Ron Schiller is a 1984 graduate of the University of Pennsylvania Law School, where he was an Editor of the Law Review. Ron has a broadly diversified jury trial and appellate practice, with a strong emphasis in insurance coverage and extra-contractual claim trials, arbitrations and appeals. Ron and his teams have averaged two to four trials a year in venues across the country for over a decade. Ron has also argued several appeals a year in state and federal courts on coverage, extra-contractual and business litigation matters. A substantial part of Ron’s practice includes representing insurers and reinsurers against healthcare and managed care companies in E&O, D&O, reinsurance and ERISA coverage disputes. These cases include disputes in the billions of dollars.

The respected English publisher Chambers & Partners recognized Ron in Chambers USA: America’s Leading Lawyers for Business, noting that clients admire him as “someone who consistently wins big cases.”

[Ed. Note – I read a lot of coverage cases. Take my word. Ron Schiller has a national practice involving cases with fortunes at stake and significant complexity and they often make law. rjm]

What were some of the reasons for your switch from DLA Piper to Hangley?

There were four principal reasons. First, the legal and financial world was changing, and sometimes turbulent times are good times to offer clients a new option. I found clients and my colleagues who made the move especially receptive – for which I remain very grateful. Clients may also have appreciated a break from the higher big firm rate I was then approaching – just a hunch. Second, on a spin of the old real estate mantra, “conflicts, conflicts and conflicts.” When your practice is based on opposing Fortune 100 companies and substantial mid-cap companies for large insurers and reinsurers in adversarial proceedings, 4,000 lawyers in 80-plus offices may be less-than-ideal. I have a group of terrific partners and associates very loyal to the clients (and me), and maintaining that growing practice required a platform without so many conflicts. Third, the timing was right. I had spent nearly 18 years at the world’s then-largest law firm, headed a strong, growing practice, was well-positioned but was also still in my 40s and ready for a move. Finally, I loved the idea of joining an elite, high-end litigation firm of under 100 lawyers with people I’d known and respected since law school.

Can you compare the differences between practicing at DLA and Hangley?

The easiest way to answer this is to state what has not changed. I continue to work with some 30 lawyers in the insurance litigation and counseling arena here just like I did at DLA. Even the biggest of cases get handled essentially the same way at Hangley as at DLA. This is no doubt a function of technology, the professionals, the way litigation works today, and the way we do things. Against this reality, the only differences I notice on a regular basis are, first, at some 60 lawyers I actually know everyone here, and I regularly and productively interact with most of my colleagues. Second, Hangley has an important reputation in the region, and it is definitely known by the local business community and judiciary in ways different than national or international firms. Sometimes that can be a benefit just as important as a national reputation.

Hangley is one of the finest firms in Philadelphia and beyond. But no doubt many of your clients were not familiar with it. Between that, and its much smaller size, was there any client reluctance to it?

Surprisingly – at least to me, having grown up at a large firm – there was no client reluctance to working with us at Hangley. I think I do benefit from having joined a well-regarded, terrific firm. There is no question that clients looked us up and continue to investigate us – to good effect so far. Some clients needed to be educated on the new firm, while others educated themselves or gave us a shot here.

What do you see as the chief benefit of having joined the Hangley firm?

In a constantly adjusting legal market, we were positioned well to adjust with clients. Two months after we moved here, a major client sold a part of its business, while, nearly simultaneously, another client changed its litigation strategy entirely, making what we do (temporarily, at least) less important. Yet excellent insurers and reinsurers stuck with us, and new clients gave us a chance. Some of these insurers either didn’t exist 20 years ago or were in different lines of business entirely. I think the move here allowed us to be considered by these clients, to change with them, to develop or grow these relationships, and to remain relevant. Given that most of our terrific insurance litigators are in their 30s and 40s, this is really critical to our long-term success. And we are grateful.

Last year Bridge of Spies put insurance lawyers on the big screen – and made them look very exciting.

And now this! A new sitcom: “Powerless.”

This from the NBC website: “In the first comedy series set in the universe of DC Comics, Vanessa Hudgens plays Emily, a spunky young insurance adjuster specializing in regular-people coverage against damage caused by the crime-fighting superheroes. But it’s when she stands up to one of these larger-than-life figures (after an epic battle messes with her commute) that she accidentally becomes a cult ‘hero’ in her own right… even if it’s just to her group of lovably quirky coworkers. Now, while she navigates her normal, everyday life against an explosive backdrop, Emily might just discover that being a hero doesn’t always require superpowers.”

And this from The Hollywood Reporter: “Hudgens will topline the pilot and portray Emily Locke, an insurance claims adjuster who loves her job because she gets to help people. Emily likes to fly under the radar and just get her work done, but she finds herself increasingly exasperated by the disruptive antics of the various superheroes that proliferate in her city.”

What’s next? How about a television show about a short, nerdy, bow-tie and glasses wearing guy who writes an insurance newsletter. Get me Brad Pitt on the phone.

I will keep an eye on “Powerless” and report back. Watch this space.

[Thanks to Bill Wilson and his IIABA VUpoint newsletter for alerting me to this.]

It is unquestionably one of the most challenging issues to confront an insurer – the demand to settle a claim within the insured’s limits of liability. We all know the drill. An insurer has been defending its insured for a while. The case is coming down to the end and trial is on the horizon. The insurer is at the point where it knows as much about the liability and damages issues as it ever will. And with that information, the possibility of a verdict in excess of the limits of liability is known to be a real one. A demand to settle within the insured’s limit of liability, thereby relieving the insured of the risk of personal liability, is made by the plaintiff. All things considered, the applicable state standard, for whether the insurer should accept the limits demand, has been met. In other words, not accepting the demand will saddle the insurer with liability for an excess verdict. [Of course, when there are also coverage issues, the degree of difficulty here goes from a double lutz to a triple axel. But that’s not the issue today.]

But there is another version of this story. Change one fact -- a demand to settle within the insured’s limit of liability is never made. In this situation, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. After all, even if the insured has a legitimate risk of personal liability for a verdict above its policy limit, and the insurer knows it, the insurer’s hands are tied. Right? Without a demand to settle within the insured’s limit of liability, what’s it to do? No matter how much it makes sense to settle the case, the opportunity to do so just isn’t there.

But is this true? Does an insurer instead have an obligation to attempt to settle a case -- even if there is no demand within limits? And, if it fails to do so, and there is an excess verdict, the insurer is liable for the whole ball of wax. Most courts have said no. But a few have said yes. Welford v. Liberty Insurance Corporation, No. 15-333 (N.D. Fla. June 2, 2016), following Florida law on this issue, demonstrates the challenge for insurers that find themselves in yes states.

Welford involves an automobile claim with odd facts. Matthew Zisa struck three pedestrians who were walking in the southbound lane of a road. Two were killed and one was injured. Zisa, travelling north, had gone into the southbound lane to pass another northbound vehicle. The southbound lane was a marked passing zone. The individuals struck were wearing dark clothes and had no flashlights. Prior to this, Zisa had attempted to pass the same northbound vehicle, but it sped up, causing Zisa to return to his lane.

The driver of the car that had sped up, preventing Zisa from passing the first time, was John Middleton. He was driving his girlfriend’s mother’s vehicle with consent. It was insured under a Liberty Insurance policy with liability limits of $10,000 per person and $20,000 per accident. Middleton and his girlfriend returned to the scene of the accident and gave statements to law enforcement. The Florida Highway Patrol concluded that the pedestrians were the cause of the accident and not Zisa.

Two months after the accident an investigator for a lawyer for the estate of one of the decedents called Lisa Mottsey, the owner of the vehicle that Middleton was driving. She was angry and insisted that her daughter and Middleton had done nothing wrong. She refused to give the investigator her insurance information and falsely told him that she had no insurance. Later that day, Mottsey called Liberty and reported the accident.

Here’s where the story gets very detailed and, given the unusual facts, it’s not worth getting into the weeds to make the important points. To put it simply, Mottsey was eventually sued. The case went to trial and one of the decedent’s estates recovered $1.3 million. The jury apportioned liability as follows: 55% on the decedent; 7% on Zisa; and 38% on Middleton (for speeding up and failing to let Zisa pass the first time).

The court got into a discussion of bad faith failure to settle, which is the point here.

Under Florida law (Powell v. Prudential), the court observed: “The lack of a formal offer to settle [by the plaintiff] does not preclude a finding of bad faith .... Bad faith may be inferred from a delay in settlement negotiations which is willful and without reasonable cause. Where liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.”

The court then went on to note that, under Powell, an insurer’s affirmative duty to initiate settlement discussions will exist only “where liability is clear.”

The court observed that, in Powell, the insured’s liability was evaluated at being somewhere between 80-100%. Here, however, liability was not anywhere near as certain. The court explained: “[I]t was debatable whether Middleton had any responsibility at all. Not only did Mottsey, Middleton, and Mayhair each dispute liability, but Corporal Davis [Florida Highway Patrol] found that ‘Middleton is listed as a witness. There [was] no contact with his vehicle. FHP can’t prove that he contributed to the accident.’” (emphasis in original)]

Herein lies the challenge for insurers that find themselves in states that impose an affirmative duty to initiate settlement discussions. How does it know if liability is clear? On one hand, the Welford court offered some guidance, rejecting the “some potential liability” standard: “On its face, Powell does not obligate insurers to initiate settlement negotiations whenever an insured is involved in a crash and has some potential liability. Indeed, if that were the law, insurers would have that obligation in virtually every accident case as it is almost always possible that an insured may be found at least partially liable for an injury.” (emphasis in original).

So we know what “clear” liability is not. As for what it is, the court defined “clear” as follows: free from doubt; sure; unambiguous; obvious; beyond reasonable doubt; plain; evident; free from doubt or conjecture and unequivocal. Yep, that’s clear.

In my experience, those who handle general and professional liability claims don’t get jonesed for decisions involving automobile coverage. And there’s good reason for that. Many automobile coverage cases do not involve issues that are relevant to general and professional liability claims. Sure there are exceptions – most notably, the lessons from bad faith failure to settle cases are transferrable to general and professional liability claims.

The Colorado Supreme Court recently issued a decision in an automobile coverage case involving an issue with the potential for much wider applicability. The fact that there were ten amici curiae involved – including three representing the interests of builders (yes, builders, in an auto coverage case) -- is strong evidence of this.

At issue in American Family Mutual Insurance Co. v. Hansen, No. 14SC99 (June 20, 2016) is whether extrinsic evidence can alter the terms of an insurance policy. That the case arises in the auto policy context is of no consequence. The decision is applicable to every type of policy.

The facts are simple and so is the analysis.

Jennifer Hansen was injured in a motor vehicle accident. She presented a UIM claim to American Family Mutual Insurance Company, asserting coverage under her policy on her 1998 Ford Escort. “As proof of insurance, Hansen offered lienholder statements issued to her by American Family’s local agent that identified her as the named insured at the time of the accident. American Family’s own records, however, including a November 2007 declaration page, indicated that the named insureds on the policy at the time of the accident were Hansen’s stepfather and mother, William and Joyce Davis.”

Continuing on with the facts as set out by the court: “In reliance upon the policy as reflected in its own records, American Family determined that Hansen was not insured under the policy and denied coverage. Hansen filed an action against American Family asserting claims for breach of contract, common law bad faith, and statutory bad faith for unreasonable delay or denial of benefits under sections 10–3–1115 and –1116, C.R.S. (2015). Prior to trial, American Family reformed the contract to name Hansen as the insured, and the parties settled the breach of contract claim, leaving only the common law and statutory bad faith claims for trial.”

The dispute is easy to see. American Family looks at its policy and sees that it’s issued to Jennifer Hansen’s parents. Since Jennifer doesn’t live at home, coverage is denied. Hansen sees it much differently, and not surprisingly. She points to the lienholder statements issued to her by American Family’s local agent. The document looks just like a policy declarations page and it identifies her as the named insured at the time of the accident.

American Family reformed the policy and settled the UIM claim. So Jennifer had something to her argument. However, the case still went to trial on Jennifer’s bad faith claims. The trial court determined that the discrepancy between the lienholder statement and the records in American Family’s underwriting department created an ambiguity as to the identity of the named insured. The court instructed the jury that an ambiguous contract must be construed against the insurer. The jury found in American Family’s favor on the common law bad faith claim but in Hansen’s favor on the statutory bad faith claim. [The fact that these are bad faith claims is not relevant to the core issue – can the lienholder statement alter the policy?] The court of appeals affirmed, finding that the lienholder statements created an ambiguity.

The Colorado Supreme Court reversed: “Because the insurance contract unambiguously named William and Joyce Davis as the insureds at the time of the accident, the trial court and court of appeals erred in using the extrinsic evidence of the lienholder statements to find an ambiguity in the contract. Accordingly, American Family’s denial of Hansen’s claim in reliance on the unambiguous insurance contract was reasonable, and the company cannot be held liable under sections 10–3–1115 and –1116 for statutory bad faith.”

The Supreme Court’s reasoning was simple. The insurance policy itself was not ambiguous. The declarations page unambiguously named William and Joyce Davis as the insureds. It was only the existence of the lienholder statement that created the ambiguity. However, “an ambiguity must appear in the four corners of the document before extrinsic evidence can be considered.” (emphasis in original). As the Supreme Court succinctly put it: “[E]xtrinsic evidence cannot create ambiguity; it is an aid to ascertaining the intent of the parties once an ambiguity is found.”

This is no insignificant decision. It is easy to see Jennifer Hansen waving that lienholder statement up and down saying – “Look. Look at this. It says I’m an insured. So either I am -- or its ambiguous (and so I am).” As attractive of an argument as that seems for an insured – Jennifer or others in a variety of scenarios -- it was rejected. Extrinsic evidence can only be a solution to a problem. It cannot create a problem.

Determining whether an insurer has a duty to defend is by far the most important liability insurance coverage issue. It arises in every type of claim – no matter the facts or the type of policy. And the consequences for an insurer that breaches the duty to defend can be huge (yuge). And once an insurer agrees to defend, it has now opened the door to a financial obligation, which is to say that it may now consider settling the claim, even if defensible, in an effort to prevent what could be greater defense costs.

There are two overarching principles that govern whether an insurer has a duty to defend. The first – duty to defend 101 -- is the almost universal rule, to the general effect that the duty to defend is broader than the duty to indemnify, and an insurer must defend so long as there is a possibility of coverage. This rule does not get a lot of attention because it is so almost-universally accepted.

The more important duty to defend principle is the second: is the determination of the duty to defend tied to the four corners of the complaint or must extrinsic evidence be considered by the insurer (usually only to find a duty to defend and not exclude it)? “Four corners” versus “extrinsic evidence” can have a huge impact on whether an insurer’s defense obligation is triggered.

As an aside, in those states that require an insurer to consider extrinsic evidence, a difficult follow-on issue sometimes emerges – What evidence can, or must, be considered by the insurer? This can be no easy issue.

Just how many states follow four corners and how many extrinsic evidence? This question was discussed in Water Well Solutions Service Group v. Consolidated Insurance Company, No. 2014AP2484 (Wis. June 20, 2016). It’s a lengthy opinion with a lengthy dissent.

For purposes of the discussion here, which is not the Water Well case itself, I note that the court held that “the longstanding four-corners rule in duty to defend cases requires the court to compare the language in the complaint to the terms of the entire insurance policy, without considering extrinsic evidence, even when an insurer unilaterally declines to defend its insured.” To be even clearer, the court stated: “[T]here is no exception to the four-corners rule in duty to defend cases in Wisconsin.”

The court observed that the four corners rule generally favors insureds: “The rule ensures that courts are able to efficiently determine an insurer’s duty to defend, which results in less distraction from the merits of the underlying suit. Also, the four-corners rule supports the policy that an insurer’s duty to defend is broader than its duty to indemnify. That is because it is the nature of the claim alleged against the insured which is controlling even though the suit may be groundless, false or fraudulent.” (citations and internal quotations omitted).

I believe that insureds would have a hard-time accepting this conclusion, especially that last part (and especially when you consider that extrinsic evidence is almost always only allowed to benefit insureds). The New York Court of Appeals certainly saw it that way in Fitzpatrick v. Am. Honda Motor Co., Inc., 575 N.E.2d 90, 92 (N.Y. 1991): “[I]n these circumstances, where the insurer is attempting to shield itself from the responsibility to defend despite its actual knowledge that the lawsuit involves a covered event, wooden application of the ‘four corners of the complaint’ rule would render the duty to defend narrower than the duty to indemnify—clearly an unacceptable result. For that reason, courts and commentators have indicated that the insurer must provide a defense if it has knowledge of facts which potentially bring the claim within the policy’s indemnity coverage.”

But back to the bigger question: Putting aside the specific issues in Water Well (and what type of exception to the four corners rule should be allowed), how many states follow the four corners rule and how many allow considerations of extrinsic evidence?

In Water Well, Justice Bradley, as part of a vigorous dissent, noted that 31 states allow for the consideration of extrinsic evidence for purposes of determining an insurer’s duty to defend. She further concluded that in four states the law is unclear.

My own scorecard on the extrinsic evidence issue closely resembles Justice Bradley’s. I’d put the number at 33 states. But, to be sure, anytime you do a survey like this there are going to be a few states where the law is not crystal clear and different people can reach different conclusions. But the moral of the story is the same – In more than half the states, insurers need to be mindful that their duty to defend determination must go beyond consideration of only the complaint.

My father, after serving as the president of his condominium association, astutely concluded: “Condo living isn’t for everyone.” For sure. It involves close proximity to your neighbors, shared common space and lots of rules – some you don’t like and some you may not even know about.

Condo living, and its perils, is at the heart of Keeley v. Travelers Home and Marine Insurance Co., No. C16-0422 (W.D. Wash. June 21, 2016).

Brian and Tereasa Keeley live in a condominium in Seattle. Their unit is directly above a unit owned by Laura Curcio. In April 2009, the Keeleys installed hardwood floors in their unit. “In early 2010, Mr. Keeley realized that he overlooked a provision in the condo bylaws stating that ‘no Owner shall install hard surface flooring within a Unit except with the prior written consent of the Unit Owner below, if any.’ On February 1, 2010, Mr. Keeley alerted Curcio that he had installed the flooring without obtaining her consent. Curcio made no complaint at that time.”

But that changed. In early 2013, Curcio began to complain to the Keeleys about noise that she attributed to their floor. In February 2014, Curcio sent a letter, through legal counsel, making a formal claim against the Keeleys, stating that their installation of the hardwood flooring interfered with her use of her unit and that the condo bylaws gave her “the absolute right to prevent [the Keeleys] from installing hardwood floors in [their] Unit.” The next month, Curio filed suit against the Keeleys, seeking an injunction requiring them to remove their hardwood flooring and preventing them from its future installation without Curcio’s consent.

The Keeleys sought coverage under their homeowner’s policy with Travelers. The policy provided coverage for damages because of “bodily injury,” “personal injury” or “property damage” caused by an “occurrence.”

Travelers denied coverage. The Keeleys and Curio entered into a settlement. The Keeleys agreed to remove the floors and pay Curio $3,442. The total cost to the Keeleys, to remove the floors, temporarily vacate their unit and pay Curcio, was just over $22,000.

The Keeleys filed a coverage action against Travelers. The court addressed Travelers’s motion to dismiss and the Keeleys motion for summary judgment.

Travelers argued that there was no “property damage,” defined as “physical injury to, destruction of, or loss of use of tangible property.” The court disagreed: “Here, the subject property damage is Curcio’s loss of use of her condo based on the alleged excessive noise.” The court rejected Traveler’s argument that there was no showing that the noise prevented Curcio from using her unit. As the court saw it: “[p]roperty in a thing [includes] the unrestricted right of use, enjoyment, and disposal. Anything which destroys one or more of these elements of property to that extent destroys the property itself. Curcio described the noise as ‘unbearable,’ clearly identifying a restriction on her enjoyment of the unit. The Court thus finds that there was ‘property damage’ at issue.”

While Travelers struck out on its “no property damage” argument (and its “no damages” argument -- see Tapas column), it succeeded in convincing the court that there was no “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions[.]”

The court looked to Washington law for the definition of “accident:” “‘an accident is never present when a deliberate act is performed unless some additional unexpected, independent and unforeseen happening occurs which produces or brings about the result of injury or death.’ ‘The means as well as the result must be unforeseen, involuntary, unexpected and unusual.’ ‘The accident need not be caused by ‘an unconscious, nonvolitional act.’ Rather, the act must be ‘done with awareness of the implications or consequences of the act.’”

The Keeleys analogized their situation to a 2007 Washington appellate case, holding that it was an accident where the insured turned on the irrigation system in an onion field, causing onions to rot. The court found that to be an “accident” because there was “no evidence that the insured knew or should have known that turning on the irrigation system would damage the crop. Thus, . . . turning on the irrigation, although intentional, was not deliberate.”

But the court did not see the Keeleys’ situation being on all fours with the onion crop case: “The Keeleys argue that the present situation is analogous to Hayles [onion crop case], alleging that a ‘reasonable person in Mr. Keeley’s position might not have been aware—indeed might have been completely unaware—that installing new floors would require consent, that consent would not be forthcoming, or that the Keeleys’ floors would affect anyone else’s unit.’ But in Hayles, the insured ‘had no duty to observe the crop and no authority to decide when the crop needed water or when it needed to be dry.’ The same cannot be said for the Keeleys: as members of the condo association, they had a duty to abide by the condo bylaws. And, though the Keeleys were not actually aware they were in violation, [another case] makes clear that an insured’s subjective knowledge does not govern. Rather, the Court focuses on what a reasonable person in the Keeleys’ position knew or should have known. While the Keeleys’ predicament is certainly unfortunate, the Court cannot say that a reasonable person ignores his or her own duty.”

Held: “[T]he harm resulting from the floor’s installation was not truly an ‘unexpected, independent, and unforeseen happening.’ As such, there was no ‘occurrence’ within the meaning of the policy.”

Aqua Star (USA) Corp. v. Travelers Casualty and Surety Co., No. C14-1368 (W.D. Wash. July 8, 2016) does not involve a cyber policy. But it involves a cyber claim -- hacking. And it demonstrates how unique such claims can be – in terms of both facts and especially policy language. These are not pollution exclusion claims folks. Coincidentally, as this issue was being finalized, I learned of another decision involving coverage for a hacking incident.

At issue in Aqua Star is coverage for a hacking incident that led to a serious financial loss. A hacker, disguising itself as a vendor of Aqua Star, by using a spoofed e-mail domain similar to the vendor’s real one, instructed Aqua Star to change bank account information for future wire transfers to the vendor. Aqua Star did so and was ultimately defrauded out of over $700,000.

Aqua Star was insured under a Crime policy issued by Travelers. It provided coverage for Computer Fraud: “The Company will pay the Insured for the Insured’s direct loss of, or direct loss from damage to, Money, Securities, and Other Property directly caused by Computer Fraud.”

The court, assuming that the loss was caused by Computer Fraud, turned to the potential applicability of an exclusion: The Policy “will not apply to loss resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured’s Computer System.”

The court concluded that the exclusion applied. But how it got there was interesting.

The Treasury Manager for Aqua Star “saved the email with new wiring instructions, and entered the new bank account information in the Excel spreadsheet that she used to keep track of payments to Longwei [the vendor].” This was her convenient way to store payment details for each vendor, saving her from having to look them up every time she made a payment. She also included the spreadsheet in a packet given to Aqua Star management to approve payments to vendors. Aqua Star did not contend that she was an unauthorized user or that she did not input Electronic Data into Aqua Star’s Computer System.

Based on this procedure, the court saw it this way: “In this case, the entry of data into the Excel spreadsheet on Aqua Star’s Computer system was an indirect cause of Aqua Star’s loss. The fraudulent bank account information was entered in Aqua Star’s Computer System and used to prepare a packet of materials for approval of the payment by Aqua Star’s management. Entering this data into a spreadsheet was a necessary step prior to initiating any transfer. [The Treasury Manager] printed out a copy of the spreadsheet and included it in a package of documents that was presented to a member of Aqua Star’s management for approval of the payment. Even if management did not rely upon or even review the account number in the packet, however, [the Treasury Manager] also used the information she input into the spreadsheet to prepare and initiate the wire transfers. Therefore, the entry of Electronic Data into Aqua Star’s Computer System was an intermediate step in the chain of events that led Aqua Star to transfer funds to the hacker’s bank accounts. Because an indirect cause of the loss was the entry of Electronic Data into Aqua Star’s Computer System by someone with authority to enter the system, Exclusion G applies.” (emphasis added).

Aqua Star, as I’m sure most policyholders would, saw it much differently, making several arguments, all of which were rejected by the court for several reasons: (1) “Although entering data into a third party’s computer system may have been the final step that led to Aqua Star’s loss, necessary intermediate steps prior to the transfer involved entering Electronic Data into Aqua Star’s own Computer System;” (2) “Saving the bank information in the spreadsheet ‘was not materially different than writing the information on a sticky note or index card;’” and (3) The exclusion was intended to apply to computer fraud that was an inside job: “where a fraud is perpetrated by an authorized user of an insured’s computer system, such as an employee or customer.”

As this issue of Coverage Opinions was being finalized, I learned of another decision involving coverage for a hacking incident: ABL Title Insurance Agency v. Maxum Indemnity Co., No. 15-7534 (D.N.J. June 30, 2016). Time is short. I’ll keep this brief.

ABL was the closing agent for a residential real estate sale. A hacker, using an email address similar to the seller’s attorney’s email address, sent an email to the buyer’s attorney, indicating that the sellers desired payment by wire transfer. As a result, ABL wired nearly $600,000 to the hacker. This caused ABL to have insufficient funds to cover disbursements for several real estate closings. As a result, lots of claims were made against ABL.

ABL sought coverage under a professional liability policy for a wrongful act in rendering professional services. At issue was the applicability of the exclusion for damages arising out of conversion. The court addressed the competing arguments of the parties but concluded that it was too early in the proceedings to make a “legal determination that the tort of conversion occurred.”

I’ve been talking about this issue a lot on these pages. Insurers face enormous exposure for bodily injuries on construction sites. Recently, they have been attempting to reduce this exposure (along with their property damage exposure – see First Manifestation, Loss in Progress and similarly named endorsements).

Increasing efforts on the bodily injury front have 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. Since the people most likely to be injured on a construction site, especially one closed to the public, are employees of a contractor – some contractor, any contractor, even one with nothing to do with the insured -- it is easy to see the breadth of such an exclusion.

In general, insurers have been winning cases where such exclusions have been at issue. But not all. In some cases, the breadth of the exclusion has not gone unnoticed by the court. Atain Specialty Inc. Co. v. Lusa Construction, Inc., No. 14-4356 (D.N.J. June 21, 2016) is one of them.

Carlos Araujo, an employee of JKL Construction, was injured on a construction site while installing a plumbing line for masonry work. JKL was a subcontractor for Lusa Construction, which was itself a contractor for general contractor Waterside Construction.

Araujo filed suit. Lusa sought coverage under its general liability policy from Atain. Waterside was an additional insured under Lusa’s policy. So far nothing out of the ordinary.

Lusa’s CGL policy contained an Employer’s Liability exclusion as follows: “‘Bodily Injury’ to an ‘employee’, subcontractor, employee of any subcontractor, ‘independent contractor’, employee of any ‘independent contractor’, ‘leased worker’ or ‘volunteer worker’ of the insured arising out of and in the Course of employment by or service to the insured for which the insured may be held liable as an employer or in any other capacity.”

The policy defined Independent Contractor as: “one that contracts to do work or perform a service for another and that retains control over the means or methods used in doing the work or performing the service. ‘Independent contractor’ includes, but is not limited to, subcontractors and any employees of a subcontractor, and employee of an independent contractor, and ‘employees’ of the insured, agents, representatives, volunteers, spouses, family members or the insured or any Additional Insureds added to this policy.”

Atain denied coverage to Lusa on the basis of the Employer’s Liability exclusion -- Mr. Araujo was an employee of JKL, a subcontractor of Lusa’s. Enter Crum & Forster, the insurer of Waterside. C&F tendered the defense and indemnification of Waterside to Atain. Atain again asserted the Employer’s Liability exclusion and denied coverage.

Atain filed an action seeking a declaratory judgment that it did not owe coverage to Lusa or Waterside. The court had an easy time concluding that the Employer’s Liability exclusion precluded coverage for Lusa: “It excludes coverage for ‘Bodily Injury’ to an ... employee of any subcontractor ... of the insured arising out of and in the Course of employment by or service to the insured for which the insured may be held liable ... in any other capacity.” Mr. Araujo was an employee of JKL, which was a subcontractor of Lusa. Case closed.

Turning to Waterside, it wasn’t so cut and dry. JKL was not a subcontractor of Waterside as they never contracted with each other. But no matter, according to Atain -- JKL was an independent contractor. The court described the issue this way: “[W]hether the Employer’s Liability exclusion defines ‘independent contractor’ to include only those who contract with the insured, or more broadly as those who contract with anyone to do work that eventually benefits the insured.”

The court adopted the narrower approach: “The Employer’s Liability provision excludes coverage for employees of ‘independent contractor[s] ... of the insured.’ The language ‘of the insured’ modifies ‘independent contractor.’ It imposes some requirement that the independent contractors be tied to the insured. This requirement cannot merely be that the benefit accrue to the insured, as that is already stipulated in subsequent language: ‘arising out of and in the Course of employment by or service to the insured....’”

Since JKL contracted with Lusa, not Waterside, JKL did not qualify as an independent contractor of Waterside. Therefore, the Employer’s Liability exclusion did not preclude coverage for Waterside.

Although it could have, the court did not stop at the policy language. It went a step further – noting that the alternative interpretation of independent contractor “takes on an absurdly broad scope, encompassing anyone who contracts with anyone else. The language is at best ambiguous, and the Court generally construes ambiguous insurance policy exclusions narrowly.”

Therein lies the challenge for insurers that seek to impose broad Employer’s Liability exclusions. Despite what the policy language may dictate, a court may also believe that an exclusion, that applies to anyone who contracts with anyone else, is “absurdly broad.”

Back in the April 8, 2015 issue of Coverage Opinions I discussed Mount Vernon Fire Insurance Co. v. Visionaid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015). The court addressed the knotty issue of an insurer, defending an insured, and the insured believes that it has a counterclaim against the plaintiff. Defense counsel files the counterclaim or the insured hires separate counsel, to work with the insurer-appointed counsel, to file the counterclaim. However, the insurer does not wish to pay the legal fees associated with the counterclaim. After all, the counterclaim is not a suit filed against the insured. And a claim filed against the insured is what the duty to defend is all about. It often gets worked out. Sometimes the insured agrees to pay for the prosecution of the counterclaim. Sometimes the insurer pays it because it ultimately benefits the defense of the insured, i.e., a good offense is part of the defense. But it does not always get worked out. That’s what happened in Visionaid and the parties marched off to court.

The Massachusetts District Court, following a lengthy analysis, held that Mt. Vernon was not obligated to fund VisionAid’s counterclaim. What makes the VisionAid opinion useful was that the court addressed, one by one, so many of the very arguments that are often raised by insureds when seeking to have a counterclaim funded as part of a defense being provided to it by an insurer. These include the broad duty to defend obligates the insurer to fund the counterclaim; the counterclaim is an aid to the defense of the insured; the counterclaim creates a conflict for the insurer’s retained counsel; and requiring separate counsel to pursue the counterclaim would make the defense unwieldy.

VisionAid is the most detailed opinion I’ve ever seen that addresses whether an insurer is obligated to fund an insured’s counterclaim. [If there’s a more detailed one I’d love to know.] For that reason, the Massachusetts federal court’s decision was a candidate for inclusion in my 2015 “10 Most Significant Coverage Decisions of the Year” article. But, alas, it was appealed to the First Circuit. So this took it out of consideration for the 2015 “Top 10.”

I was disappointed. But, in the back of my mind, I knew that the First Circuit’s decision would be a strong candidate for inclusion in the 2016 “Top 10” article. But then something happened on the way there. The First Circuit – with Justice Souter on the panel, sitting by designation – pulled a judicial go-ask-your-mother and certified the issue to the Massachusetts Supreme Judicial Court. Mount Vernon Fire Insurance Co. v. Visionaid, Inc., No. 15-1351 (1st Cir. June 9, 2016).

Come on. You gotta be kidding me. [Justice Souter – How hard can this be compared to the stuff that you saw on the Supreme Court?] So now it looks like it won’t be until 2017 (hopefully) that VisionAid gets a chance to make the Top 10.

What was it that caused the First Circuit to need help seeing in VisionAid? Nothing surprising -- what you would expect when certification occurs: no controlling precedent; the outcome of the case could affect lots of insurance disputes in Massachusetts; insurance is an area of traditional state regulation; and the policy arguments do not clearly favor one side or the other.

The First Circuit, after discussing the case (see CO April 8, 2015 for the background), certified the following questions to the Massachusetts SJC (and conveniently did so in a way that outlined the arguments of the parties):

(1) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured—whether under the insurance contract or the Massachusetts “in for one, in for all” rule—to prosecute the insured’s counterclaim(s) for damages, where the insurance contract provides that the insurer has a “duty to defend any Claim,” i.e., “any proceeding initiated against [the insured]”?

(2) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured to fund the prosecution of the insured’s counterclaim(s) for damages, where the insurance contract requires the insurer to cover “Defense Costs,” or the “reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense, and appeal of a Claim”?

(3) Assuming the existence of a duty to prosecute the insured’s counterclaim(s), in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaim(s)?

VisionAid – See ya in 2017.

Pennsylvania Court Nixes Coverage For Construction Defect
When it comes to coverage for construction defects in Pennsylvania, policyholders have been confronted with a kryptonite that can be described in two words: Kvaerner and Gambone. Kvaerner says that faulty workmanship is not an “occurrence.” While that’s not an unusual holding in the world of CD coverage, Gambone goes a step further, and says that foreseeable consequential damages are also not an “occurrence.” That second step is not often taken by courts that have confronted the issue.

In Peerless Insurance Co. v. Manown Builders, No. 15-281 (W.D. Pa. June 30, 2016), the Pennsylvania federal court issued a decision that won’t surprise anyone familiar with the plight of Pennsylvania policyholders seeking coverage for construction defect: “In this case, it is undisputed that the claims in the underlying action ‘are based upon Manown’s alleged failure to properly construct and/or erect the resident dwelling,’ including failing to properly construct, erect, and/or install pillars, floors, and ceilings. The underlying plaintiffs’ complaint further alleges that Manown failed to use appropriate materials, follow specifications, and follow uniform building codes when constructing of the home. The underlying plaintiffs’ claims against Manown are therefore unequivocally based upon faulty workmanship of the home itself. As such, Kvaerner and its progeny dictate that an ‘occurrence,’ as defined in the policy, has not been alleged in the four-corners of the underlying complaint because faulty workmanship in the construction of a home is not, as a matter of law, an ‘accident.’ See Gambone, 941 A.2d at 713.”

Court Holds That “Such Other Relief” Sought In Complaint Is “Damages” To Trigger Defense
Most courts do not treat a catch-all demand, in a Wherefore clause, for “such other relief as the court deems just and equitable,” or along those lines, as a claim for “damages.” This issue usually arises if there is no specific claim for “damages” -- and only this generic catch-all prayer for relief could trigger a defense. But Keeley v. Travelers Home and Marine Insurance Co., No. C16-0422 (W.D. Wash. June 21, 2016) said the opposite, holding that a complaint’s demand for “injunctive relief, attorney’s fees and such other and further relief as the court deems appropriate” alleged damages. It reached its decision by relying on case law holding that the catch-all allegation of “such additional relief” would permit an award of monetary damages.