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Coverage Opinions
Effective Date: September 7, 2016
Vol. 5 - Issue 9

Declarations: The Coverage Opinions Interview With Mark Lanier: Don’t Mess With Texas Plaintiff’s Attorneys
For Mark Lanier, $100 million+ verdicts no longer shock anyone. He even had one for $9 billion not long ago. He’s gone hunting with Scalia, played himself in a movie, gave John Grisham a story idea and had Bon Jovi and Sting perform at the firm Xmas party. But on Sundays it’s another story for the lawyer who could pass for a law student: he goes to church, where he is a teacher and sometimes pastor.

Alexander Hamilton: Lawyer At Your Service, Sir
The Lawyer Workin’ A Lot Harder, Bein’ A Lot Smarter And Bein’ A Self-Starter
Ron Chernow, whose Alexander Hamilton biography was the inspiration for the smash hit Broadway musical, encouraged me to write about the $10 founding father’s life as a lawyer. I don’t reject advice from Pulitzer Prize winners.

Randy Spencer’s Open Mic
The Absolute Dumbest Class Action Of All Time
Big News: Randy Spencer will be appearing at Dangerfield’s in New York City (Free Tix)

ACT NOW: Big Discount Ending Soon
General Liability Insurance Coverage: Key Issues In Every State

Coverage Opinions “Out And About” Page
See how much fun people can have with an insurance coverage newsletter

Nose Bite Litigation – This Is Snot A Joke

Coming Soon: White And Williams Coverage College Turns 10!
See Why Hundreds Travel From Across The Country For This FREE Event

Update From The Reporters On The ALI Restatement Of Liability Insurance
And A Chance For Newcomers To Get On Board

The Four Questions:
Why Is This Coverage Lawyer Different From All Other Coverage Lawyers?

Randy Evans: Coverage Lawyer And Political Insider

A Monster: Insurer Sasquashed: #1 Coverage Case Of 2016

ABSOLUTE MUST READ: Bad Faith: Turning $30K into $3M (And Easily Preventable)

Consequences For Breach Of The Duty To Defend

This Decision Should Really Trouble Lawyers

Court Upholds Very Broad Exclusions For A Construction Site Bodily Injury Claim

Supreme Court: Insurer Cannot Contract-Around “Notice-Prejudice” Rule

In A New York State Of Bind: Achieving Allocation Between Covered And Uncovered Claims [A First For New York?]

Tapas: Small Dishes Of Insurance Coverage
· The Wall Street Journal Tackles Construction Defect Litigation And Insurance
· Supreme Court Wishes Insureds “Good Luck” Understanding Their Policy
· California Supreme Court: This Could Be Big
· For My Pennsylvania Construction Defect Friends: Kvaerner Applies;
Indalex Does Not
· Location, Location, Location -- Does Not Matter

Back Issues:



Vol. 5, Iss. 9
September 7, 2016


The Absolute Dumbest Class Action
Of All Time



Class actions are a funny thing. Not funny ha-ha. But funny in that they serve such divergent purposes. On one hand, virtually every social movement since the 1950s has been augmented through class actions and they have served to protect constitutional rights. This is the case that Professor Arthur Miller made to Maniloff in the last issue of Coverage Opinions (which, I might add, is a useless publication except for the “Randy Spencer’s Open Mic” column).

On the other hand, Miller also acknowledged the well-known knock on class actions, that there have been some “downright silly” ones. Indeed, just a few days ago, a California federal judge dismissed a putative class action against Starbucks seeking damages from the coffee giant on the basis that its cold drinks contain ice, which lessens the amount of beverage in the cup. And don’t forget the class action against Subway because its “foot long” subs measured fewer than twelve inches. That one settled.

These types of consumer class actions get a lot of media attention because of their silliness and opportunity to portray the legal system as broken – especially when they involve a settlement that gives the class members a pittance and the lawyers gobs of money. These are simply irresistible stories for the media.

Well, when it comes to silly consumer class actions, the shark has officially been jumped. On August 19 a putative class action was filed in the Central District of California, against Envelope Corporation of America, alleging that the envelope behemoth is violating a variety of California consumer protection laws by not stating on its packaging that the glue on its envelopes contains no nutritional value. The plaintiff, for himself and on behalf of all others similarly situated, alleges that ECA is obligated to warn consumers that licking an envelope will not satisfy any of the government’s recommended daily nutritional requirements.

The plaintiff concedes in the complaint that envelopes are exempt from the Federal Food, Drug, and Cosmetic Act information panel requirement because envelopes are not a prepared food. [That’s the little box on the package that tells you the calories and fat content of a food and that three potato chips constitutes a serving]. So the complaint takes a different tack, maintaining that consumers could be led to believe that, because envelope glue enters their mouth when licking it, they are obtaining a nutritional benefit. As a result, the complaint warns that consumers may forego eating other foods, on the mistaken belief that the envelope has already satisfied an aspect of their daily nutritional requirements. Plaintiffs seek medical monitoring to be sure that they have not been physically harmed by inadequate nutrition, on account of NEC’s gross negligence by its omissions, as well as a host of damages for violation of various consumer protection laws, and, of course, the accompanying attorney’s fees allowed by these laws.

The case is Phillip Finley, and all others similarly situated v. Envelope Corporation of America, No. 16-cv-1259 (C.D. Calif. Aug. 19, 2016).

Thank goodness the post office switched to sticker stamps a while back. Can you imagine?

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



Vol. 5, Iss. 9
September 7, 2016

ACT NOW: Big Discount Ending Soon
General Liability Insurance Coverage: Key Issues In Every State

Jeff and I are very pleased to report that the venerable National Underwriter Company is now publishing the 3rd edition of Insurance Key Issues. We are thrilled and honored to be associated with such a long-standing industry leader.

From here out, National Underwriter will handle the pricing. The current 50% discount for the third edition of Key Issues, offered by the earlier publisher, will end on September 16. After that, the price will be higher. If you’ve been considering purchasing a copy of Key Issues 3d, or some extra copies to avoid the hassle of sharing, this is the time to do it. [Please do not read this as a sales pitch. This book does not make Jeff or me rich. We just love seeing it in use.]

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.


Get the 3rd edition of Insurance Key Issues here www.createspace.com/5242805
and use Discount Code NTP238LF for a 50% discount





Vol. 5, Iss. 9
September 7, 2016

Nose Bite Litigation – This Is Snot A Joke


The DRI insurance message board was recently full of kudos for member Chris Fargnoli on her win in a “nose bite case” before the South Carolina Court of Appeals. Well, when it comes to a nose bite case, we here at Coverage Opinions say sinus up. [Actually, Coverage Opinions is a one man band. There is no us. Writer’s embellishment used to make that work.]

Anyway, there is no way that Coverage Opinions would blow the opportunity to discuss a nose bite case. In fact, in July 2004, CO included an entire article on nose bite coverage litigation. The article looked at a couple of cases where nose biters sought coverage for claims arising out of their actions.

With Chris’s case getting attention, I decided it was now time to take a look at nose bites cases outside the coverage arena. And there are hundreds. Most are criminal. It’s a crime to bite someone’s nose. But there is no shortage of civil ones too. Plus, don’t forget when Uncle Joe grabbed your nose when you were three years old, put his thumb between his two fingers, and declared that he took off your nose. Surely that’s an area ripe for litigation.

With all these nose bite cases, it’s only a matter of time before a CLE company declares nose biting to be the “next asbestos” and offers a two hour program.

First here is a quick look at the recent decision from the South Carolina Court of Appeals in Easterling v. Burger King Corp, No. 5404 (S.C. Ct. App. May 18, 2016). It arises out of a fight in the drive-through of a Burger King (which is strange -- because nose supposedly tastes like chicken).

Gary Eastwood was behind Thomas Easterling in a Burger King drive-through in Charleston. Eastwood rear-ended Easterling twice. The court described what happened next: “Following the second impact, Easterling stepped out of his vehicle to assess the damage. While Easterling was assessing the damage, Eastwood exited his vehicle and approached Easterling in a ‘very aggressive’ fashion. Eastwood lunged at Easterling, put his shoulder in Easterling’s stomach, and grabbed Easterling around the waist. At some point during the altercation, Easterling hit the curb, tripped, and fell backward down the embankment. Easterling stated he must have bumped his head when he hit the ground because he was ‘knocked unconscious.’ When Easterling regained consciousness, Eastwood was on top of him and proceeded to violently bite his nose off.”

Easterling sued Burger King, asserting various theories why BK was liable for his injuries. Easterling lost. The opinion has as many parts to it as a Whopper. Here are a couple of the court’s conclusions: “Easterling failed to produce any evidence that Burger King did not execute economically feasible security measures to prevent a physical assault in its drive-through.” Burger King did not create an unreasonable and dangerous condition by constructing a drive-through lane adjacent to an embankment, which Easterling claims prevented him from exiting the drive-through lane to safety.

I looked at a lot of nose bite cases and the ones in the criminal context were the most interesting. I picked these as my favorites.

Morris v. State, 382 S.W.2d 259 (Tex. Ct. Crim. App. 1964): The defendant appealed his conviction for maiming. The statute provided as follows: “Whoever shall willfully and maliciously cut off or otherwise deprive a person of the … nose … shall be guilty of maiming.” The physician who examined the victim testified that “the tip of the nose including a part of the cartilage and the part that flares out had been severed.”

The defendant argued that the trial court erred, when it charged the jury that it could convict, based on a finding that the defendant deprived the victim of a “substantial portion” of his nose. Essentially, the defendant’s argument was that, to be guilty, he had to bite off the entire nose. The Texas appeals court disagreed, holding that the inclusion of “substantial portion” in the charge was not reversible error.

State v. Mairs & Mairs, 1 N.J.L. 518 (1795) (yes, nose bite cases go way back): In dicta, the New Jersey Supreme Court stated that, if a person bit off another’s nose, he would be guilty of assault and battery, even if the indictment charged him with cutting off the nose with a knife.

Mathis v. State, 17 S.E.2d 194 (Ga. Ct. App. 1941): While this was an ear biting case, the court drew upon nose biting for guidance. Defendant was convicted of mayhem for biting off someone’s right ear. He argued that, at most, he was guilty of a less serious statute prohibiting “[slitting] or biting the nose, ear or lip of another…” Looking to the more serious statute, which prohibited the cutting or biting off of the nose, the court stated that, if one third of a nose were bitten off, the person would be guilty of that crime, even though the entire nose had not been bitten off. Thus, the statute prohibiting the mere slitting or biting of the nose or ear was not in play for the defendant’s serious ear biting.

In all three cases, the defendants made fine-point distinctions between their particular nose biting and what they felt it should have taken to convict them. While the defendants all thought these deviations were nothing to sneeze at, in each case the court turned up its, well, you know.

Vol. 5, Iss. 9
September 7, 2016

Coming Soon: White And Williams Coverage College Turns 10!
See Why Hundreds Travel From Across The Country For This FREE Event


Sharpen your pencils. Get a new Trapper-Keeper. The 10th Annual (Yes, 10th, it’s the big one) White and Williams Coverage College (FREE for most) is quickly approaching – September 22nd at the Pennsylvania Convention Center in Philadelphia. Registration is brisk and we are well on our way to a capacity crowd of students from insurance and related companies from all across the country. Last year there were 600 registered students from 150 companies and 19 states. Coverage College is the social event of the claims season! If you are planning to attend, the time to register is now.

Students can choose from a variety of multi-discipline Masters Classes, exploring a host of coverage issues, taught by experienced White and Williams lawyers.

The College also includes breakfast, lunch, two breaks and a cocktail reception, allowing students to interact and engage with the faculty, fellow students and sponsors throughout the day. You won’t leave hungry. I can promise that. For those in the insurance industry – other than non-sponsor vendors – the Coverage College is free.

Come see why the White and Williams Coverage College draws so many insurance professionals from across the country. Click here http://www.coveragecollege.com for more information.

Vol. 5, Iss. 9
September 7, 2016

Update From The Reporters On The ALI Restatement Of Liability Insurance
(And A Chance For Newcomers To Get On Board)


It has now been almost two years since the American Law Institute did a switcheroo and converted its Principles of the Law of Liability Insurance to the Restatement of the Law of Liability Insurance. Just a one word change – but an impact that speaks volumes. So what’s been happening with the project of late? To find out I checked-in with the Restatement’s Reporters – Professor Tom Baker of Penn Law School and Professor Kyle Logue of Michigan Law. The Reporters were kind enough to send me an informative letter for Coverage Opinions readers, which I set out here.

When it comes to the Restatement project, it is a tale of two citizens. I have seen some in the liability coverage world who are very knowledgeable about it – both substance and status -- and others who know very little. For those not familiar with the project, it may seem a daunting task to get up to speed so late in the game. Kind of like tuning in to an episode of Dateline when it’s halfway over. You know someone was killed, and you know the husband is the prime suspect, but you’ve missed the first four twists and turns in the story.

For those in this camp, Tom and Kyle’s update offers one-stop shopping to get familiar with the project, while also being enlightening for those more familiar with the project. I appreciate Tom and Kyle taking the time to put together this thorough update.

Dear Randy,

Thank you for asking for an update about the progress of the Restatement of the Law, Liability Insurance (RLLI). We’re pleased to report that the project is progressing on the schedule we laid out to you in the update last summer.

The RLLI has four chapters. Chapter 1 addresses contract law doctrines with special importance in the insurance context: interpretation, waiver and estoppel, and misrepresentation. Chapter 2 addresses duties relating to the management of potentially insured liabilities: defense, settlement, and cooperation. Chapter 3 addresses general principles of the risks insured: coverage topics such as trigger; the application of exclusions and conditions; and topics related to limits, multiple insurers, and allocation and contribution. Chapter 4 addresses topics related to enforceability and remedies, including bad faith.

The ALI approved the “Tentative Draft” of all of Chapters 1 and 2 and most of Chapter 3 at the May 2016 Annual Meeting. That draft is available in electronic format for a nominal charge on the ALI webpage at this link, where it is called Tentative Draft No. 1 (Restatement 2016). There were a few amendments to this draft at the May meeting, so the final version will be somewhat different, mostly in tiny ways. We ran out of time for discussion at the Annual Meeting just before tackling allocation, so the discussion of the RLLI at the meeting next May will begin with that topic.

In the meantime, we will be finishing up the rest of Chapter 3 and Chapter 4. We will be distributing a draft of these final parts of the RLLI to our Advisers and Members Consultative Group in September and discussing that draft with them in October. The list of the participants in those two groups appears at this link. This is a serious group of insurance practitioners, academics, and judges, so we are getting excellent, well-informed feedback on the drafts.

The plan is to bring these remaining parts to the ALI Council (a truly all star body) for approval in January 2017 and then to the membership for approval at the Annual Meeting in May 2017. In our experience there always are some revisions after the Annual Meeting, so fall 2017 is the earliest that we can expect the truly final RLLI to go to the printer, and it is certainly possible that there will be some issues that will require going back to the Council and the Annual Meeting one more time. If that happens, final approval would not be until May 2018. Restatements are not an overnight project! Readers who would like to see the ALI’s description of how the Restatement process works should look at this link.

Early on we made a decision to focus on topics that apply to all or most kinds of liability insurance, and not to try to address specialized questions that affect only one or two kinds of liability insurance. We’re very pleased with that decision, and not just because it means devoting only seven years to the project instead of twenty. Focusing on general topics means that we have the opportunity to identify the coherent core of liability insurance law and to present it in a manageably-sized volume that explains the most important liability insurance law rules without being too overwhelming. Only history will tell, but we think that the RLLI will be useful to judges, lawyers, and law students, and liability insurance law will be more coherent and predictable as a result. The feedback we’ve received from academic colleagues is that the drafts have already proven useful in teaching and Tom reports that he wished there had been a restatement to consult when he began practicing insurance law in the 1980s.

For people who would like to hear about the project in person, we will be going on the road a bit this year to talk about the project. Tom will be at the DRI insurance coverage event in New York in December and the TTIPS insurance coverage meeting at the Arizona Biltmore in February. Both Kyle and Tom will both be at a San Francisco event the first week in January that will be hosted by Orrick and open to the public. We hope to see many of your readers at these events.

Thank you again for your interest and your efforts to keep insurance practitioners informed about the RLLI. We look forward to seeing you at the Members Consultative Group meeting in October.

Tom Baker and Kyle Logue

Vol. 5, Iss. 9
September 7, 2016

Randy Evans:
Coverage Lawyer And Political Insider

Randy Evans, partner at Dentons US in Atlanta, is a coverage lawyer. Indeed, he is the co-author (with J. Stephen Berry) of the hefty book Georgia Property and Liability Insurance Law (Thompson Reuters 2014) (I have a copy of it on my shelf) as well as other books on insurance law.

But Evans is also a political insider. And at the highest level. He served as outside counsel to former Speakers of the House Newt Gingrich and Dennis Hastert and later served as a senior advisor to Gingrich’s 2012 presidential campaign. These days, Evans is the Georgia Republican Party’s national committeeman, chair of the Republican National Lawyers Association and co-chair of the Georgia Judicial Nominating Commission. He was also appointed to the Republican National Committee’s Debate Committee, which was responsible for hammering out the details of the Republican presidential debates.

Coverage lawyer and political insider is a seemingly odd combination. Randy was kind enough to answer four questions about his unique dual practice.


Your credentials in the political arena are lengthy and impressive. Insurance coverage seems out of place on your resume. How did your coverage practice come about?

Both my coverage practice and political involvement developed simultaneously. During college, I met former Speaker Newt Gingrich. During law school, I enjoyed litigation and insurance. So, when I hit the ground after law school, I started both. Increasingly, I noticed how interrelated they were in many respects, especially as my practice became national and then international. Globalization has only made it more so.

Are there any ways that your political experience transfers to your insurance coverage work?

The overlap between politics and insurance coverage is far greater than most folks think. From regulations by insurance commissioners, to statutes by legislatures, to decisions by judges - all of whom are either elected or appointed - the public policy implications of insurance and insurance coverage inevitably overlap. By being involved heavily in both, it gives attorneys, including me, a better view of where things have been, where things are, and where things are going. It also gives coverage attorneys the chance to shape policy as well as predict it, in states where commissioners, legislatures, and judiciaries are in a state of transition.

Politics aside, Donald Trump tapped into the public’s dissatisfaction with Washington and the so-called establishment. Whether he wins or not, do you see other any changes on the horizon in Washington as a recognition of this?

The electorate is in a state of transition. If Trump wins, it could actually translate into the de facto formation of a third political party. There will be the traditional Democrats, Republicans (in control of the Congress) and Trump voters in control of the White House. It is why he describes the Presidential election as not a partisan choice, but instead a choice of more of the same or a new direction for the country. The ramifications of such a transition are enormous and will be manifested in many elections to come as parties realign or disappear and new alliances emerge from the top of the ballot to the bottom.

As a political insider – and especially at the House Speaker level – you surely know things about the process that we on the outside are not aware of. What are some things about the political process that the general public cannot appreciate?

Probably the single most significant unknown thing is the impact of good and reliable data. At the highest levels of government, like the President or Speaker, the information advantage is enormous. As a result, high ranking government officials know what’s coming days, weeks, and even sometimes months before everyone else does. As a result, when you talk to someone high up in the White House or in the Leadership in the Congress, the odds are that whatever you are discussing is dated.

The end effect is what you see now is actually the product of what was done years ago and what we will see years from now is the product of what is being done now. This time lag makes judging any one Congress or President in real time virtually impossible absent major blunders.


Vol. 5, Iss. 9
September 7, 2016

A Monster: Insurer Sasquashed: #1 Coverage Case Of 2016


The Illinois Appellate Court’s decision in Harwell v. Firemen’s Fund Insurance Co., No. 1-15-2036 (Ill. Ct. App. June 30, 2016) is the most significant coverage case of the year to date. And even though the big blotter calendar on my desk says it’s only September -- yes, that’s what I still use – I am confident that nothing in the next four months is going to surpass Harwell.

Yes, I know, I’ve really built this one up. This is hyperbolic even by Coverage Opinions standards. But read on. I’m not overselling the potential significance of this decision from the Land of Lincoln.

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 seen is followed -- and the Appellate Court of Illinois is not a Montana small claims court -- it could send defense counsel down roads that they surely would not like to travel.

Vol. 5, Iss. 9
September 7, 2016

ABSOLUTE MUST READ: Bad Faith: Turning $30K into $3M (And Easily Preventable)


When it comes to bad faith cases, very rarely do they involve claims that an insurer wrongly interpreted a policy provision. Based on the high standard for establishing bad faith, unless an insurer is blatantly ignoring clearly applicable, and binding precedent in making its decision, it would be difficult to prove that the insurer’s conduct rose to the necessary level of culpability.

Rather, bad faith cases almost exclusively involve the manner in which an insurer handled a case. Did it do something that failed to adequately protect its insured’s interests? Did the insurer do something that can be seen as placing its own interests ahead of its insured’s? In addition, for various reasons, bad faith cases have a way of growing out of low limits auto policies. Springsteen made this point in a song called “From small things big things one day come.”

Barickman v. Mercury Cas. Co., No. B260833 (Cal. Ct. App. July 25, 2016) is a bad faith case that never should have happened. It offers a very clear lesson to insurers about how not to turn an easy $30,000 case into a $3,000,000 case, not to mention the declaratory judgment transaction costs. This was policyholder alchemy. And it was easily preventable.

Brickman started out as a straightforward automobile claim. The court described the facts like this: “Timory McDaniel, driving while intoxicated in a car insured by Mercury Casualty Company, ran a red light, struck and seriously injured Laura Beth Barickman and Shannon Mcinteer, who were in a crosswalk with the walk signal in their favor. Barickman and Mcinteer agreed to settle their claims against Timory for her insurance coverage limits, $15,000 each; but Mercury would not agree to additional language inserted by Barickman and Mcinteer’s lawyer in Mercury’s form release of all claims: ‘This does not include court-ordered restitution.’”

The restitution issue came about because Timory was sentenced to three years in prison and ordered to pay $165,000 in restitution. Counsel for the plaintiffs sought the language in the release, that it did not include court-ordered restitution, simply to make clear that his clients were not waiving such right by entering into the settlement. Plaintiffs’ counsel also made clear to Mercury that the insurance payment would be a set-off against the insured’s restitution obligation – as the law allowed. So Mercury was doing anything to harm its insured on that issue.

Mercury spent several months considering whether it would agree to the restitution language in the release. Timory’s criminal defense lawyer instructed Mercury not to accept the added language.

Counsel for the plaintiffs got fed up with the delay in getting the case settled and filed suit against Timory. The case “was settled with a stipulated judgment in favor of Mcinteer against Timory for $2.2 million and in favor of Barickman against Timory for $800,000. Timory assigned her rights against Mercury to Barickman and Mcinteer in exchange for their agreement not to attempt to collect the judgment against her. Mercury paid each woman the $15,000-per-person policy limits.”

Barickman and Mcinteer filed a bad faith action against Mercury. “The complaint alleged Timory’s liability for the catastrophic injuries caused to Barickman and Mcinteer was virtually certain, as was the likelihood that their damages would result in judgments against Mercury's insured well in excess of the $15,000/$30,000 policy limits. As a result, Mercury’s failure to make an offer without unacceptable terms and conditions, its refusal to settle the case at policy limits when it had the opportunity to do so, and its unwillingness to make efforts to reach a reasonable settlement constituted a breach of its obligation of good faith and fair dealing, exposing Timory to excess damages.”

The case went to trial before a retired judge serving as a referee. The referee found in favor of Barickman and Mcinteer and upheld the settlement. Mercury appealed. The appeals court – applying a bad faith test that examined whether the insurer’s conduct was reasonable under all of the circumstances -- affirmed, explaining its decision as follows [lengthy quote to follow but it sums it up in a neat and tidy package]:

“Barickman and Mcinteer each agreed in mid-December 2010 to settle her civil claims against Timory for $15,000, as offered by Mercury, after their lawyer had finished his due diligence regarding Timory’s insurance, assets and employment. The only obstacle to completion of the settlement was the dispute between Algorri [plaintiffs’ counsel] and Mercury over the language of the accompanying release. Mercury contends the addition proposed by Algorri could have been interpreted as a waiver by Timory of her right to an offset and it had an obligation to its insured not to jeopardize that right. . . . However, after hearing conflicting testimony from Algorri and Chang [Mercury representative] regarding their conversations as to the import of the language added by Algorri—‘this does not include court-ordered restitution’—the referee found, in the portion of his statement of decision quoted above, that Algorri assured Mercury both orally and in writing that he intended only to preserve his clients' basic restitution rights and was not seeking to eliminate Timory’s right to an offset for the amounts paid by Mercury. In view of that finding, Algorri’s added language was simply intended to incorporate and make explicit what [2 cited cases] required: A civil settlement does not eliminate a victim’s right to restitution ordered by the criminal court, but the defendant is entitled to an offset for any payments to the victim by the defendant’s insurance carrier for items included within the restitution order. Based on these foundational findings and Timory’s certain exposure to substantial liability, the referee could properly conclude that Mercury’s refusal to accept the release as amended by Algorri or, at least, to present to Barickman and Mcinteer in a timely fashion a revised release that included both Algorri’s language and his explanation of its meaning (for example, by inserting after Algorri's addition, ‘and does not affect the insured's right to offset’) was unreasonable.”

The court also put blame on Mercury for placing the decision whether to settle in the hands of Timory’s criminal defense lawyer, without telling him that plaintiffs’ counsel only sought to preserve his clients’ right to seek criminal restitution and not to disturb Timory’s offset rights.

My take on Barickman is that it seems like a situation of an insurer not being willing to agree to something proposed by the other side, simply because, well, it was proposed by the other side. It seems that it could not have been clearer that the insurer’s concerns were unfounded – based on both the representations by plaintiffs’ counsel and the state of the law. But, no matter, the insurer objected to the requested release language. The lesson is obvious. Choose your battles wisely. Otherwise, from small things big things one day come.

Vol. 5, Iss. 9
September 7, 2016

Consequences For Breach Of The Duty To Defend


Admittedly, KM Strategic Management, LLC v. American Casualty Co., 15-1869 (C.D. Cal. July 25, 2016), a case involving an insurer’s consequences for breaching the duty to defend, is likely only impactful to a coverage case involving California law. This is because of California’s unique rules concerning an insurer’s ability to seek reimbursement of defense costs associated with uncovered claims (subject to the ability to establish such apportionment). Nonetheless, it is a very interesting case and worth the minute that it will take to read about it.

KM Strategic Management filed suit against American Casualty Co., alleging that the insurer breached its duty to defend KM in two underlying actions. [There is no discussion in the opinion of the facts of the underlying cases or coverage issues, but such information is not required.] The court granted KM’s motion for summary judgment and held that the insurer if fact did breach its duty to defend.

KM now sought damages. Not surprisingly, it sought all reasonable fees and costs that it incurred to defend the two underlying suits. American Casualty said, aah, but, under California law, it need only pay for the defense costs associated with covered claims. In general, under California law (Buss), when an underlying action involves both potentially covered, and not covered, claims -- a so-called “mixed action” -- an insurer must defend the claim in its entirety. Thereafter, the insurer can seek to recover the costs incurred to defend the claims that were not covered.

For sure such an allocation can be difficult to achieve, as defense work is often performed for the benefit of the entire case -- and not in such a neat and tidy manner that it can be shown that this work was performed for this claim and that work was performed for that claim. But, here, American Casualty had an expert, who reviewed the defense bills and materials from the underlying actions, and concluded that 95% of the defense costs were related to the defense of non-covered claims. So, as American Casualty saw it, if it had to pay all of the reasonable fees and costs that KM incurred to defend the two underlying suits, the insurer was being deprived of its right to limit its obligation to only the defense costs associated with covered claims.

The court was unimpressed with American Casualty’s argument, holding that “having breached its duty to defend, American Casualty is required, as a matter of law, to pay as damages all reasonable and necessary fees and costs that plaintiffs incurred to defend against the underlying . . . Actions, including any fees and costs related to the defense of claims for which there was not even a potential for coverage.”

The court’s decision was not based on its own expressed reasoning, but, rather, arrived at by rejecting American Casualty’s various arguments. But you get a sense that the court was guided by two things. First, even in a so-called “mixed action,” an insurer must defend the claim in its entirety. Second, if American Casualty could breach the duty to defend, and then turn around and limit its defense obligation to only those fees and costs associated with potentially covered claims, it would be getting off without any real consequences for its actions.

Vol. 5, Iss. 9
September 7, 2016

This Decision Should Really Trouble Lawyers


There is no shortage of decisions that examine whether the acts of a professional qualify as a “professional service,” either for purposes of determining coverage under a professional liability policy or the applicability of a CGL policy’s professional services exclusion. Often-times these cases involve professions that I know nothing about. So I do not have the benefit of any first-hand knowledge whether the acts qualify as a “professional service.” I can follow the court’s analysis, and decide whether I agree, and think about whether the act “feels” like a professional service, but that’s all I can do.

But Sentinel Insurance Company v. Cogan, No. 15C8612 (N.D. Ill. Aug. 15, 2016) is different. It involves the applicability of a professional services exclusion under a general liability policy issued to a law firm. So here I can put myself in the insured’s shoes. And so can many of you.

At issue in Cogan is coverage for defamation counts in a suit filed by one law firm (McNabola Law Group) against another law firm (Cogan & Power). Some lawyers from the Cogan firm had left the McNabola firm and started a competing firm and litigation ensued.

The particulars of the facts are important so I’ll let the court take over from here: “In August 2014, just before the Cogan Defendants appeared and filed an answer in the underlying suit, Cogan attorney Jon Papin sent an email to the law clerk of a judge before whom McNabola had a pending case. Papin had worked extensively on the case prior to his departure from McNabola. The email alleged serious ethical and professional misconduct by a McNabola attorney. It was sent from Papin’s email account at the Cogan firm and suggested to the law clerk that his suspicions should be shared with the presiding judge. Indeed they were, and the judge relayed the content of the email to the accused McNabola attorney in open court. In September 2014, an attorney for McNabola sent the Cogan Defendants a letter demanding that they ‘immediately cease and desist from publishing false and defamatory statement[s] about [McNabola attorneys], and warning that ‘the McNabola Law Group will take swift action to protect their legal rights.’ As promised, in October 2014, McNabola amended its complaint against the Cogan Defendants to add two defamation claims based on the content of Papin’s email. In support of those claims, they alleged that ‘Papin sent the email accusing [a McNabola attorney] of unethical behavior in his capacity as a partner, representative, employee, and agent of the Cogan Firm, and on behalf of the Cogan Firm . . . with the intention of harming [the McNabola attorney and firm] and benefitting himself and the Cogan Firm.’”

The Cogan firm sought “personal and advertising injury” coverage under its general liability policy issued by Sentinel, which included a professional services exclusion, which applies to any “‘personal and advertising injury’ arising out of the rendering of or failure to render professional services as a lawyer.”

Sentinel argued that it owed no duty to defend the Cogan firm. The competing arguments of the parties – both making sense -- were as follows: “Sentinel argues that the professional services exclusion applies because ‘Papin spoke as a lawyer’ when he communicated his professional opinion to the court regarding pending litigation in which he was previously involved as an attorney. The Cogan Defendants do not dispute this characterization of Papin’s conduct. Indeed, they concede that Papin ‘was acting as an officer of the court consistent with his belief that he had an ethical obligation to point out what he viewed as improper conduct.’ The Cogan Defendants contend, however, that because Papin was not representing a client when he sent the allegedly defamatory email, he was not ‘rendering a professional service’ within the meaning of the exclusion.”

The court noted that “Illinois courts have consistently held that in the context of insurance agreements for lawyers, the term ‘professional services,’ without any modifying language, refers to ‘the practice of law.’” On that basis, the court held that the professional services exclusion did not apply: “Reporting suspected attorney misconduct is a professional duty; it does not ‘involve[ ] service to another.’ It is true that Papin’s email contained information he allegedly obtained while practicing law. It is also true that in conveying his concerns to the court, Papin called upon his specialized knowledge and training as a lawyer. But a service to the profession is not the same as a professional service.”

[Ultimately Sentinel was relived of its duty to defend based on late notice.]

I find Cogan troubling. By concluding that a service to the profession is not the same as a professional service – especially here, where Papin’s email contained information he allegedly obtained while practicing law -- the court is likely preventing coverage for such conduct under a legal malpractice policy. This may have adverse consequences for lawyers because a firm may not have a commercial general liability policy (of course it should). Second, even if it does, the limits of the commercial general liability policy may be less (much less) than those of the legal malpractice policy. After all, the financial consequences for committing legal malpractice can be much greater for a law firm than a client slipping on a banana peel walking up the law firm’s steps.

Vol. 5, Iss. 9
September 7, 2016

Court Upholds Very Broad Exclusions For A Construction Site Bodily Injury Claim


I’ve written about this a lot in past issues of CO: insurers using a variety of exclusions to limit coverage for construction site bodily injury claims. The results have been mixed. But in Atlantic Casualty Insurance Co. v. Price, No. 15-12889 (D. Mass. July 26, 2016) the insurer achieved its objective.

The coverage issue grows out of a straightforward claim. Doyle Price (as Onsite Construction) was the general contractor for the demolition and construction of a home. Price subcontracted with Anderson Insulation to work on the home. Antonio Sousa, one of Anderson Insulation’s employees, was injured while working on the site and filed suit, alleging that Price was negligent in not ensuring the safety of the workplace.

Onsite Construction was insured under a general liability policy issued by Atlantic Casualty. Atlantic Casualty disclaimed coverage based on an endorsement titled “Exclusion of Injury to Employees, Contractors and Employees of Contractors.” Sousa was an employee of an Onsite Construction contractor. Coverage litigation ensued, with Sousa named as a party.

The exclusion, in part, nixed coverage for “bodily injury” to any “contractor” for which any insured may become liable in any capacity.

For purposes of this exclusion the definition of “employee” was replaced by the following: “Employee” “shall include, but is not limited to, any person or persons hired, loaned, leased, contracted, or volunteering for the purpose of providing services to or on behalf of any insured, whether or not paid for such services and whether or not an independent contractor.”

Further, “contractor” was defined to state that it “shall include, but is not limited to, any independent contractor or subcontractor of any insured, any general contractor, any developer, any independent contractor or subcontractor of any general contractor, any independent contractor or subcontractor of any developer, any independent contractor or subcontractor of any property owner, and any and all persons working for and or providing services and or materials of any kind for these persons or entities mentioned herein.”

Sousa couldn’t get around the fact that the exclusion applied on its face: the exclusion applied to injuries to employees who work for OnSite’s contractors.

With nowhere to go on the policy language, Sousa turned to other avenues in an effort to get around the exclusion – essentially that the policy was ambiguous and that the exclusion rendered the policy without substantial economic value. However, the court rejected all of them.

As for ambiguity, the court concluded that “mere complexity of a policy is not itself a basis for finding ambiguity.” Further, just because the definition of “contractor” exceeded sixty words, and uses the word “contractor” itself six times, did not make it ambiguous. “Wordiness on its own,” the court stated, “does not cause ambiguity.”

The more interesting issue is the argument that the policy is void, as against public policy, because it is without substantial value. I imagine that many contractors would feel this way because the exclusion takes away coverage for a substantial risk that they face – worksite injuries involving contractor’s employees.

However, the court rejected this argument: “[A] provision in an insurance policy that negates the very coverage that the policy purports to provide in the circumstances where the person is liable is void as against public policy. However, if the policy still provides coverage for some acts, it is not illusory simply because of a potentially wide exclusion. . . . The policy here is not illusory or void as against public policy simply because it has many exclusions. There are a number of events for which Price would be provided coverage even considering all of the exclusions. Atlantic Casualty notes that injuries to the homeowners, neighbors, architect, engineer, town building inspectors, deliverymen, and realtors would all be covered by the policy. In this way the policy is similar to that discussed in B & T, in that it covers injuries to a range of individuals who might be at the worksite even if not Sousa’s injuries. Finally, the policy here also covers property damage and ‘personal and advertising injury liability.’ Although these two types of damage are not at issue here, that they could be covered demonstrates that the policy as a whole is not illusory.”

Atlantic Casualty achieved what it set out to do – eliminate coverage for a large swath of construction site bodily injury claims. The problem for insureds is that they often do not become aware of these types of exclusions until after a claim is made. And, whether they could have purchased the policy without them is another story – based on availability and affordability.

Vol. 5, Iss. 9
September 7, 2016

Supreme Court: Insurer Cannot Contract-Around “Notice-Prejudice” Rule


The Supreme Court of Wyoming recently adopted the “notice-prejudice” rule for purposes of late notice. In other words, the court in Century Surety Co. v. Hipner, No. S-15-0294 (Wyo. Aug. 17, 2016) held that, for an insurer to disclaim coverage on the basis of late notice, it must prove that it was prejudiced by the delay. In reaching its decision, the court examined late notice law nationally, the various rationales for adopting the notice-prejudice rule, and hopped on board to join the majority of states that have done so.

Hipner is a significant decision for Wyoming’s coverage landscape. However, given how very well-developed late notice case law is nationally, the decision won’t have much significance outside the Equality State.

However, there is one aspect of Hipner that is an exception to its otherwise future anonymity outside Wisconsin. After adopting the notice-prejudice rule, the court turned to the insurer’s “so what” argument. The insurer maintained that, even if the notice-prejudice rule is adopted, its policy specifically excluded coverage unless the insured notified the insurer “as soon as practicable . . . whether [the insurer] [is] prejudiced or not.”

But the court rejected the insurer’s ability to rely on this policy language. Essentially, as the court saw it, since the notice-prejudice rule was based on a public policy rationale, any policy language that attempted to circumvent it was void as against public policy.

In reaching its decision, the Hipner court looked at the only two decisions nationally to have addressed the issue. A New York appellate court and the Ninth Circuit, both applying California law, held that an insurer could not enforce a policy provision that waived the prejudice requirement for purposes of late notice.

Hipner is an unusual take on an otherwise tried and true issue. On one hand, decisions from the Supreme Court of Wyoming, the New York Appellate Division and the Ninth Circuit do not a national rule make. But Hipner is likely to carry some sway with other courts, looking at whether an insurer can contract-around the notice prejudice rule.

Vol. 5, Iss. 9
September 7, 2016

In A New York State Of Bind:
Achieving Allocation Between Covered And Uncovered Claims [A First For New York?]


I addressed the South District of New York’s March 4, 2015 opinion, in Uvino v. Harleysville Worcester Insurance Company, in the March 18, 2015 issue of Coverage Opinions. The case involves the knotty and critically important issue of allocation of covered and uncovered claims. Univo is back. It was important then and it’s important now.

I’ll start out with the same introduction that appeared in the March 2015 issue of CO.

You have just written the greatest reservation of rights letter ever. If Felix Unger handled claims, this is what his letter would look like. If there were a hall of fame for reservation of rights letters, you would soon get to see how yours looked in bronze. Your letter compares the specific allegations in the complaint, to the policy language, and explains, with laser-like precision, why, despite the insured being provided with a defense, no coverage may be owed for any settlement or judgment. You mail the letter, put a copy in the file, take a deep breath of satisfaction, waste a few minutes reading a couple of meaningless articles on Yahoo, and then off you go to your next claim. It’s a fine day.

But the challenge with reservation of rights letters is not writing them. It is enforcing them. Because a reservation of rights letter is written in a sterile environment – at someone’s desk – it can easily spell out, in black and white terms, those claims and damages at issue in the underlying suit for which coverage may not be owed. The underlying litigation, on the other hand, is likely proceeding in a manner that is anything but as neat and tidy.

It will frequently be the case that the underlying litigation is simply not capable of producing an outcome that makes it possible for the insurer and insured to compare its results, with the reservation of rights letter, and easily decide which claims and damages are covered and which are not. To the contrary, the underlying litigation may result in a verdict that does not specify the extent to which it represents this or that type of damage or the claims on which the relief is based. In this situation, often-times referred to as a “general verdict,” the policyholder is likely to argue that, because the basis for the jury’s verdict cannot be determined, it must be presumed that the entirety of the jury award represents covered claims and damages. Adding to the difficulty for insurers is that it cannot ask appointed defense counsel to seek special jury interrogatories, which would go a long way toward solving this problem. [And similar problems may come from a settlement.]

Some courts have accepted the policyholder argument that, if the insurer created the problem of an inability to allocate between covered and uncovered claims, it must therefore bear the consequences. In other words, if it cannot be determined which portion of a verdict is covered and which is not, then all of the damages will be considered covered. Or the insurer may be given a difficult burden to prove covered versus uncovered damages. In these situations, the fact that the insurer issued a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, is no protection against failing to prevent a general verdict and the consequences that it causes.

At the heart of these decisions is the placing of blame on the insurer for being aware that the underlying litigation may result in a verdict that does not enable a determination to be made between covered and uncovered claims and/or damages, yet it took no steps to prevent such outcome. Indeed, these decisions sometimes speak in very harsh tones -- essentially blaming the insurer for being its own worst enemy.

Univo v. Harleysville I

Allocation between covered and uncovered claims was at the center of the court’s March 2005 opinion in Uvino v. Harleysville Worcester Insurance Company, No. 13-4004 (S.D.N.Y. Mar. 4, 2015). And the underlying claim at issue was of the type where allocation is frequently needed. All allocation of covered versus uncovered claims are noteworthy – as the issue is so important and the case law not abundant. [At least not as abundant as you would think, given the frequency in which the issue arises.] But Uvino v. Harleysville has an extra reason why it is noteworthy. It involves New York law, not to mention that, in discussing the issue, the court cited to all non-New York cases. So if Uvino isn’t the first New York case to address the issue, it appears that there certainly can’t be many.

Uvino v. Harleysville involves coverage for an underlying construction defect suit. Nothing you haven’t seen before. A contractor, JBI, was hired to serve as Construction Manager for the construction of a home in Long Island. As seems to happen so often, the relationship went south and the homeowners, the Uvinos, filed suit against JBI alleging construction defects and related claims.

Harleysville insured JBI under a commercial general liability policy and retained counsel to defend it pursuant to a reservation of rights. As is often the case in construction defect, there was an issue of uncovered damages (related to the repair and replacement of JBI’s faulty work) versus covered damages (related to damages to other property).

Recognizing this issue, Harleysville, shortly before trial was to begin, “sought leave to move to intervene for the purpose of requesting that the court ‘submit special interrogatories to the jury to allocate between those damages related to the repair and replacement of [JBI’s] faulty work versus damages to other property.’ . . . Harleysville argued that the burdensome prospect of undertaking subsequent litigation to allocate covered damages favored allowing Harleysville to intervene to submit interrogatories at trial. JBI opposed the motion, asserting that the motion was untimely and that while JBI would be harmed by jury confusion caused by the interrogatories, Harleysville faced no prejudice if intervention was denied as it could resolve the coverage issues in a later proceeding.”

At this point, the opinion gets a little confusing as there was a mistrial and a disqualification of counsel. Putting all of that aside, the court denied Harleysville’s motion to intervene. The case went to trial and a jury found JBI liable for damage to the Uvinos’ home and awarded them $317,840 in general damages, $83,788 in consequential damages and $51,231.04 in damages for breach of fiduciary duty. This was a general verdict and the court made no determination whether the losses were covered under the Harleysville policy. Shortly thereafter, Harleysville disclaimed coverage. The Uvinos initiated the action seeking a judgment that Harleysville must indemnify JBI for the damages.

The court in the declaratory judgment action undertook a long analysis of whether coverage was owed, under New York law, for the damages awarded. The issue before the court was the one so often seen in construction defect coverage disputes: “Generally, damages to remedy a contractor’s defective work will not be covered under a general commercial liability policy like the one at issue here; rather, coverage exists only where the contractor’s defective work causes harm to others or others’ work.”

It is unnecessary to get into this several page analysis. All that matters here is that, when all was said and done, the court held that the claims submitted by the Univos to the jury may include claims covered under the Harleysville policy.

Here is where it gets interesting. Harleysville argued that, “even if some of the Uvinos’ claims are covered under their policy, Harleysville is entitled to summary judgment because the Uvinos cannot prove what portion of the $401,628 general verdict awarded by the jury is attributable to covered claims and what portion is attributable to noncovered claims.” The court agreed, but with one caveat.

The court stated that, “[j]ust as the insured has the initial burden of establishing its entitlement to coverage, the insured generally has the burden of identifying covered damages. However, the court also noted there is an exception: “[I]in certain circumstances, that burden may be shifted to the insurer, and/or the party seeking recovery may be permitted to withstand summary judgment and proceed to further litigation on allocation of covered versus noncovered claims. For instance, if the insurer did not adequately make known to the insured the availability and desirability of receiving a special verdict, or if it is not clear that the insured was apprised its interest in receiving a special verdict, the parties seeking coverage need not be required to prove what portion of a general verdict is covered at the summary judgment stage.”

In setting forth this exception, the court string-cited four cases. Critically, none were from a New York court – state or federal. They were from the Fifth Circuit, District of Rhode Island, District of Florida and the Idaho Court of Appeals. That’s quite a combination.

The court concluded that, by its actions, Harleysville did not cause the burden of allocation to shift. This was because Harleysville “moved to intervene for the purpose of requesting special interrogatories to forestall a coverage-allocation dispute and therefore made known both the availability of the interrogatories and the parties’ divergence of interests, did not fail in its fundamental responsibilities to its insured such that the burden of proving allocation should shift to Harleysville.”

Thus, the case would move to an allocation proceeding and, because Harleysville took preemptive steps to achieve allocation, the burden of proving covered damages would remain on the Univos. [There is some more to it but it’s unique to the case and unnecessary for the discussion here.]

While Univo v. Harleysville may be a federal District Court opinion, it is worthy of note. The court stated that, if an insurer did not take some affirmative steps, to address allocation between covered and uncovered damages, the insured need not be required to prove what portion of a general verdict is covered. In stating this, the court cited four non-New York cases. While time constraints precluded me from researching New York law on this issue, I suspect that the judge’s law clerks were not so constrained. The fact that Univo cites only non-New York cases suggests that New York law is sparse on the issue, perhaps even to the point where the decision is the first. [If there are others, I’d appreciate someone telling me.]

This gets back to the beginning. That an insurer issues a world class reservation of rights letter, spelling out in detail its precise position on what is and what’s not covered, may be no protection against failing to prevent a general verdict and the consequences that it can cause. Reservation of rights letters are not self-enforcing. Writing them is often just the first step to limiting exposure to covered claims alone. Getting there may require that the insurer take a second step.

Univo v. Harleysville II

On August 18, 2016, the court issued another opinion in Uvino v. Harleysville Worcester Insurance Company, No. 13-4004 (S.D.N.Y. Aug. 18, 2016) (Uvino II). At issue was the Univos’ request for an allocation hearing on the basis that they can identify covered damages incorporated in the general verdict.

Given how lengthy this write up is already (is anyone still reading this?), and with the Univo II opinion being highly technical, I’ll dispense with the detail and get right to the court’s overarching conclusion.

The jury awarded the Univos $317,840 in general damages, $83,788 in consequential damages and $51,231.04 in damages for breach of fiduciary duty. However, the court observed that “no set of figures from the exhibits introduced at trial add up to the amount of general damages received,” As a result “the Uvinos have tried to show, through a process of elimination, that the general and consequential damages awards are covered in their entirety.”

However, the court was not convinced, concluding that “[t]he Uvinos cannot proceed to an allocation hearing, because they have not presented a viable way to ‘establish in the mind[] of the [factfinder] a reasonable certainty that damages awarded by the jury flow naturally from the cause of action established under the policy of coverage.’”

As I see it, the moral of the story is this. Harleysville, by intervening in the underlying action, even though the request was denied, did not cause the burden of allocation to shift to itself. As the court in Univo I noted, Harleysville “moved to intervene for the purpose of requesting special interrogatories to forestall a coverage-allocation dispute and therefore made known both the availability of the interrogatories and the parties’ divergence of interests, did not fail in its fundamental responsibilities to its insured such that the burden of proving allocation should shift to Harleysville.”

Having done so, Harleysville kept the (difficult) allocation burden on the insured, and Univo II shows how that worked out. The lesson for insurers, confronted with underlying actions involving covered and uncovered damages, is apparent


Vol. 5, Iss. 9
September 7, 2016

The Wall Street Journal Tackles Construction Defect Litigation And Insurance
It is always nice to see the national press take up an issue that is usually reserved to the insurance press or lives principally in the insular world of coverage professionals. Such was the case with an August 8th article in The Wall Street Journal: “Lawsuit Threat Crimps Condos.” Reporter Chris Kirkham does an excellent job addressing the onslaught of construction defect litigation concerning condominium developments. The article noted that condos have been the slowest segment of the housing market to bounce back. Reasons for this include construction defect lawsuits and the resulting increase in the cost of insurance. The article reported that, based on a study of the Denver market in 2013, it costs a developer three times more for insurance for a condo unit than a similarly sized apartment. Further, the study found that the risk of CD litigation adds an additional $15,000 to the cost of a condo unit.

This is a good time to bring out the best quote ever from a court about construction defect litigation: “As Forecast [Homes] told us at the beginning of its brief, ‘given our litigious society, Forecast is also in the ‘business’ of getting sued over the homes that it builds. It is not too much of an exaggeration to say that as soon as the last nail in a project is hammered and the keys are handed over to the homeowners, the ink on the first lawsuit over the construction of the homes is starting to dry.” Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4th 1466, 1482 (2010).

Supreme Court Wishes Insureds “Good Luck” Understanding Their Policy
I’ve never see this statement in a judicial opinion – although I suspect that some judges are thinking it. The Supreme Court of Idaho had this to say about a policy provision in the context of resolving a dispute over a UIM claim: “Good luck to the average insurance buyer in deciphering the meaning of this provision.” The provision, for which a rabbit’s foot is required, is an “other insurance” clause that reads as follows: “If there is other applicable similar insurance we will pay only our share. Our share is the proportion that our limit of liability bears to the total of all applicable limits. If this policy and any other policy providing similar insurance apply to the accident, the maximum limit of liability under all the policies shall be the highest applicable limit of liability under any one policy. However, insurance we provide with respect to a vehicle you do not own shall be excess over any other collectible insurance.” Personally, I do not believe that the provision is hard to understand. And I know that lots of readers would agree. But I guess CO readers are not “average insurance buyers.”

California Supreme Court: This Could Be Big
The Ninth Circuit has asked the California Supreme Court to answer this question: “Whether there is an ‘occurrence’ under an employer’s commercial general liability policy when an injured third party brings claims against the employer for the negligent hiring, retention, and supervision of the employee who intentionally injured the third party?” Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., No. 14-56120 (9th Cir. Aug. 22, 2016). In my experience, insurers generally accept that negligent hiring (in general, failure to prevent-type claims) are an “occurrence.” I would expect to see that change, somewhat, if the venerable California Supreme Court concluded otherwise.

For My Pennsylvania Construction Defect Friends: Kvaerner Applies; Indalex Does Not
This is for those who follow Pennsylvania CD law. Since it’s for a narrow audience, who are familiar with the issues, I’ll just set out the holding here, sans explanation. If you are in this group, you’ll know the significance of this. No explanation is needed.

Acuity v. Knisely & Sons, Inc., No. 3:15-76 (W.D. Pa. Aug. 9, 2016): “[T]he Court concludes that Kvaerner, rather than Indalex, governs the resolution of this action. The claims in the Fifth Amended Joinder Complaint are unequivocally based on faulty workmanship. Kvaerner and its progeny dictate that such claims do not constitute an occurrence as required to trigger an occurrence-based insurance policy.” The court examined what made Indalex different from Kvaener and concluded that “neither of these critical factors is present in the instant case. The underlying action does not involve a bad product designed by Knisely, but rather, poor workmanship in the course of attempting to remedy the deficiencies in an existing product.”

Location, Location, Location -- Does Not Matter
In Lima Delta Co. v. Global Aero, Inc., No. A16A0643 (Ga. Ct. App. July 12, 2016), the court held that no coverage was owed under an aviation policy, for a Gulfstream that crashed landed in the Congo. The policy included an “open pilot warranty” stating that it does not apply (as paraphrased by the court) “while a scheduled aircraft is in flight unless both the pilot in command and the second in command have completed the manufacturer’s recommended ground and flight training school for the applicable make and model aircraft within the 12 months preceding the date of the flight.” One of the pilots had not completed the required training within the 12 months preceding the accident. The court rejected the argument that the “open pilot warranty” did not apply because it was located in the Declarations section of the policy and is not specifically labeled an “exclusion.” The court stated: “[T]he insureds have failed to cite any case that supports their position that the location of the provision creates an ambiguity, where, as here, the terms of the policy provision at issue are clear and unambiguous.”