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Coverage Opinions
Effective Date: February 13, 2017
Vol. 6 - Issue 2

Declarations: The Coverage Opinions Interview With Karen Korematsu
February 19th is the 75th anniversary of FDR’s signing of Executive Order 9066, which created the Japanese internment camps during WWII. This led to the landmark 1944 Supreme Court case of Fred Korematsu v. United States, finding the executive order not unconstitutional. The Korematsu case has been raised lately in the dialogue concerning travel restrictions for reasons of national security. That E.O. 9066 is celebrating its diamond anniversary now is breathtaking timing. I had the privilege of discussing the life of civil rights legend Fred Korematsu with his daughter.

Declarations: The Coverage Opinions Interview With Garold Heslinga
The Iowa “Spring Gun” case is legendary – having been studied by Torts students for 40 years. Garold Heslinga was the attorney for Marvin Katko, the thief. Mr. Heslinga, now 93, recently retired from practice after 66 years. He shared with me some wonderful stories about the case, including lots of things not in any Torts book.

Randy Spencer’s Open Mic
The Toilet Seat Goes To Court

Proof That Coverage Opinions Is Made In Philadelphia

The Valentine’s Day Tradition Continues
“50 Ways To Leave No Cover:” An Insurance Coverage Love Song

My Hometown: Lee Shidlofsky: Practicing Insurance Coverage Law In Texas

SCOTUS Nominee Judge Neil Gorsuch And Insurance Coverage: Haunted Houses And Lost Fenders

General Liability Insurance Coverage: Key Issues In Every State

When A Reservation Of Rights Letter Is Not
#1 Coverage Decision of 2017 (Already)

MUST READ: Possible Bad Faith For Using Extrinsic Evidence To Deny Duty To Defend

This Is Some Very Impressive Claims Handling

A Rarity: A Construction Defect Coverage Case That’s Interesting

The Pollution Exclusion And Charlie Brown

Tapas: Small Dishes Of Insurance Coverage
· For those who follow Pennsylvania Construction Defect Coverage

Back Issues:
  Volume 5 - Issue 12 -December 7, 2016




Vol. 6, Iss. 2
February 13, 2017


The Toilet Seat Goes To Court



With Valentine’s Day upon us, the timing is spectacular to discuss the Hawaii Circuit Court’s recent opinion in Paxton v. Volcano Mutual Insurance Company, No. 15-235 (Haw. Cir. Ct. Jan. 31, 2017).

When it comes to civilization’s greatest achievements, surely indoor plumbing would make any top ten list. Top five even. Along with Mexican jumping beans and Velveeta.

But, of course, there are no free lunches in this world. Indoor plumbing solved one problem, but opened the door to another – the holy war between men and women over putting the toilet seat down. There are many debates between the genders, but perhaps none spurs as much passion as this.

A Michigan State economics professor even wrote an eighteen page paper, filled with graphs and calculus equations (at least it looks like calculus), to determine whether the seat should be left up or down. Conclusion: “[T]he ‘selfish’ or the ‘status quo’ rule that leaves the toilet seat in the position used dominates the ‘down rule’ in a wide range of parameter spaces including the case where the inconvenience costs are the same.” Huh? I’m not sure what this says about Michigan State.

The International Center for Bathroom Etiquette, founded in 1995 by a Stanford Ph.d., who has been described as “the Emily Post of the Loo,” also has a lot to say about the up or down issue on its website (icbe.org). You would think so.

Paxton v. Volcano Mutual grew out of a years-long fight, between Herbert and Gloria Paxton, over the position of their toilet seat. Gloria reached her breaking point and used hot glue to put the powder room seat in a permanent down position. [As an aside, I just don’t know how people live without a hot glue gun in the house.] Unfortunately, before Herbert had a chance to learn what Gloria had done, their gardener, Rick Rogers, asked to use the bathroom. Herbert said yes and pointed him in the direction of the powder room. Unable to lift the seat after a couple of tries, Rick used some muscle. But it was too much. He pulled the seat off its hinges. It struck him in the face, breaking his orbital socket.

Rogers sued the Paxtons in Hawaii circuit court. The Paxtons sought coverage from their homeowner’s insurer, Volcano Mutual Insurance Company. Volcano Mutual denied coverage, including for a defense, on the basis that Rogers’s injuries were not caused by an “occurrence,” defined as an accident. As Volcano saw it, Gloria Paxton should have known that someone could be injured, precisely in the way Rogers was, by using their strength to lift a toilet seat that was mysteriously stuck in the down position.

The Paxtons and Rogers settled the matter for $55,000. The Paxtons sued Volcano Mutual for the settlement amount and $7,000 incurred in defense costs. At issue was whether Rogers’s injuries were caused by an accident.

As the court explained, under Hawaii law, “if the insured did something or failed to do something, and the insured’s expected result of the act or omission was the injury, then the injury was not caused by an accident and therefore not within the coverage of the policy.” Paxton at 4 (citing AIG Haw. Ins. Co. v. Estate of Caraang, 851 P.2d 321 (Haw. 1993)).

Applying this standard, the court found in favor of the Paxtons. On one hand, the court agreed with Volcano Mutual that Gloria Paxton should have known that someone who comes upon a toilet seat, stuck in the down position, and seeking to lift it, could be injured just as Rogers was. It was the “expected result” of Gloria’s act.

However, the court concluded that it was not the “expected result” that Rick Rogers, or anyone other than Herbert Paxton, would be the one to come upon the glued-down toilet seat. Gloria Paxton testified that Rick Rogers had never asked to use their bathroom in the four years in which he had been taking care of their lawn. Further, the Paxtons could only recall three people using the powder room, other than themselves, over the past year. Thus, the “expected result” was that Herbert Paxton would be the first person to discover the toilet seat in the glued-down position.

So the insurer had a, er, duty to defend. [Sorry.]

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


Vol. 6, Iss. 2
February 13, 2017

Proof That Coverage Opinions Is Made In Philadelphia


Vol. 6, Iss. 2
February 13, 2017

The Valentine’s Day Tradition Continues
“50 Ways To Leave No Cover:” An Insurance Coverage Love Song

It just wouldn’t be Valentine’s Day if I didn’t include one of my favorite Coverage Opinions pieces. This insurance coverage love song originally appeared in the February 13, 2013 issue of CO and I re-ran it last year and here it is again. There are lots of new subscribers who have never seen it. Not to mention that rerunning an article takes no effort on my part, which is a bonus. Besides, The Wall Street Journal has been running the same editorial the day before Thanksgiving since 1961. And they seem to be doing just fine.

I hope you enjoy one of my favorite Coverage Opinions pieces.

50 Ways To Leave No Cover

The problem is all inside your head she said to me
People paid for a liability policy

And now your desk has paper in piles
And people screaming about upcoming trials

The answer is easy if you take it logically
Just close those files and set yourself free

I’d like to help you in your struggle
With those large loss reports that you must juggle

There must be fifty ways
To leave no cover

Your notice was late Kate
And then you didn’t cooperate

That’s not an occurrence Terrence

It’s impaired property Lee

You furnished alcohol Paul

You intended that Matt

We’re just excess Bess

We reserved on Buss Gus

Your claim relates back Jack

You spilled pollution Lucien

It’s a four corners state mate

That’ not PD Bea

The plaintiff’s your employee Dee

You’re just not an AI Ty

You never gave notice Otis

Your payment was voluntary Jerry

An insured, a dog is not, Spot

You had knowledge of falsity Leigh

We just never intended to cover that Pat

You prejudiced us Russ

That relief’s only declaratory Lori

You’re not legally obligated to pay Jay

That’s not trade dress Les

There’s misrep. in your app. Kap

We defended but we don’t have to indemnify Guy

We’ll just investigate Nate

Your claim’s not first made Wade

There’s other insurance Vince

You’ve got an uninsured share Claire

The damage is your own work Kirk

Wrong policy term Thurm

We forgot to reserve but we still didn’t waive Dave

It’s TCPA Faye

Or call it a junk fax Max

It’s not an accident Kent

We don’t cover an assault Walt

We lost your file Kyle

And your file too Lou

Your watercraft’s not less than 26 feet Pete

Emotional injury is not BI Di

That’s not a professional service Gervase

I just ignored my boss Ross

We don’t cover recall Saul

The policy is void Boyd

That’s mobile equipment Clint

That’s not a suit Newt

And for absolutely no reason at all, your claim’s denied Clyde

There must be fifty ways
To leave no cover

A tribute to Paul Simon’s classic “50 Ways to Leave Your Lover” may seem an odd choice for celebrating Valentine’s Day. But despite a title suggesting otherwise, it is a love song. After all, the song is about a woman providing advice to her lover, on ways that he can leave his wife or another woman. I mean, how’s that not a love song? That’s as romantic as anything Karen Carpenter ever belted out.


Vol. 6, Iss. 2
February 13, 2017



Lee Shidlofsky:
Practicing Insurance Coverage Law In Texas

I know, I know, I know. I got the memo. Everything is bigger in Texas. I get it. But even though there is a lot of truth to Texas’s motto, surely there must be exceptions. And I know of one. When it comes to law firms representing policyholders, for my money, the go-to firm in Texas is Shidlofsky Law Firm in Austin. Don’t be fooled by its size. Its three lawyers handle some very heady and sophisticated coverage cases in the state.


Shidlofsky Law Firm was lead counsel in Lamar Homes vs. Mid-Continent Casualty Company, Texas’s groundbreaking case addressing coverage for construction defects. Not long ago the firm was again before the Texas Supreme Court as counsel for Ewing Construction in its case against Amerisure. Here the Texas high court held that allegations that a general contractor failed to perform its work in a good and workmanlike manner, that results in “property damage” caused by an “occurrence,” does not fall within the “contractual liability” exclusion of a standard-form CGL policy. I can’t overstate how significant this decision – or, to put to more accurately, not getting the opposite decision – was for contractors. These guys have had the weight of every person in Texas who works with a hammer on their shoulders.

Lee H. Shidlofsky is the founding member of Shidlofsky Law Firm PLLC. The firm handles a wide variety of insurance coverage cases (D&O, E&O, commercial property, business interruption, pollution and commercial auto) and Lee’s practice has a particular emphasis on coverage for construction defect and product liability claims. In addition to his insurance coverage practice, Lee mediates multi-party construction defect cases as well as insurance coverage matters. When Lee is out mediating cases, Douglas P. Skelly heads up the Insurance Coverage group and has been working side-by-side with Lee since 2007.

I reached out to Lee and asked him to tackle My Hometown for Texas. He’s the first policyholder-side coverage lawyer to participate in this new Coverage Opinions column. A Texas size thank you to Lee for agreeing to do so.


Hello from Texas, the home of “The Most Important Liability Insurance Coverage Judge” – Justice Don Willett of the Texas Supreme Court -- well, at least according to Randy’s “incredibly subjective and unscientific” methodology (his words, not mine). Randy has always said that a lot of coverage law is made in Texas and he’s right. As a result, Texas courts oftentimes get cited across the country. The Supreme Court of Texas hears more coverage cases on an annual basis than any other state’s highest court (and, for the record, I agree that Judge Willett is extremely influential in this area of law; he made President Trump’s list for potential Supreme Court nominees). Moreover, although they issue a multitude of coverage decisions each year, the Fifth Circuit Court of Appeals has also shown a tendency in recent years to certify insurance cases of first impression to the Supreme Court of Texas rather than make Erie guesses.

Hopefully the below summary will provide at least a little insight into Texas coverage law⎯rumor has it there is a good 50-state survey that goes into more detail. Substantive issues aside, I want to make an observation. While practicing law in a state where the slogan is “Everything is Bigger in Texas” may seem daunting, the fact is that the coverage bar is a relatively tight knit group of professionals that, for the most part, share a collegial relationship. Many cases are settled, at least initially, with a phone call, text, tweet or handshake and the trust factor is high among the lawyers that actively practice in the Texas coverage bar. Simply put, despite the vastness of the state, most in the coverage bar are well known to each other and that has fostered an excellent environment for coverage lawyers. We are pretty nice to outsiders as well. It has truly been an honor to practice in the Lone Star State.

For years, Texas has been “perceived” to be a pro-insurer state. Let’s just call that an “alternative fact.” The reality is that, while Texas law is generally hostile to bad faith and other extra-contractual causes of action, the law is quite favorable to insureds in many respects. Moreover, in my humble opinion, Texas judges do their best to apply insurance policies as written.

That being said, “[t]he maxims of contract interpretation regarding insurance policies operate squarely in favor of the insured.” See Lubbock County Hosp. Dist. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA., 143 F.3d 239, 242 (5th Cir. 1998). If a policy provision is ambiguous, the court must adopt the insured’s construction of the provision “as long as that construction is not unreasonable, even if the construction urged by the insurer appears more reasonable or a more accurate reflection of the parties’ intent.” See Nat’l Union Fire Ins. Co. of Pittsburgh, PA. v. Hudson Energy Co., 811 SW.2d 552, 555 (Tex. 1991). If a policy provision is susceptible to only one reasonable interpretation, the court must enforce the provision as written. See id. And, as noted by the Texas Supreme Court, “Texas law . . . requires that insurance policies be written in English, preferably plain English, not code.” Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 13 (Tex. 2007).

Because Texas courts strive to apply insurance policies as written, Texas law does not recognize the “reasonable expectations” or similar doctrines. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 145 (Tex. 1994). Further, Texas courts oftentimes do not let equitable considerations override the actual policy language. By way of example, in Fortis Benefits v. Cantu, the Supreme Court of Texas refused to apply the “made whole” doctrine to subrogation recoveries where the policy language did not support it. See Fortis, 234 S.W.3d 642 (Tex. 2007). Occasionally, however, Texas courts will interpret policy language in a practical manner or to stay within the mainstream and, in doing so, may stray from otherwise strict contract interpretation principles. See, e.g., McGinnes Industrial Maintenance Corp. v. Phoenix Ins. Co., 477 S.W.3d 786 (Tex. 2016) (holding that EPA enforcement proceedings under CERCLA are considered a “suit” within the meaning of a CGL policy even though the definition of “suit” may not technically reach that far).

The duty to defend in Texas is determined based on a standard where any potential for coverage triggers a complete duty to defend. In this regard, although some tension exists between federal courts and state courts, the Supreme Court of Texas has never recognized a formal exception to the “eight corners” rule. Accordingly, facts outside of the pleadings, even those easily ascertained, are ordinarily not material to the determination of a liability insurer’s duty to defend and allegations against the insured are liberally construed in favor of coverage. Simply put, in most cases, the duty to defend is determined by the plaintiff’s pleadings, considered in light of the policy provisions, and without regard to the truth or falsity of those allegations. See GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). As one judge on the Fifth Circuit aptly described it: “When in doubt, defend.” See Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 369 (5th Cir. 2008).

Texas courts do not recognize a pro rata or allocated defense. If an insurer owes a defense, even if only a single allegation triggers a potential for coverage, the insurer owes a complete defense. See Tex. Prop. & Cas. Ins. Guar. Ass’n v. Sw. Aggregates, Inc., 982 S.W2d 600, 604–07 (Tex. App.⎯Austin 1998, no pet.). Likewise, absent a specific policy provision or agreement of the insured, Texas courts have not recognized an insurer’s unilateral right to recoup defense costs or indemnity payments. See Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000); Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008). While the duty to defend is based on allegations and thus presents a question for courts to determine as a matter of law, the duty to indemnify is based on the “actual facts” as established in the underlying lawsuit. See D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., Ltd., 300 S.W.3d 740 (Tex. 2010). To that end, even though the duty to defend is broader than the duty to indemnify, Texas courts have recognized that a duty to indemnify may exist even in the absence of a duty to defend. See id.

A popular saying in Texas is that “if you don’t like the weather, just wait an hour.” With that in mind, I am somewhat hesitant to set out “black letter” principles of Texas coverage law. But, as of the date of this publication, the following—in my opinion—is an accurate sampling of certain key issues:

Trigger – Injury in Fact (See Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008)).

Allocation – Joint and Several, such that for any one occurrence the insured is permitted to select a single policy period among triggered policy periods in any manner so as to maximize its insurance recovery (See Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013)).

Stacking – Not permitted to stack a single occurrence over consecutive policy years (See RLI Ins. Co. v. Philadelphia Indem. Ins. Co., 421 F. Supp. 2d 956 (N.D. Tex. 2006)).

Exhaustion – Vertical (See Trammell Crow Residential Co. v. St. Paul Fire and Marine Ins. Co., 2014 WL 12577393 (N.D. Tex. Jan. 21, 2014)).

Policy Conditions – Treated as conditions precedent and insurer must establish that it has been prejudiced by a material breach (See PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008)).




Vol. 6, Iss. 2
February 13, 2017

SCOTUS Nominee Judge Neil Gorsuch And Insurance Coverage:
Haunted Houses And Lost Fenders

Many are busy these days delving into SCOTUS nominee Judge Neil Gorsuch’s decade of decisions from the Tenth Circuit to determine what his views may be on a host of important issues likely to come before the high court. One conclusion that these voyeurs have reached (and an easy one at that) is that the guy is a masterful writer. He employs a conversational, storytelling style and often uses a catchy lede to grab the reader’s attention from the get-go. Assuming he is confirmed, the legal press and blogosphere will have a wonderful time reporting on the latest Gorsuch yarn, turn of phrase or clever prose.

I took a look at Judge Gorsuch’s opinions in liability insurance coverage cases. Just curious what I’d find. Any trends? Did he show a propensity to find or deny coverage? Could his approach to policy interpretation be discerned? The result was both unsatisfying and fascinating.

Judge Gorsuch participated as a panel member in many decisions in liability coverage cases. But he authored just a very small number. In fact, the number is so small, compared to how many in which he participated, that you get the impression that he was purposely trying to avoid having to write the opinion in coverage cases. If that’s so, then the Judge is of course pleased that the U.S. Supreme Court does not take insurance coverage cases. If he enjoyed them, he’d be out of luck. Like enjoying ice fishing and moving to the Sahara.

So while there were not enough Gorsuch-authored opinions in liability coverage cases to draw any conclusions about the judge’s views, I did find a few that make the point about his wonderful writing style. Here are the ledes in a few of his insurance coverage and related cases.

Western World Ins. Co. v. Markel Am. Ins. Co., 677 F.3d 1266 (10th Cir. 2012) (“other insurance” clause dispute)
“Haunted houses may be full of ghosts, goblins, and guillotines, but it’s their more prosaic features that pose the real danger. Tyler Hodges found that out when an evening shift working the ticket booth ended with him plummeting down an elevator shaft. But as these things go, this case no longer involves Mr. Hodges. Years ago he recovered from his injuries, received a settlement, and moved on. This lingering specter of a lawsuit concerns only two insurance companies and who must foot the bill. And at the end of it all, we find, there is no escape for either of them.

The problems began at the front door of the Bricktown Haunted House in Oklahoma City. There Mr. Hodges was working the twilight hours checking tickets as guests entered. When the flashlight he used began flickering and then died, he ventured inside in search of a replacement. To navigate his way through the inky gloom, Mr. Hodges used the light of his cell phone. But when an actor complained that the light dampened the otherworldly atmosphere, Mr. Hodges turned it off and stumbled along as best he could. He was aiming for the freight elevator, where (imprudently, it turns out) spare flashlights were stored. When he reached the elevator, Mr. Hodges lifted the wooden gate across the entrance and stepped in. But because of the brooding darkness, Mr. Hodges couldn’t see that the elevator was on a floor above him and he crashed 20 feet down the empty elevator shaft.”

Johnson v. Liberty Mut. Fire Ins. Co., 648 F.3d 1162 (10th Cir. 2011)
“This case is about a pair of missing tail lights and the limits of reasonable foreseeability. Russell and Jennifer Johnson blame Liberty Mutual for failing to hold onto a pair of tail lights that, they say, would have helped them win a personal injury lawsuit they wanted to bring. Problem is, the Johnsons never asked Liberty Mutual to keep the tail lights, never mentioned their intent to sue, and allowed years to pass without a word. Now they fault the company for failing to divine their hidden (and perhaps not yet formed) intentions. Because the Johnsons, quite unsurprisingly, cannot identify a statutory or contractual basis for their claim, they ask us to create one for them in the common law of tort. But, we hold, the common law doesn’t require such uncommon foresight.”

Regional Air, Inc. v. Canal Ins. Co., 2011 U.S. App. LEXIS 683 (10th Cir. Jan. 14, 2011)
“Sometimes litigation takes so many twists and turns that, by the end of it all, it’s hard to tell who won and who lost. Ours is such a case. After much motions practice and a trial, Canal paid Regional Air just less than $60,000 for an insurance loss. After trial, both sides declared victory. And this led to a whole new fight over who won and who lost the last fight. Claiming to be the ‘prevailing party,’ each side argued that Oklahoma law entitled it to recover attorneys’ fees, costs and, in Regional Air’s case, interest from its opponent.”


Vol. 6, Iss. 2
February 13, 2017

General Liability Insurance Coverage: Key Issues In Every State

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







Vol. 6, Iss. 2
February 13, 2017

When A Reservation Of Rights Letter Is Not
#1 Coverage Decision of 2017 (Already)

I have lost track of the number of times that I’ve addressed in Coverage Opinions and my annual top ten cases of the year article and client seminars and webinars and to the guy next to me in line at Trader Joes, that for a reservation if rights letter to be effective it must fairly inform the insured of the reasons why the insurer, despite that it is providing a defense to the insured, may not be obligated to provide coverage for certain claims or damages in a suit. The only other reminder I’ve given more often is to my ten year old daughter – that she not talk to strangers.

We have all seen reservation of rights letters that set forth a brief factual summary of the claim, followed by several pages of policy language – some completely irrelevant – and then a concluding statement that, viola, the insurer reserves its rights.

But drafting a reservation of rights letter takes more than simply addressing the facts [in detail, hopefully] and citing policy provisions [and not numerous irrelevant ones, hopefully]. The important step is to then tie these two aspects together. In other words, if a policy provision is being cited in the reservation of rights letter, because it may preclude coverage, it should be accompanied by the allegations in the complaint that support this potential coverage defense. A letter may not be a reservation of rights letter simply because it calls itself one. Nor because it says, sometimes multiple times throughout, that the insurer is reserving its rights to deny coverage.

Lots of courts have concluded that reservation of rights letters, lacking specificity in why coverage may not be owed, do not make the grade, no matter how many times they may use the words reservation of rights. As such, the reservation of rights letter is ineffective. Translation – the insurer does not have the coverage defenses that it thought it did. The loudest cases of late to make this point have been Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (Top Ten Case of 2012) and Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., 449 S.W.3d 16 (Mo. Ct. App. 2014) (Top Ten Case of 2014).

In Hoover, the court stated: “In order to inform an insured of the insurer’s position regarding its defenses, a reservation of rights must be unambiguous. If it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured. A reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position.” (internal quotes and citations omitted). Hoover at 417.

In Advantage Builders, a Missouri trial court found that an insurer, after undertaking its insured’s defense, owed no coverage. But that decision went by the wayside at the appeals court because the reservation of rights letters – despite containing a lot of pages, setting out the facts at issue, voluminous policy language and a statement that the insurer was reserving its rights – were found to be not effective. The court put it like this: “The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.” Advantage Builders at 23.

The new year has barely gotten off the ground. A half a bag of Ruffles from your New Year’s Eve celebration is still in the snack drawer. You are still dating letters and checks 2016. But, nonetheless, I believe that the most significant coverage decision of the year has already arrived.

In Harleysville Group Insurance v. Heritage Group Communities, No. 27698 (S.C. Jan. 11, 2017), the Supreme Court of South Carolina held that an insurer’s “reservations of rights” letter, despite setting out many pages of policy provisions, and other information usually contained in a reservation of rights letter, was ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage.

Specifically, the court held: “At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement, Harleysville's duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage.”

Heritage Communities is one of the loudest, longest and clearest decisions that I have seen holding that a reservation of rights letter can be ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage. Such a strong decision, from a supreme court, not to mention on the heels of others, sets the stage for the possibility of Heritage Communities being followed by courts on a national basis. In addition, decisions addressing the manner of reservation of rights letters -- because they are relevant to every type of liability policy, and without regard to the claim facts -- have the potential for the widest impact of all coverage cases. Because of this combination it will take a lot for me to conclude that another coverage decision, handed down this year, could be as impactful on as many claims.

As an aside, but an important one, Heritage Communities involved coverage for construction defects. The jury in underlying litigation awarded damages to homeowners’ associations against the developers of their condominium complexes. The awards were in the manner of general verdicts. However, under South Carolina law, the cost of repairing faulty workmanship is not covered; but resulting property damage, beyond the defective work itself, is covered. In addition to the court’s pronouncement, that the reservation of rights letters were ineffective, the court also took the insurer to task for not advising the insured of the need for allocation between covered and uncovered damages. As a result, “the Special Referee found coverage under the policies was triggered because the juries’ general verdicts included some covered damages. Although the Special Referee found that the costs to remove and replace the faulty workmanship were not covered under the policies, the Special Referee concluded that it would be improper and purely speculative to attempt to allocate the juries’ general verdicts between covered and non-covered damages. Accordingly, the Special Referee ordered the full amount of the actual damages in the construction-defect suits would be subject to Harleysville’s duty to indemnify in proportion with its time on the risk.” This approach was affirmed by the supreme court.

This is no small point. Even though the insurer’s liability was limited to its time on the risk – an issue that the court spent considerable effort addressing – the fact remains that, on account of the general verdicts, the insurer’s time on the risk share included uncovered “faulty workmanship” damages. Paying for uncovered damages was the insurer’s consequence for not addressing, in the reservation of rights letter, the need for allocation between covered and uncovered damages.

“What’s in a name? That which we call a rose by any other name would smell as sweet.” William Shakespeare, “Romeo and Juliet,” Act II, Scene 2. But the same cannot be said of reservation of rights letters. In fact, just the opposite. A letter that is called a reservation of rights may be nothing of the sort.

Vol. 6, Iss. 2
February 13, 2017

MUST READ: Possible Bad Faith For Using Extrinsic Evidence To Deny Duty To Defend

Let’s face it. Despite all the allegations that are thrown around by policyholders, it is rare for an insurer to be found to have made a coverage determination in bad faith. The standards are just too high. An insurer getting a coverage determination wrong, and getting it wrong by acting maliciously or intentionally or recklessly or with an evil motive, are two very different things. Most insurer bad faith arises in the context of failure to settle, and not failure to figure out what’s covered.

This is why Williford Roofing v. Endurance American Specialty Insurance Company, No. 16-1830 (D.S.C. Feb. 6, 2017) is a significant decision. The court found the insurer may have acted in bad faith. Its sin? Not applying the correct test for determining whether it had a duty to defend.

Williford Roofing is an interesting decision on two levels. Williford sued a homeowner for monies owed for roofing work. The homeowner counterclaimed, alleging that rainwater entered her home after Williford removed shingles and left it exposed to heavy rain. Williford then brought in its subcontractors that performed the roofing work. The case settled for $35,000 and Williford incurred $29,000 in defense costs.

Williford filed suit against its insurer, Endurance, alleging that it breached its duty to defend and indemnify it against the underlying suit. Endurance’s defense was that it was entitled to disclaim coverage based on its Roofing Limitation Endorsement, which provided as follows: “It is hereby agreed that we do not cover claims, loss, costs or expense due to ‘property damage’ arising out of wind, hail, snow, rain, ice or any combination of these unless a suitable waterproof temporary covering, able to withstand the normal elements and large enough to cover the area being worked on, has been properly secured in place. This cover is to be put into place any time the contractor leaves the job site. This limitation applies to any sub-contracted work performed on behalf of the insured, including any sub-contractors of sub-contractors.” (emphasis added).

Thus, Endurance’s coverage determination turned on whether a “suitable waterproof temporary covering” had been secured on the roof. Endurance maintained that it had not been, and, therefore, a defense was not owed. The court held that, since the policy did not define the term “suitable,” and since there was no judicially-determined definition of the term, there was a genuine issue of material fact whether the Roofing Limitation Endorsement barred coverage.

But the real issue in Williford Roofing was not how to define the term “suitable.” Rather, it was the manner in which Endurance made the determination that it had no duty to defend.

In concluding that a suitable waterproof temporary covering had not been secured on the roof, Endurance relied on a letter from the homeowner’s counsel stating that Williford “failed to adequately cover the open portions [of Devore’s roof] during heavy rains.”

However, the counterclaim itself alleged that Willford “fail[ed] to notice rainwater and other exterior environmental elements coming into Ms. Devore’s house through their roof covering; [and] in failing to stop the rainwater and other exterior environmental elements coming into Ms. Devore’s house through their roof covering[.]” (emphasis added).

Accordingly, the court held that the dispute between Williford and Endurance, over whether the roof was actually covered on the night it rained, must be resolved in favor of Williford as the non-moving party. Therefore, the insurer’s summary judgment motion was denied.

But that wasn’t the end of it. The court turned to Williford’s bad faith claim. Here too the court concluded that summary judgment for the insurer was not appropriate.

The court put much emphasis on the fact that the insurer disclaimed a defense by relying on the letter from the homeowner’s counsel stating that Williford “failed to adequately cover the open portions [of Devore’s roof] during heavy rains.” It was on this basis that the insurer concluded that the Roofing Limitation Endorsement barred coverage.

However, the court concluded that the insurer’s reliance on the letter was inappropriate. While noting that it is true that an insurer’s duty to defend is not strictly controlled by the complaint, an evaluation of the complaint is the first step an insurer must take in determining whether it has a duty to defend. Turning to the matter at hand, the court determined that a trier of fact could find that the insurer acted in bad faith when it refused to defend.

The decision could have done a better job explaining, under what circumstances, an insurer’s duty to defend can be determined based on things other than the complaint. However, it appears that the court’s decision was that, because the complaint, standing alone, triggered a defense, i.e., the Roofing Limitation Endorsement was not applicable, the analysis should have ended there. In other words, the letter from the homeowner’s counsel could not be used to alter a “four corners”-based duty to defend conclusion.

The court’s decision does not state what the appropriate standard is to prove that the insurer acted in bad faith. Hopefully for insurers it is more than simply applying the wrong duty to defend test.

Vol. 6, Iss. 2
February 13, 2017

This Is Some Very Impressive Claims Handling

Back in the November 14, 2012 issue of Coverage Opinions – just the 3rd issue when there were few subscribers – I addressed the California Court of Appeal decision in State Farm v. Wier. My conclusion: “Credit to State Farm for having a very real understanding that handling a claim, that involves providing a defense under a reservation of rights, does not end when the letter is issued. The moral of the story for insurers defending under reservations of rights is simple.”

The case is back. And once again the decision demonstrates how well the claim at issue was handled by State Farm.

In State Farm v. Pyorre, No. A147302 (Cal. Ct. App. Jan. 10, 2017), John Wier and Richard Pyorre, former State Farm agents, were sued by State Farm for allegedly taking trade secret customer information and using it to solicit customers after they joined a competitor. The agents happened to be insureds under State Farm policies and they tendered their defense to State Farm under a CGL policy. [Defending the people that you are suing – now that’s a good neighbor.]

State Farm defended the agents under a reservation of rights pursuant to the “advertising injury” provision. Then the California Supreme Court granted review in Hameid v. National Fire Insurance of Hartford. At issue in Hameid was whether an insured’s use of a competitor’s customer list to solicit the customers gave rise to a duty to defend under the “advertising injury” provision of a CGL policy. Two lower courts had said yes. But Hameid was now poised to possibly change the law.

Based on the possible decision in Hameid, State Farm sent the agents a supplemental reservation of rights letter, in which (based on Buss) the company reserved the right to seek recovery of defense costs if the Supreme Court changed the existing law, resulting in there being no duty to defend.

Lo, and behold, the California Supreme Court did eventually change the law, holding in Hameid that using a competitor’s customer list to solicit those customers did not give rise to a duty to defend as “advertising injury.” The high court held that the term “advertising injury,” in the CGL policy, required “widespread promotion to the public,” rather than individual solicitation.

Based on that decision, State Farm stopped providing a defense and brought suit against the agents for recoupment of defense costs expended after the date of the supplemental reservation of rights letter. The California Court of Appeal held, based on the Supreme Court’s decision in Hameid, that State Farm did not have a duty to defend the agents in the trade secrets case. Further, the appeals court held that State Farm was entitled to recoupment of defense costs.

After this the case gets into the weeds concerning the timing of when State Farm’s right to recoupment began. That aspect of the court’s decision, related to the ins and outs of California recoupment law, is not important here.

Instead, the point to be made here is that State Farm undertook its insureds’ defense under a reservation of rights. But it did not just issue the letter and leave it at that. To the contrary, State Farm became aware that the California Supreme Court granted review in Hameid. It was also aware that, if the Hameid decision went a certain way, State Farm would have no duty to defend. Then, under Buss, this would give rise to a right to reimbursement of defense costs -- if State Farm issued an appropriate follow-up reservation of rights letter. So it did. As a result, when the law did in fact change, State Farm achieved a significant benefit in the way of recoupment of certain defense costs (assuming it can actually recover them; a whole other story). But this possibility could not have been achieved if State Farm only had the benefit of the initial reservation of rights letter – no matter how well it had been prepared. Again, as I said over fours ago, the moral of the story is simple.

Vol. 6, Iss. 2
February 13, 2017

A Rarity: A Construction Defect Coverage Case That’s Interesting

Construction defect cases have taken over the coverage world. Their numbers are astronomical. But despite how many there are, they are remarkable similar. The facts are often alike – owner of a defective building or condo owners bring claims against the GC and subs – and so are the issues – is faulty workmanship an “occurrence,” the “your work” exclusion, exclusions J(5) and J(6) and the like. The cases are important and serve a critical function. But they are monotonous.

Then along came Celina Mutual Insurance Co. v. Gallas, 14-1616 (N.D. Ind. Jan. 30, 2017). Far from claims against a general contractor or other typical subcontractors, at issue was coverage for a company hired to clean the windows and doors of a home. Besides such an unusual insured for a construction defect case, the court’s decision is also worthy of note.

Homeowners hired Finishing Touch Cleaning Service to clean the glass in the windows and doors of their home. After Finishing Touch’s work was complete, the homeowners noticed white stains and spots on the glass, although the glass itself was not damaged. Finishing Touch returned to the home and removed the spots from the glass in the windows and doors.

That wasn’t the end of it: “After the Finishing Touch employees had left the home, Wendt [the homeowner] observed that the glass was clean and the water spots had been removed, but that the paint around the glass in the windows and doors was bubbling and blistering, and some paint was sliding off. He also observed that the silicone seals and caulking of the windows had ‘turned to a soft rubbery bubblegum-like’consistency and br[oke] into strands.’ The Wendts’ home subsequently experienced condensation in the windows, and on cold days and nights, condensation would drip from the windows and form small puddles inside the home. The Wendts contacted Pella Windows and various contractors regarding these problems, and were advised that replacing the windows and doors would be less expensive than repairing them. The Wendts replaced the windows and doors, which caused damage to the siding shingles covering the home’s exterior, some interior woodwork and other parts of the home’s interior. The Wendts replaced the damaged siding shingles, damaged interior woodwork and repainted and restained parts of the home's interior.”

The homeowners sued Finishing Touch, alleging that the company damaged parts of the windows and doors. Celina Mutual defended Finishing Touch under a reservation of rights. Celina filed a declaratory judgment seeking a no coverage determination.

Now, if you do construction defect coverage work you know right where this is going. The insurer acknowledged that there was “property damage” caused by an “occurrence” and the court then got right to the “your work” exclusion.

Here was the issue: “The parties agree that the Damage to Your Work exclusion does not exclude coverage for damage to other property arising out of Finishing Touch’s work. However, they disagree as to whether the damages alleged in the underlying lawsuit ‘are confined to [Finishing Touch’s] work and caused by the . . . work,’ and thus, fall within the Damage to Your Work exclusion. The application of this exclusion depends upon the meaning of Finishing Touch's ‘work.’”

Finishing Touch alleged that its agreement “was only for removing the spots on the glass, it was not to wipe down or clean, or perform any work on any portions of the home other than the glass.”

The court described Finishing Touch’s “work” as follows: “Defendants assert that ‘it was not necessary for Gallas or Finishing Touch to touch or come into contact with any portion of the windows or doors other than the glass in order to perform the limited service of removing white spots from the glass.’ But the undisputed evidence demonstrates otherwise. As Gallas testified, ‘when [Finishing Touch employees] do a window-cleaning job, the water is going to get on the frame, no matter what you do. So, they're trained to wipe off the frame.’ When Gallas instructed the employees to use OneRestore, he told them to ‘clean the window like you would normally clean the window, squeegee it off and wipe it off, wipe off the frames with their rags.’”

Here’s the money paragraph: “The Policy states that ‘your work’ ‘[m]eans . . . [w]ork or operations performed by you or on your behalf.’ It does not limit ‘your work’ to work that the insured was hired to do. Moreover, Indiana courts apply business risk exclusions ‘to what the insured or those on his behalf worked upon or produced.’ Given the undisputed evidence that Finishing Touch’s employees were trained to wipe the frames surrounding the glass they cleaned, and that they wiped off the OneRestore that came in contact with the frames, sills and cladding, the Court finds that Finishing Touch performed work upon the frames, sills and cladding surrounding the glass of windows and doors of the Wendts’ home. As such, any property damage resulting from Finishing Touch’s work upon the frames, sills and cladding of the windows and doors of the Wendts’ home is eliminated from coverage by the Damage to Your Work exclusion.” (emphasis added).

I can imagine some insurers perhaps having seen this case differently -- that Finishing Touch’s work was solely to clean the windows. Thus, if the windows had been damaged, the “your work” exclusion precludes coverage for the cost to repair or replace the windows, but not beyond that. In other words, damage to the frames, sills and cladding surrounding the glass of the windows and doors of the home was consequential, and, thus covered. Perhaps Gallas takes the “your work” exclusion further than some may have expected.

Vol. 6, Iss. 2
February 13, 2017

The Pollution Exclusion And Charlie Brown

For insurers in Indiana, their efforts to enforce the pollution exclusion have resembled Charlie Brown tying to kick a football. But despite the futility their persistence has been Linus-like. After all, someday the Great Pumpkin just might arrive.

Ironically, despite how dismal it has been for insurers trying to enforce the pollution exclusion in Indiana, it could be the exact opposite. All insurers have to do is draft the pollution exclusion using the simple instructions that the Indiana Supreme Court has provided. In general, in Indiana, for the pollution exclusion to apply, the hazardous material argued to be a “pollutant” must be specifically mentioned in the pollution exclusion. It’s really that simple. Forget all that general talk about whether the pollution exclusion is limited to traditional environmental pollution or applies more broadly. In Indiana, the pollution exclusion applies to whatever the insurer says. But while the rule is that simple, its application has proven to be anything but.

An Indiana federal court in Atlantic Casualty Ins. Co. v. Garcia, No. 15-66 (N.D. Ind. Jan. 5, 2017) recently had occasion to address the state’s easy to say, not so easy to do, pollution exclusion rule. While the court found in favor of the insurer, it did so by punting the pollution exclusion. If it hadn’t, the insurer would have once again missed the football. Even though the court avoided the pollution exclusion, the decision still sheds light on the issue for those dealing with it in the Hoosier state.

At issue in Garcia was coverage for environmental contamination of property that had been used for many years as the site of a dry cleaning operation. The contaminating substances at issue were Stoddard Solvents, PCE and heating oil. The Garcias, the owners of the property, were facing claims for clean-up costs brought by the Indiana Department of Environmental Management. The Garcias sought coverage from their general liability insurer, Atlantic Casualty. The insurer denied coverage based on the pollution exclusion.

As noted, in Indiana, for the pollution exclusion to apply, the hazardous material argued to be a “pollutant” must be specifically mentioned in the pollution exclusion. Therefore, it is necessary to take a close look at the exclusion’s definition of “pollutants,” which is: “[A] solid, liquid, gaseous, or thermal irritant or contaminant or all material for which a Material Safety Data Sheet is required pursuant to federal, state, or local laws, where ever discharged, dispersed, seeping, migrating or released, including but not limited to petroleum, oil, heating oil, gasoline, fuel oil, carbon monoxide, industrial waste, acid, alkalis, chemicals, waste, treated sewage; and associated smoke, vapor, soot and fumes from said substance. Waste includes material to be recycled, reconditioned, or reclaimed.” (emphasis added).

The court in Garcia noted that heating oil was specifically listed in the definition of “pollutants.” Further, Stoddard solvents and PCE are required to have Material Safety Data Sheets under federal law. So, as far as the insurer saw it, it was in compliance with Indiana’s requirement – all of the substances, for which coverage was sought, were specifically listed in the pollution exclusion.

Hold on. Not so fast said the Garcias. Even if the insurer’s pollution exclusion has some specificity, because heating oil is specifically listed in the definition of “pollutants,” the language is still ambiguous because “it refers to pollutants by citing federal law rather than identifying specific pollutants within the policy itself.”

That was the issue before the court – does an insurer satisfy Indiana’s pollution exclusion requirement, that to-be-excluded substances must be specifically listed as “pollutants,” by referring to a list of pollutants under federal law?

The court was ready to say no – that simply referring to substances listed under federal law is not sufficiently specific -- agreeing with a 2015 decision from the Southern District of Indiana addressing the same issue. But the court passed on the issue and held that no coverage was owed for another reason:

“The Court is inclined to agree with its colleague in the Southern District of Indiana, but the question is a close one, and the Court is also mindful of Indiana Supreme Court Justice Sullivan’s warning that finding nearly all pollution exclusions unenforceable will cause ‘premium increases as insurers seek to charge for the increased risks [of extremely unpredictable pollution liability]’ and will present Indiana businesses with ‘a Hobson's choice: paying higher premiums for coverage they don’t need, thereby dissipating their financial resources, or going without coverage, thereby exposing themselves to risk of loss from ordinary tort liability.’

Under the principle of judicial restraint, federal courts ‘should not reach out to resolve complex and controversial questions when a decision may be based on a narrower ground.’ And as explained in Section IV.B, below, the Court finds that Atlantic’s policy does not provide coverage to the Garcias because of the policy’s claims-in-process exclusion. So the Court need not rule on whether the policy’s pollution exclusion bars coverage in order to resolve this case, and the Court declines to do so.”

Vol. 6, Iss. 2
February 13, 2017

For those who follow Pennsylvania Construction Defect Coverage
Pennsylvania CD followers will know what this means: In Quality Stone Veneer v. Selective Insurance Company, No. 15-6509 (E.D. Pa. Jan. 23, 2017) the court addressed Kvaerner and Gambone at length and then concluded that Indalex did not apply as an exception: “In sum, the underlying claims against QSV are based solely on allegations of faulty workmanship. None of the allegations are product-liability based. Nor do they allege, in any way, that QSV’s product (the stone veneer) actively malfunctioned. Rather, the allegations state that QSV did a poor job installing the stone veneer. Because such allegations, and the resulting damages, do not constitute a fortuitous ‘accident,’ there is no ‘occurrence’ under the CGL policy.” [Disclosure: The insurer was represented by lawyers from White and Williams.]