions that make the Top 10 Coverage Cases list, I included it here.

According to ISO, for purposes of “bodily injury” and “property damage” coverage, an endorsement would be available, that amends the Insuring Agreement, to specify where in the “coverage territory” such injury and damage must occur. The revised language would state that “bodily injury” or “property damage” must occur on the premises shown in the Schedule or the grounds and structures appurtenant to those premises, or must arise out of the project or operation shown in the Schedule.

The endorsement also includes changes to the “personal and advertising injury” Insuring Agreement to specify that the offense must arise out the insured’s business performed on the premises shown in the Schedule or in connection with the project or operation shown in the Schedule. There are also amendments to specifically address where false arrest and wrongful eviction (and related offenses) must have been committed.

The proposed effective date for the endorsements is April 1, 2017.

As for the “impact” of these changes, ISO’s explanation is what you would expect: “In circumstances in which individual insurer claims settlement practices or state law are reflective of the Brewer and Western Heritage decisions, certain revisions, in the context of a schedule premises, may be a reduction in coverage.”

Vol. 5, Iss. 12
December 7, 2016

J&C Moodie Props. v. V., 2016 MT 301 (Mont. Nov. 22, 2016)

Not My Brother’s Keeper: Supreme Court Says One Insurer’s Defense Does Not Preclude Another’s Breach


Incredibly the Supreme Court of Montana has two decisions on this year’s annual Top 10 Coverage Cases list – that’s one more than the entire state has traffic lights. [Seriously, for a small population state, its Supreme Court issues a lot of really interesting opinions.]

The Supreme Court of Montana’s decision in J&C Moodie Properties v. V. involves an issue that I have never seen litigated, yet has the potential to arise with frequency – especially since it would come up in the context of the continuous trigger. As we all know, the continuous trigger has graduated from its roots in asbestos and environmental property damage – where it still lives large -- to arguments that it applies to construction defect coverage and lots of other scenarios where efforts are made to find coverage, increase the availability of coverage or share coverage.

At issue in J&C Moodie -- can an insurer admit that it had a duty to defend, but, despite not defending, not have breached the duty to defend because its insured was defended by another insurer? The insurer lost. However, the court also was clear that that need not always be the outcome. That there are two sides to the issue adds to J&C Moodie’s significance as guidance for other courts addressing this scenario down the road.

J&C Moodie Properties involves coverage for construction defects. Claims were brought against Haynie Construction for defective construction of a building, for Moodie, for a farm equipment dealership. During the course of its work Hayne was insured by both Farm Bureau and Scottsdale. Farm Bureau undertook Haynie’s defense under a reservation of rights. Scottsdale disclaimed a defense – asserting that an exclusion precluded coverage for operations prior to the inception of the policy.

Haynie and Moodie reached a settlement and filed it with the trial court that recited: “(1) Moodie’s claims against Haynie; (2) Moodie’s expert witnessess’s opinion that the project was negligently constructed and that Moodie suffered $5,650,000 in damages; (3) Scottsdale’s refusal to provide a defense or coverage; (4) Haynie’s resulting substantial risk, including financial insolvency; (5) the settlement reached between Moodie and Haynie for $5,650,000; (6) Moodie’s agreement to file a covenant not to execute on such judgment; and (7) Haynie’s agreement to assign all its rights and interest in the Scottsdale policy to Moodie. Kyle Haynie attested that, as a result of Scottsdale’s refusal to provide a defense, he had ‘settled with Moodie to eliminate the severe risks to me and my business.’”

Moodie filed an action against Scottsdale seeking a declaratory judgment that Scottsdale had breached its duty to defend, that the judgment was reasonable and negotiated in good faith and Scottsdale was liable for the stipulated judgment. The trial court ruled in favor of Moodie on all issues, including that Scottsdale had a duty to defend.

Scottsdale appealed everything to the Montana Supreme Court – except the decision that it had a duty to defend. Instead, Scottsdale’s argument was that “it did not breach the duty because, at all times during the litigation, Haynie was fully defended by counsel provided by Farm Bureau.”

The Montana Supreme Court held that Scottsdale breached the duty to defend. However, the court was clear that, under some situations, the fact that one insurer is defending can preclude another insurer’s breach.

The Montana Supreme Court described Scottsdale’s handling of the claim as follows: “After receiving notice of the claim, Scottsdale spoke with Kyle Haynie on March 21, 2013, learning that Farm Bureau had assigned a claim number to the matter and filed an Answer on behalf of Haynie, and again on March 25, 2013, when it learned that the construction contract had been signed before the inception of its policy period and that Farm Bureau was undertaking defense of Haynie. Doing nothing more, on May 20, 2013, Scottsdale denied coverage pursuant to the ‘Designated Operations Exclusion’ of its policy, and did nothing further until it was named as a defendant in this action following entry of the stipulated judgment.”

Scottsdale pointed to decisions from the Montana high court that it asserted support its position. However, the court didn’t break a sweat to distinguish them. In particular, the court distinguished Scottsdale’s handling of the claim from that of State Farm in State Farm v. Schwan (Mont. 2013): “State Farm Fire engaged in discussions with the insured’s co-insurer, confirmed the co-insurer did not need assistance and was defending the insureds on all claims, committed to assuming the defense if the co-insurer discontinued its defense, participated in settlement discussions, and kept the insured advised of its actions. State Farm Fire also filed a declaratory action to determine coverage and hired coverage counsel for the insureds, even though not required to do so under the policy. We reasoned that the insureds had not been ‘left unprotected or . . . prejudiced’ by State Farm Fire’s actions and the duty to defend had not been breached.”

The Supreme Court of Montana was unambiguous in how it viewed Scottsdale’s “roll the dice” handling of the claim: “[C]ontrary to what we have ‘repeatedly admonished insurers (citation omitted) Scottsdale did not seek a declaratory ruling to confirm its internal coverage determination. A declaratory action could have been brought early in the litigation—either upon tendering a defense to Haynie upon reservation of rights, or while letting Farm Bureau take the lead in defending Haynie—to resolve the coverage issue and confirm whether Scottsdale had a duty to defend. Failing that, Scottsdale provided no other assistance whatsoever to its insured related to the defense. As the District Court found, ‘Scottsdale can point to no evidence of actions it took to assist or participate in its insured’s defense.’ Unlike the insurers in Schwan and Westchester [Surplus Lines v. Keller Transportation (Mont. 2016)], Scottsdale made no effort to contact the co-insurer to further understand the claims, offered no coordination, and provided no other defense support pending a ruling that would affirmatively confirm whether coverage existed under the policy. It simply made the unilateral decision that it was done.”

Vol. 5, Iss. 12
December 7, 2016

West Virginia High Court: No Coverage For Innocent Co-Insureds
The Supreme Court of Appeals of West Virginia held in Am. Nat’l Prop. & Cas. Co. v. Clendenen, No. 16-0290 (W. Va. Nov. 17, 2016) that no coverage was owed to an “innocent co-insured,” for the acts of another insured who committed excluded conduct, when the exclusion at issue applied to “any insured.” In reaching this decision, the court was required – as is often the case in these types of claims -- to hold that a severability clause (or separation of insureds clause) did not prevail over an unambiguous “any insured” exclusion.

Arkansas Federal Court: Insurer’s Punitive Damages Exclusion Not Valid
The District Court of Arkansas held in Atl. Cas. Ins. Co. v. Paradise Club, 4:15-CV-04103 (W.D. Ark. Nov. 4, 2016) that an insurer’s punitive damages exclusion was not enforceable. An Arkansas statute provides that “[p]olicies containing an exclusion for punitive damages must include a definition of punitive damages substantially similar to the following: ‘Punitive damages’ are damages that may be imposed to punish a wrongdoer and to deter others from similar conduct.”

The punitive damages exclusion at issue provided as follows: “This insurance does not apply to any claim of or indemnification for punitive, exemplary and/or statutorily enhanced damages, including, but not limited to, multiple damages. If a ‘suit’ seeking compensatory and punitive, exemplary and/or statutorily enhanced damages, including, but not limited to, multiple damages has been brought against you for a claim covered by this policy, we will provide defense for such action. We will not have any obligation to pay for any costs, interests or damages attributable to punitive, exemplary and/or statutorily enhanced damages, including, but not limited to, multiple damages.”

The court held that “the language used in the Punitive Damages Exclusion found in the policy presently at issue does not convey to the average reader that ‘punitive damages’ are awarded as a means of punishment and deterrence. Therefore, the Punitive Damages Exclusion before the Court does not have language ‘substantially similar’ to the language found in Ark. Code Ann. § 23-79-307(8) and is void.”