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Coverage Opinions
Effective Date: March 22, 2017
Vol. 6 - Issue 3
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Declarations: The Coverage Opinions Interview With Robert Morgenthau
Robert Morgenthau spent 35 years as Manhattan’s D.A. He’ll turn 98 this summer. But the man who served as the basis for the D.A. in Law & Order is still at it – working five days a week. He was kind enough to let me visit him at his office at Wachtell Lipton. He shared with me the greatest story I’ve ever heard.

Randy Spencer’s Open Mic
The Flying Trapizza:
Court Addresses, For The First Time, CGL Coverage For A Drone Accident

NCAA Tournament and Courts (Of Law)

My Hometown: Paul Perkins: Practicing Insurance Coverage Law In Vermont

Westminster Kennel Club Dog Show: Even Fancy Pants Show Dogs Bite People
Meet Coverage Opinions’s 105 Year Old Reader

The Most Unique Insurance Coverage Blog Out There

Tongue Piercing And Insurance Coverage

General Liability Insurance Coverage: Key Issues In Every State

The Most Overlooked Coverage Issue -- That’s Relevant In 45 States

Is This Argument For Coverage Ridiculous Or Genius?

Court Addresses Coverage For An Airbnb Claim

Coverage Counsel Sanctioned In Failure To Cooperate Case

Incredibly Tragic Case – Incredibly Unique Issue

Court Calls Policy Ambiguous – But Insurer Still In The Game

Tapas: Small Dishes Of Insurance Coverage
· For Those Of You Who Follow Kvaerner In Pennsylvania
· Oregon: Pollution Exclusion Applies To Carbon Monoxide
· New York Court Allows Reimbursement of Defense Costs (Slight Twist)

Back Issues:
  Volume 5 - Issue 12 -December 7, 2016
  Volume 6 - Issue 2 -February 13, 2017


Vol. 6, Iss. 3
March 22, 2017


The Flying Trapizza:
Court Addresses, For The First Time, CGL Coverage For A Drone Accident



Everywhere you turn these days the talk is drones, drones, drones. They supposedly have a million and one uses, including, we’re told, by Amazon for the delivery of packages. I’m dubious that Amazon will ever be dropping books from the sky onto my front porch. The awesome guy who delivers The Wall Street Journal at 5 AM every day virtually always misses my driveway. And he’s throwing the paper from ten feet away -- and while on Earth.

Another part of the drone story that has been getting a lot of chatter is insurers providing coverage for individuals and entities whose drones cause damage to people or property. It is not hard to imagine that the widespread use of drones will lead to such claims. And I’m sure we can all envision some invasion of privacy claims being brought against drone users. The insurance industry has a long history of quickly responding to emerging risks with risk transfer products. The availability of drone insurance is no exception.

But, until now, as far as I can tell, decisions addressing coverage for injury and damage caused by wayward drones have been non-existent. This is why the New Hampshire Superior Court’s recent decision in Rosenberg’s Pizza v. Live Free Insurance Co., No. 16-237 (N.H. Super. Ct. (Merrimack) Feb. 23, 2017), the first coverage decision involving a drone, is likely to get a lot of attention.

Morty Rosenberg was the third generation owner of Rosenberg’s Pizza in Concord, New Hampshire. Morty was a drone enthusiast long before drones had come to the attention of the public at large. So it came as a surprise to no one when he decided to offer pizza delivery by drone. He testified at deposition that it wasn’t meant to replace pizza delivery by car. It was “just for fun” and he called it “a publicity stunt.” Indeed, within a week of his first delivery, a local news channel did a story on it.

There were several necessary restrictions on pizza delivery by drone. The customer had to be located within 2 blocks of the restaurant, have an open front yard for a safe landing and delivery was restricted to a single pizza.

The first ten deliveries were successful. Then things came crashing down – literally. Rosenberg’s drone – nicknamed Air Sauce One -- was delivering a pizza to a house when the box disengaged from the drone too soon. The pizza box was tightly sealed and fell two hundred feet, landing on the roof of Robert Floyd’s Tesla as he was getting inside. After hitting the car the box struck Floyd in the face, causing serious injury. He required 22 stitches in his cheek and will have a permanent scar. The Tesla sustained $5,500 in damage. Thankfully Floyd’s Toy Manchester Terrier, Daisy, who he was holding at the time of the collision, was not injured. Daisy ate a slice after the box opened on impact and the pizza hit the ground.

Floyd sued Rosenberg’s Pizza for his injuries sustained. Rosenberg’s commercial general liability insurer disclaimed coverage, citing the “aircraft exclusion.” Rosenberg’s had little in the way of a defense to liability or money to satisfy a judgment. By all appearances the pizza place was a goldmine – but the company’s tax return somehow showed it losing money. Floyd and Rosenberg’s entered into a consent judgment for $325,000. Floyd agreed not to execute against Rosenberg’s and Rosenberg’s assigned to Floyd its rights under its commercial general liability policy.

Floyd filed suit against Live Free Insurance in New Hampshire Superior Court, in Merrimack, seeking coverage for the judgment. The court in the coverage action concluded that Live Free was obligated to provide coverage for Floyd’s injuries and the damage to his automobile. In a decision addressing the parties’ competing motions for summary judgment, the court held that the “aircraft exclusion” in the CGL policy did not apply.

The exclusion in the Live Free policy provided as follows:

This insurance does not apply to:

g. Aircraft, Auto or Watercraft

“Bodily injury” or “property damage” arising out of the ownership, maintenance, use, or entrustment to others of any aircraft, “auto” or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and “loading or unloading”. ***

The court, after a lengthy analysis, held that the drone was not an “aircraft.” It observed that the term “aircraft” was not defined, while the term “auto” in the exclusion was. That didn’t help the insurer, nor did the fact that exclusions must be interpreted narrowly. The court concluded that, since the aircraft exclusion had been in place long before individuals and non-military organizations were using drones, the term aircraft must be interpreted based on its meaning at the time it was drafted – a vehicle that carries passengers. This made it easy for the court to conclude that the drone was not an aircraft since, as the judge put it, “the drone carried pizza and not people.”

So, with no aircraft exclusion, Floyd got the dough.

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



Vol. 6, Iss. 3
March 22, 2017

NCAA Tournament and Courts (Of Law)


If you are reading this, then, at this moment, you have temporarily stopped ruminating over the fact that Gladys from H.R. is in first place in the NCAA Men’s Basketball Tournament office pool – despite that she has never even heard of Gonzaga.

It is not surprising that, given the money involved, the NCAA Men’s Basketball Tournament has been the subject of some legal disputes, especially involving intellectual property rights.

Jason Gay, sports columnist for The Wall Street Journal, recently reported that the NCAA is not happy with USA Gymnastics for wanting to use “The Final Five” for its gold medal winning team from the Rio Olympics. As Gay put it: “You know, because Final Five sounds like Final Four.” The NC2A is also less than pleased with the Big 10 Conference wanting to trademark the phrase “March is On!”

Gay himself came up against the NCAA’s don’t-mess-with-us attitude in 2014 when, while covering the East regional final at Madison Square Garden, between Connecticut and Michigan State, he violated the NCAA’s “cup policy.” As he recounted in a wonderfully entertaining column, the NCAA forbids outside cups at tournament games and requires that beverages be consumed in official NCAA cups. Gay, aware of this policy and looking to wage a small protest – and, no doubt, have some fun with it -- drank a beverage from a coffee mug he brought along featuring eleven illustrations of cats. He was approached by a tournament staffer who made a subtle threat that, on account of Gay’s cat mug, the Journal could be denied credentials to cover the Final Four the following weekend. Gay was forced to turn over the mug. It was returned to him after the game.

But the NCAA Men’s Basketball Tournament also shows up in cases that have nothing to do with the Tournament. This too is not surprising, given the hold that the tournament has on the public consciousness. Consider these judicial opinions where the NCAA Tournament made an appearance on a different kind of court than basketball.

In People v. Evans, 2011 Cal. App. Unpub. LEXIS 2648 (Cal. Ct. App. Apr. 12, 2011), the California Court of Appeal held that the trial court did not commit error when explaining to a jury how it may use its common sense – despite there being no evidence of a fact presented. The trial court gave as an example someone accused of theft of jewelry in April whose defense was, at the time of the theft, he was home watching the NCAA basketball tournament -- March Madness. The court explained that the jury could use its common sense in assessing the testimony, even though nobody introduced evidence of the dates of the tournament.

In Urofsky v. Gilmore, 216 F.3d 401 (4th Cir. 2000), the Fourth Circuit Court of Appeals upheld the constitutionality of a Virginia statute to the extent that it precluded professors of public colleges and universities from accessing sexually explicit materials, on state-owned or leased computers, for work-related purposes. The dissent saw it differently, noting that “[t]he Commonwealth has not explained, and cannot possibly explain, why employees who access sexually explicit material are any less ‘efficient’ at their work than employees who check espn.com every twenty minutes during the NCAA tournament.”

In Pirschel v. Sorrell, 2 F. Supp. 2d 930 (E.D. Ky. 1998), the court upheld the suspension of a student found in possession of beer while attending a basketball tournament at another school. The court looked at the impact that a school’s players can have on its team’s reputation and applied that conclusion to the team’s fans: “While a school may reap the benefits of a successful team and well-behaved fans, it may also be strapped with a negative label in the event its teams display poor sportsmanship. For example, most, if not all, University of Kentucky basketball fans recall Duke University star Christian Laettner stepping on a Kentucky player’s chest during a NCAA tournament game. Although that incident took place several years ago, many still consider Duke a dirty team.” Likewise, the court observed, “[j]ust as a school may be labeled as having excellent students based on others’ perception of their conduct, a negative reputation will result if students’ behavior is unbecoming.”

In Stainbrook v. Kent, 771 F. Supp. 988 (D. Minn. 1991), the parties agreed that serving a summons and complaint upon LSU, by delivering the documents to its assistant to the athletic director, while the LSU men’s basketball team was competing in the regional final of the NCAA tournament, did not constitute proper service.

Meinke v. VHK Genesis Labs, 2006 U.S. Dist. LEXIS 85664 (N.D. Ill. Nov. 21, 2006) involved employment-related claims brought by a sales employee who worked in the field and from home. He was directed to report to the company’s offices on March 18, 2004. When the employee did not show up, his boss called and told him to turn off the NCAA basketball tournament. He denied that he was watching the tournament at the time.

Denial – That’s my advice to you.

Vol. 6, Iss. 3
March 22, 2017



Paul Perkins:
Practicing Insurance Coverage Law In Vermont

Last month’s My Hometown column looked at coverage for a state that is large and warm – Texas. This month the attention turns to small and cold – Vermont. For this the task falls on Paul J. Perkins -- former U.S. Navy Special Warfare/Special Operations Deep Sea Diver -- at Plante & Hanley, P.C. in White River Junction, Vermont. Needless to say, Paul is well able to take this on, having served as Chair of the Insurance Law Section of the Vermont Bar Association since 2011.


Paul currently litigates insurance coverage, commercial, personal injury and employment cases in all Vermont state and federal courts. He has previously defended individuals accused of crimes and represented juveniles and parents in Children-in-Need-of-Supervision (CHINS), termination of parental rights, and delinquency proceedings in Vermont State courts. Paul is a graduate of the University of Oregon (B.A., 1994) and Vermont Law School (J.D., 1998).

I have never been to Vermont. Shame on me. But this has not prevented me from contributing to the state’s economy. I am a heavy maple syrup user.

My thanks to Paul for taking this on.


Hello and Bonjour from the Green Mountain State.

Our courts are rather insistent that the plain, ordinary language of an insurance policy is the alpha and the omega of insurance contract construction (of course, if disputed policy terms are ambiguous, they will be construed in favor of coverage). There is an old joke about Vermont that encapsulates Vermont’s preference for plain talk; a preference that runs through many of our coverage decisions (well, as many decisions as a small, rural state with no intermediate appellate court can issue):

A lost flatlander drives up to a farmhouse where an old Vermonter is sitting on the porch. He leans out his window and says, “Hey buddy, does this road go to Montpelier?

Vermonter: Nope. Stays right here.

Flatlander: No, I mean can I take this road to Montpelier?

Vermonter: Don’t think you can get it in your car.

Flatlander: Well then, if I drive down this road will I get to Montpelier?

Vermonter: Don’t know how good a driver you are.

Flatlander: You don’t know much do you?

Vermonter: I know I ain’t lost.

Under Vermont law, insurance policies are contracts, and therefore, rules of contract construction apply. Such as:

1. The construction of policy language is a question of law, not fact. Chamberlain v. Metro. Prop. & Cas. Ins. Co., 171 Vt. 513, 514, 756 A.2d 1246, 1248 (2000) (mem.); Fireman’s Fund Ins. Co. v. CNA Ins. Co., 2004 VT 93, ¶ 8, 177 Vt. 215, 220, 862 A.2d 251, 256, 2004 VT 93, ¶ 9.

2. Policies are interpreted according to their terms and the intent of the parties is determined by the express policy language. Town of Troy v. American Fidelity Co., 120 Vt. 410, 417, 143 A.2d 469, 474 (1958); Sanders v. St. Paul Mercury Ins. Co., 148 Vt. 496, 500, 536 A.2d 914, 916 (1987).

3. Ambiguous terms are construed against the drafter (the insurer) and in favor of coverage, because the insurer is in the best position to avoid, or correct, ambiguous terms. Town of Troy v. American Fidelity Co., 120 Vt. 410, 418, 143 A.2d 469, 474 (1958).

4. And, our courts “review the language of an insurance contract from the perspective of what a reasonably prudent person applying for insurance would have understood it to mean.” Towns v. Vt. Mut. Ins. Co., 169 Vt. 545, 546, 726 A.2d 65, 67 (1999) (mem.); Co-operative Ins. Companies v. Woodward, 2012 VT 22, ¶ 9, 191 Vt. 348, 352–53, 45 A.3d 89, 93 (2012).

Our courts generously construe an insurer’s duty to defend. Although we haven’t adopted the Texas nomenclature, the “eight corners rule” is the accepted methodology: “Generally, the insurer’s duty to defend is determined by comparing the allegations in the complaint of the underlying suit to the terms of coverage in the policy.” City of Burlington v. Nat’l Union Fire Ins. Co., 163 Vt. 124, 127, 655 A.2d 719, 721 (1994).

Our courts look only to the allegations of the complaint; not the legal theories, when deciding an insurer’s duty to defend. A plaintiff may not, therefore, plead the facts of an intentional tort, but state a claim for negligence, in order to invoke coverage. Coop. Fire Ins. Ass’n of Vermont v. Bizon, 166 Vt. 326, 335, 693 A.2d 722, 728 (1997).

If the complaint presents claims that are “potentially” covered by the policy, the insurer must defend. Garneau v. Curtis & Bedell, Inc., 158 Vt. 363, 366, 610 A.2d 132, 134 (1992). However, although the duty to defend is much broader than the duty to indemnify (State v. Glens Falls Ins. Co., 132 Vt. 97, 99, 315 A.2d 257, 258 (1974)), if there is no possibility that the insurer must indemnify, it has no duty to defend. Garneau v. Curtis & Bedell, Inc., 158 Vt. At 366, 610 A.2d at 134.

So what is an insurer to do when coverage is questionable? Send out a unilateral reservation of rights? No! In Vermont, “[a] unilateral reservation of rights . . . is ineffective.” Am. Fid. Co. v. Kerr, 138 Vt. 359, 363, 416 A.2d 163, 165 (1980). Simply deny coverage? Well, that is allowed, but care must be taken: “[The insurer] may refuse to pay and say nothing as to the basis of his refusal. In that case, all defenses to an action on the policy are available to him. He may refuse to pay on a particular ground reserving the right to defend on other grounds, with the same result. But, when he deliberately puts his refusal to pay on a specified ground, and says no more, he should not be allowed to ‘mend his hold’ by asserting other defenses after the insured has taken him at his word and is attempting to enforce his liability. Cummings v. Connecticut Gen. Life ins. Co., 102 Vt. 351 (1930); see also, Hamlin v. Mut. Life Ins. Co., 145 Vt. 264, 268–69, 487 A.2d 159, 162 (1984).

By far, the most common practice, and the practice endorsed by our courts, is to enter into a bilateral reservation of rights agreement with the insured, reserving coverage defenses, while agreeing to defend. Beatty v. Employers’ Liab. Assur. Corp., 106 Vt. 25, 168 A. 919, 923 (1933); Jefferson Ins. Co. v. Travelers Ins. Co., 159 Vt. 46, 50-51, 614 A.2d 385, 388 (1992).

What kinds of claims are not covered? That depends on the policy language. Vermont has no blanket public policy against insurance for intentional and criminal acts, except when the policy language shows that the parties did not contemplate such coverage. Co-operative Ins. Companies v. Woodward, 2012 VT 22, n. 1, 191 Vt. 348, 353, 45 A.3d 89, 93 (2012). Vermont also does not bar, on public policy grounds, coverage for punitive damages. To the contrary, we have a statute requiring liability insurers to “pay and satisfy any judgment that may be recovered against the insured upon any claim covered by this policy to the extent and within the limits of liability assumed thereby” (8 V. S. A. § 4203(1). The Vermont Supreme Court has “[found] in this statute a legislative declaration of a public policy favoring complete coverage.” State v. Glens Falls Ins. Co., 137 Vt. 313, 320, 404 A.2d 101, 105 (1979). And, our high court has avoided the opportunity to rule on whether public policy prohibits coverage for sexual exploitation of children, although it noted that if a policy were to do so, the insurer would be “subsidiz[ing] defendant’s sexual misconduct and force [the insurer’s] other policy holders to bear the expense of any passed-along costs.” TBH by & through Howard v. Meyer, 168 Vt. 149, 154, 716 A.2d 31, 35 (1998).

Efforts to avoid policy provisions that bar coverage for intentional acts, criminal acts, sexual abuse, and the like have largely failed. Often, these efforts manifest when the victim of an intentional tort sues the family member of the perpetrator for negligence, both of whom are insured under a homeowners’ policy. Typically, our courts find that the plain language of policy terms, such as “occurrence,” “bodily injury,” “personal injury” and exclusions, bar such coverage. Co-operative Ins. Companies v. Woodward, 2012 VT 22, 191 Vt. 348, 353, 45 A.3d 89, 93 (2012). And, when an insured denies an intent to harm, our courts may find such intent under the “inferred intent rule,” which allows a court to infer intent from the nature and character of the act (such as sexual abuse) and to establish conclusively the existence of intent to harm as a matter of law. Nationwide Mut. Fire Ins. Co. v. Lajoie, 163 Vt. 619, 620, 661 A.2d 85, 86 (1995); Massachusetts Mut. Life Ins. Co. v. Ouellette, 159 Vt. 187, 192, 617 A.2d 132, 135 (1992); TBH by & through Howard v. Meyer, 168 Vt. 149, 153, 716 A.2d 31, 34 (1998). But there is an exception to this rule for minors: the “trier of fact should examine the facts and circumstances of the case before it, including the circumstances . . . surrounding the sexual conduct, as well as the minor’s age, ability, intelligence, and experience . . . to determine whether the minor alleged perpetrator expected or intended his or her actions to result in harm to the victim.” N. Sec. Ins. Co. v. Perron, 172 Vt. 204, 218, 777 A.2d 151, 161 (2001) (internal citation and quotations omitted).

What if some claims asserted against an insured are covered and others are not? Well, the insurer must defend. But the insurer must only indemnify for those claims that actually fall within the coverage provisions and are not barred by an exclusion. Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc., 2015 VT 52, ¶ 33, 199 Vt. 104, 116, 120 A.3d 1160, 1169 (2015). If such a case goes to trial, how can the insurer protect its coverage defenses, while still discharging its duties to its insured? In Vermont, insurers are expected to become directly involved in the case to ensure that the verdict distinguishes between covered and not-covered claims and allocates damages accordingly: “it was incumbent upon [the insurer] to notify the trial court and the parties of the potential apportionment issue and of the need for special interrogatories allocating damages, to seek permission if necessary to attend the charge conference to propose such interrogatories, or even to intervene in the litigation if all else failed.” Pharmacists Mut. Ins. Co. v. Myer, 2010 VT 10, ¶ 15, 187 Vt. 323, 333, 993 A.2d 413, 420 (2010).

But of course, if the trial is going terribly, and one has tried everything else, one may always cause a mistrial by running through the courtroom and screaming, “insurance,” “insurance,” “insurance.” (Don’t actually do this.) Bliss v. Moore, 112 Vt. 185, 188, 22 A.2d 315, 317 (1941); Cone Realty Corp. v. Smith, 137 Vt. 567, 568, 409 A.2d 567, 568 (1979) (injection of fact of insurance into liability trial is grounds for mistrial).

Some other decisions of note:

1. Vermont allows first-party (failure of an insurer to pay a claim filed by its insured) and third-party (handling third-party claims brought against its insured), bad faith claims against insurers. Myers v. Ambassador Ins. Co., 146 Vt. 552, 555, 508 A.2d 689, 690 (1986) (third party bad-faith); Bushey v. Allstate Ins. Co., 164 Vt. 399, 401–02, 670 A.2d 807, 809 (1995) (first-party bad faith).

2. Insurers do not owe their insureds an extra-contractual duty, such as a duty in tort. Murphy v. Patriot Ins. Co., 2014 Vt. 96, ¶16, 197 Vt. 438, 445, 106 A.3d 911, 917 (2014).

3. An injured plaintiff may not sue a defendant’s insurer for bad faith: “the relationship between plaintiffs and [the tortfeasor’s insurer] is by nature adversarial, and we find no obligation imposed on [the insurer] to conform to a particular standard of conduct with respect to plaintiffs.” Larocque v. State Farm Ins. Co., 163 Vt. 617, 618, 660 A.2d 286, 288 (1995).

4. Finally, it is not clear whether insurers may be sued under Vermont’s Consumer Protection Statute (9 V. S. A. § 2451 et seq.), which allows recovery for misleading representations, practices, or omissions. In 1981, our high court held that insurance was not the type of “goods and services” protected under the statute. Wilder v. Aetna Life & Casualty Insurance Co., 140 Vt. 16, 433 A.2d 309 (1981). After the legislature amended the definition of “goods and services” in 1985, many trial courts (but not all) held that insurance is now covered by the statute. Fish v. Allstate Ins. Co., (No. S0056-03 CnCv (Katz, J., June 11, 2003), Bertelson v. Union Mutual Fire Insurance Co., No. 834-04 Cncv (Norton, J., Nov. 22, 2004); Vallee v. Am. Int’l Spec. Lines Ins. Co., 431 F. Supp. 2d 428, 442 (D. Vt. 2006); Christopher Blake v. Progressive Northern Insurance Co., no. 164-9-15 Oecv (Tomasi, J., February 4, 2016); but see, Nautilus Ins. Co. v. Loomis, No., 194-9-10, Oecv (Eaton, J., Feb. 29, 2012) (holding that, in the absence of either a more specific expression of legislative intent, or decision by the Vermont Supreme Court, to abrogate Wilder, that case remains controlling precedent). The Vermont Supreme Court, however, has avoided every opportunity, since 1985, to revisit the Wilder decision.



Vol. 6, Iss. 3
March 22, 2017

Westminster Kennel Club Dog Show: Even Fancy Pants Show Dogs Bite People

Last month was the venerable Westminster Kennel Club Dog Show in New York City. Rumor, the German Shepard, won Best in how. Nigel, the Norwich Terrier, got robbed. Robbed I tell you. I was glued to the television – along with my two pooches, Barney and Sarah, right by my side. You can be sure there was some wagering going on, not to mention screaming and barking at the TV in an effort to influence the judges’ decisions.

But as much as dogs are one of life’s greatest pleasures, it can’t be ignored that they are not without some danger. Dogs sometimes bite people. Putting aside who’s at fault -- there could be a hundred reasons why a dog bites someone – bites are an inherent risk of being around dogs. There are millions of dogs in this country. So while bites are rare, and most dogs never hurt anyone, the sheer number of dogs necessarily leads to a lot of bites.


This, of course, causes a significant amount of litigation involving damages for injuries caused by dog bites. Based on my research, the earliest reported decision, involving litigation for injury caused by a dog bite, is Hall v. Hall, 3 Conn. 308 (1820). Connecticut should take credit for this source of pride and brag about it on its license plates. North Carolina’s plates announce “First in Flight.” Connecticut’s could read “First in Bite.”

But what about show dogs? Do they bite people? When I watch Westminster I always marvel at the dogs being poked and prodded by the judges and displaying no negative reaction. The poor pooch is practically getting a colonoscopy on national television and he just stands there, completely oblivious to it.

On one hand, it makes sense that show dogs would be low risk for biting. After all, they surely have great temperament, are used to being around a lot of people and other dogs and are accustomed to having peoples’ hands all over them. And, besides, dogs that use hair dryers and have their nails manicured can’t be that tough.

But, after a while, these pooches may start to lose their patience with all that priming and strangers petting their heads – not to mention speaking to them in baby talk. And when they reach the end of their leash they may decide to make their displeasure known to whomever the unlucky person is that happens to be in the wrong place at the wrong time.

So I looked into it – using reported judicial decisions as the barometer. And it turns out that, just because show dogs probably get made fun of at the dog park, and have their lunch money stolen, some have a toughness behind their cucumber facemask. Consider these reported decisions involving show dogs that have not been worthy of any blue ribbons.

Splain v. Eastern Dog Club, 28 N.E.2d 450 (Mass. 1940) -- Plaintiff, attending a dog show to show his dog, was bitten by a competitor. (“Doubtless the defendant [dog club] should have foreseen and guarded against any probable harmful consequences of the presence of many dogs at the show of dogs [sic] being confined to benches or stalls for considerable periods and of exhibitors passing through aisles with dogs. But we think that, even in the circumstances of a dog show, it could not rightly have been found that the injury to the plaintiff in its general nature was a probable consequence of the failure of the defendant to take precautions, by providing attendants or otherwise, to prevent a dog on exhibition from remaining in the aisle for a period of five or ten minutes, when held by the person in charge of it by a chain or leash, or to guard against such dog--having no dangerous propensities known, or that should have been known--biting an exhibitor passing through the aisle with another dog.”).

Adkins v. Fireman’s Fund Ins. Co., 313 So. 2d 328 (La. Ct. App. 1975) - Serious injuries were sustained by a three year old who was bitten by a Weimaraner at a dog show. (“While it is true that the rules for the dog show were very loose and there was apparently no control to keep a vicious dog from being entered in the dog competition, we see no way that even if very strict rules had been adopted by the Fair that the dog in question would have been excluded from the show. Although he is a big dog, he appears to have been gentle and well trained.”).

Mieloch v. Country Mutual Ins. Co., 628 N.W.2d 439 (Wis. Ct. App. 2001) -- Kodak, an Akita, bit its professional trainer, causing injuries. (“[W]e conclude that because the [dog trainers] were already aware of the Meyer incident [Kodak snapping at another dog trainer four months earlier] prior to taking control of Kodak, the [owner] had no duty to warn them of that event. Further, we conclude that Kodak’s propensities towards other dogs are not material to Kodak’s propensities towards dog handlers, that the behavior of other dogs in linear kinship to Kodak cannot be imputed to Kodak [Kodak’s father and grandmother had bitten people], and that these contentions are not material to a duty to warn on the part of the [owner].”).

Burke v. Migday, 2001 WL 950915 (Mass. Super. Ct. Aug. 20, 2001) – A professional dog handler was bit in the face by Carlton, a Bullmastiff, after she opened his cage to say goodbye to him after a dog show. (The dog handler’s case against the dog owners for damages involved jurisdiction and choice of law issues.).

Wolf v. Bakert, 808 N.Y.S.2d 921 (Sup. Ct. 2005) – A twelve year old boy required fourteen stitches to the face after being bitten by Kirby, a Chow, at a dog show. (Trial needed to determine the facts that led to the incident. Dog owners alleged that Kirby was accustomed to being handled as he had participated in more than 240 shows. Owners alleged that Kirby was on a leash and lying down when the boy jumped on him.).

Tatman v. Space Coast Kennel Club, 27 So. 3d 108 (Fla. Ct. App. 2009) - A dog owner, in attendance at a dog show, was injured when bit by a competitor, Eli, an Akita, who was on a leash and being held by a professional dog trainer. The court held that the exculpatory clause on the entrance form for the injured person’s dog did not apply to preclude her claim.

In addition to the significant amount of litigation involving damages for injuries caused by dog bites, there is also a lot of litigation over the availability of insurance coverage for such incidents. Funny how that works.

Dog is man’s best friend
But when it bites a lawsuit will be penned
This can mean a lot to spend
So the dog will ask its insurer to defend
And also pay for the victim to mend
But what if Fido did expect or intend?

[This article was adopted from one that appeared in the February 12, 2014 issue of Coverage Opinions.]



Vol. 6, Iss. 3
March 22, 2017

The Most Unique Insurance Coverage Blog Out There

There are more insurance coverage blogs out there than Howdy Doody has freckles. They generally follow the same format – written posts, describing a recent decision in a coverage case, along with an explanation why it could have an impact on the coverage landscape in the future. And it makes sense that this would be the blog model of choice. Insurance coverage is highly case law-driven -- and new decisions rain down daily. Staying up to speed is a critical aspect of working in the area.

But then along came the Miller Friel Insurance Recovery Blog. The folks at this Washington, D.C. policyholder-side boutique firm didn’t get the how-to-blog memo. While Miller Friel’s lawyers convey some information via written posts, they mainly do so through four to six minute, highly professional, videos.

But that’s not the only thing that makes the Miller Friel blog unique. When the firm’s lawyers look into the camera their objective is not to discuss recent decisions in coverage cases. Rather, the content of the posts is much more general – discussing, in plain English, overarching coverage problems and scenarios faced by policyholders and ways in which solutions may be had. Recent video posts have addressed such issues as retroactive dates, things to know about excess policies, triggering multiple policy types for a single claim, panel counsel conflicts and the role of brokers in the claims process.

I suspect that Miller Friel resisted the traditional blogging model because the firm’s target audience is corporate executives and not other coverage lawyers. The blog’s intended readers have a coverage problem on their hands and need a coverage lawyer -- not a coverage lecture (at least not yet). Blog posts addressing the finer points of coverage cases have a lot of value. But there’s a time and place and audience and purpose for them.

The Miller Friel Insurance Recovery Blog -- millerfriel.com/blog -- is the most unique insurance coverage blog that I’ve seen. They get it. I highly recommend the blog both for its content and style. Not to mention, if you are considering starting a blog, which brings the huge challenge – and harder everyday -- of getting people to read it, taking a less-traditional approach may be something to consider.

Vol. 6, Iss. 3
March 22, 2017

Tongue Piercing And Insurance Coverage

The February issue of CLM Magazine included the article Tort for Tattoo. S. Karen Bamberger of Betts, Patterson & Mines, P.S. and Roger DeKraker of Nationwide address risks faced by tattoo artists and manufactures of tattoo-related products. The authors warn that lawsuits can follow if there is contaminated ink or improper procedures used when applying tattoos.

That got me wondering. With all these risks out there, are there any decisions addressing coverage for a claim involving a tattoo gone wrong? Surely the CGL “your work” exclusion would preclude coverage for a tattoo artist for a claim that his or her work was artistically unsatisfactory (if that were even an “occurrence” in the first instance). And, of course, there’s the Roofing Exclusion – “No coverage is owed if you get sued for applying a tattoo to someone who had been instructed – ‘you are not allowed to get a tattoo so long as you’re living under my roof.’”

I did not locate any case law addressing coverage for a tattoo mishap. However, Burns v. Scottsdale, 2010 U.S. Dist. LEXIS 74907 (W.D. Wash. July 23, 2010) is a close cousin. Lacey Filosa had her tongue pierced by an employee of Painless Steel. Two weeks later she was no doubt regretting the decision as she was suffering from a “life threatening infection of ‘flesh eating’ bacteria.” Lacey’s doctor “opined that the bacteria in her own saliva entered her body through the hole in her tongue, causing a serious infection. Lacey recovered, but not without significant scarring.

Lacey filed suit against Painless Steel. She reached a settlement with its owners for $3 million. The court held a reasonableness hearing and found that the settlement was reasonable. Painless Steel assigned to Lacey its rights under its general liability policy issued by Scottsdale. Lacey sued Scottsdale. The court concluded that no coverage was owed.

Putting aside a lengthy Who is an Insured issue, the court held that coverage was barred by the policy’s Professional Services Exclusion: “[T]the professional services exclusion applies. That exclusion excludes ‘any and all professional exposures.’ The policy does not define ‘professional service’ or ‘professional exposure.’ In the absence of such a definition, plaintiff argues that a dictionary definition should prevail, and cites Webster’s Collegiate Dictionary (10th ed. 1995), which defines ‘professional’ as ‘of, relating to, or characteristic of a profession.’ In turn, it defines ‘profession’ as ‘a. a calling requiring specialized knowledge and often long and intensive academic preparation; b. a principal calling, vocation, or employment; c. the whole body of persons engaged in a calling.’ Despite plaintiff’s claim to the contrary, that definition is broad enough to include tattooing services, which is a vocation and also a calling that requires specialized knowledge. The employee who pierced Filosa’s tongue had undergone a one-year apprenticeship. The organization that provided the training is called the ‘Alliance of Professional Tattoo Artists,’ which suggests that tattoo artists consider themselves professionals. Furthermore, the term ‘professional’ ‘generally signifies an activity done for remuneration as distinguished from a mere pastime.’”

So now you know.


Vol. 6, Iss. 3
March 22, 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. 3
March 22, 2017

The Most Overlooked Coverage Issue -- That’s Relevant In 45 States

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: possibly having to pay the policyholder’s attorney’s fees. I sometimes (a lot of times, in fact) see this consideration overlooked, or not given enough weight, in the calculus. After all, it is a potential factor in 45 states. In my experience this is the most overlooked coverage issue.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim. In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim. Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith. Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured. Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute. And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases an insurer that is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

A recent decision from the Oregon Supreme Court demonstrates in stark terms how significant the attorney’s fees issue can be for an insurer that is unsuccessful in coverage litigation – and even if there’s no decision in the coverage case.

In Long v. Farmers Ins. Co., No. SC S063701 (Ore. Feb. 2, 2017), the Oregon Supreme Court addressed the state’s statute -- ORS 742.061(1) -- that creates the potential for an insured to recovery its attorney’s fees in coverage litigation. The statute provides as follows: “Except as otherwise provided in subsections (2) and (3) of this section, if settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff's recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.” (emphasis added by court)

The case is lengthy and I want to keep this short and simple.

The insured argued that, if you file an action on an insurance policy, and you later obtain more from the insurer – even if through the insurer simply voluntarily paying you more -- than the insurer tendered in the first six months after proof of loss, then you are entitled to recover attorney’s fees. In other words, the insured argued that “recovery” “refers to any kind of restoration of a loss, including a voluntary payment of a claim made after an action on an insurance policy has been filed.”

We are Farmers, bum ba dum bum bum bum bum, argued that “recovery,” as used in the statute, means a “money judgment in the action in which attorney fees are sought. Under that interpretation, attorney fees may be had for an insured’s action on a policy only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after the insured offers proof of loss.”

The court found for the insured, holding that “when an insured files an action against an insurer to recover sums owing on an insurance policy and the insurer subsequently pays the insured more than the amount of any tender made within six months from the insured’s proof of loss, the insured obtains a ‘recovery’ that entitles the insured to an award of reasonable attorney fees.” (my emphasis added).

In other words, as the court put it: “A declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” (emphasis added by court).

Putting aside the court’s lengthy analysis, and numerous arguments back and forth between the parties, the court rested its decision on the purpose of the statute: “The purpose of ORS 742.061 is to discourage expensive and lengthy litigation. Requiring the insurer to pay the insured’s attorney fees if and only if the insured obtains more in the litigation than was timely tendered advances that purpose insofar as it encourages insurers to make reasonable and timely offers of settlement and also encourages insureds to accept reasonable offers and forego litigation. But the statute also serves a compensatory purpose. The statute ensures that, when insureds file suit to obtain what is due to them under their policies, they do not win the battle but lose the war by expending much or all of what they obtained in the litigation on attorney fees. . . . The function that a ‘recovery’ plays in that overall framework is to establish that the insured indeed obtained something in the action—payment of benefits due under the insurance policy that exceeded any amount that the insurer timely tendered. . . . It was [in the examples provided] the insurer’s payment, not the form of payment, that entitled the insured to attorney fees.”

On one hand, as Long v. Farmers addresses an Oregon statute, you could write the decision off as being limited to Oregon. However, I believe that the decision has the potential for wider reach. Given that the decision was tied to the rationale for allowing an insured to recover attorney’s fees – prevent the insured from winning the battle and losing the war; which is the same rationale used by many states -- other states may consider allowing an insured to do so, even if coverage was not obtained through judicial decree.

Vol. 6, Iss. 3
March 22, 2017

Is This Argument For Coverage Ridiculous Or Genius?

Part of the business of being a lawyer is having to handle less than ideal cases. All lawyers get bad cases. Counsel must play the hand they are dealt – and their job is to make the most of it. That’s how I would describe the situation that confronted the plaintiff’s counsel in its pursuit of coverage in Associated Dermatology & Skin Care Clinic v. Mt. West Farm Bureau Mutual Ins. Co., No. DA 16-0098 (Mont. Feb. 21, 2017). Counsel had a pair of twos. But they didn’t push their cards into the center of the table. Instead they did what they could. They lost. But I can’t decide if the argument they made is support of coverage, for this tough case, was ridiculous or genius. But the fact that the trial court bought it suggests the latter.

In Associated Dermatology, the Montana Supreme Court addressed coverage for damages arising out of a fire. Robert Fitte ran a construction business out of his home. His property contained pine trees that had been killed by beetles. Concerned about potential damage that could occur to his work vehicles, ladders, and scaffolding if a tree fell, he decided to cut down two beetle-killed pine trees on his property. He cut down the tress without incident. So far so good.

Fitte cut the trunks into eight-foot logs and stacked them on his property. Pursuant to a burn permit he started a fire to burn the branches from the trees so that they would not take up space on his property.

You can see where this is going. “Two days later, a fire rose from the ashes of Fitte’s burn and erupted into a wildfire that became known as the Corral Fire. . . . The Corral Fire burned over 1,800 acres owned by approximately 35 landowners, including [Stephen] Behlmer’s 224-acre parcel, and consumed four dwellings, timber, and other personal property.” [Jeez Louise.] Fitte conceded negligence.

Fitte was insured under three policies issued by Mountain West: $300,000 homeowners policy; $1,000,000 commercial general liability policy; and $500,000 commercial automobile policy. Mountain West acknowledged coverage under the homeowner’s policy and another court concluded that no coverage was owed under the CGL policy.

Fitte and Behlmer entered into a stipulated judgment and covenant not to execute and Fitte assigned to Behlmer Fitte’s rights under the commercial auto policy. Auto policy? Huh? Wait, you’ll see.

Behlmer filed suit against Mountain West. The auto policy insuring agreement provided: “ We [Mountain West] will pay all sums an ‘insured’ legally must pay as damages because of ‘bodily
injury’ or ‘property damage’ to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of a covered ‘auto.’”

The trial court found in favor of Behlmer: “By removing and disposing trees to prevent damage to his vehicles, Fitte caused the Corral Fire. Thus, [Behlmer’s] property damage flowed from, grew out of, or originated from Fitte maintaining his insured vehicle.” (emphasis added).

An appeal was taken to the Montana Supreme Court. Writing for a unanimous court, Justice Jim Rice [I had his 1975 rookie card; Actually, I still have it] turned to whether the damage resulted from the “maintenance” of Fitte’s covered vehicles. Mountain West argued that “preventing harm to a vehicle by cutting down trees is not ‘maintenance’ of a vehicle, but, rather, ‘maintenance’ consists of ‘repairing or working on an intrinsic part’ of a vehicle.” Behlmer argued that the trial court got it right.

The court held that Fitte’s act of cutting down the trees was not maintenance of the autos: “Intrinsic within the definition of ‘maintenance’ . . . [is] that the acts of ‘preservation’ or ‘repair’ or ‘support’ or ‘sustaining’ or ‘continuing’ would occur on the item being maintained. ‘Maintenance’ as constituting work on the actual object is a meaning commonly understood by other courts. ‘Maintenance’ includes ‘the act of repairing the covered automobile.’ . . . In an automobile insurance contract, New York defined ‘maintenance’ as ‘performance of work on an intrinsic part of the mechanism of the car and its overall function.’” (emphasis in original).

However, the court also noted that, after all this discussion, the maintenance question was actually a non-issue: “Even if we were to assume, for sake of argument, that cutting down trees constituted maintenance of a vehicle, the policy would not extend coverage for the damages here. Placing the word ‘maintenance’ back within the provision at issue requires that the damage ‘result from’ the maintenance of the covered vehicles. Fitte’s decision to dispose of the branches by burning them and his action of starting the fire occurred after the trees had been cut down. As Fitte admitted in his deposition, the perceived risk to his vehicles was eliminated when he felled the trees. Fitte could have disposed of the trees in any number of ways, demonstrating that his decision to burn the branches was not an inherent part of vehicle maintenance.”

Ridiculous or genius?

Vol. 6, Iss. 3
March 22, 2017

Court Addresses Coverage For An Airbnb Claim

There has been a lot of talk about coverage issues that may arise concerning the so-called sharing economy. And unlike some emerging issues, where coverage lawyers get in a tizzy discussing things are unlikely to actually materialize into more than a negligible number of claims, coverage for the sharing economy is a source of legitimate discussion. Think Uber. A lot of bad things can happen riding in a car, not to mention a stranger’s. There’s Uber’s coverage. The driver’s. The passenger’s. It can get messy.

The number of coverage decisions, addressing the sharing economy, have been minimal. One came along last month in Carroll v. American Empire Surplus Lines Insurance Company, No. 16-2589 (E.D. La. Feb. 10, 2017). Unfortunately it involved a procedural issue and not coverage per se. But the procedural issue may itself be a coverage issue – just one that is unique to the sharing economy.

Carroll is a brief but complex case. Bear with me. There are a lot of parties that need to be kept straight.

Justin Carroll and his wife Keren Rosenblum (the “Carroll Plaintiffs”) rented an apartment in New Orleans from Mark Hamilton and Lynn Schwarzhoff through the website Airbnb. The stairs to the apartment collapsed as the Carroll Plaintiffs were using them, causing them to fall approximately 10 feet. Andrew Collard was also injured in the same incident. American Empire was the general liability insurer of Schwarzhoff and Hamilton.

The Carroll Plaintiffs filed suit for damages, as well as, in a separate (now consolidated) action, did Andrew Collard. All plaintiffs named as defendants Hamilton, Schwarzhoff and their general liability insurer, American Empire. [It’s Louisiana – a direct action state.] The Carroll Plaintiffs also included Airbnb and its insurer, United Specialty, as defendants.

Then, “Schwarzhoff, Hamilton, and their insurer American Empire have filed a third party complaint against United Specialty and Airbnb. They allege that Airbnb agreed to provide ‘primary, non-contributory insurance coverage for accidents that occur at an insured location.’ They aver that this coverage was underwritten by United Specialty. Accordingly, they allege that United owes them defense and indemnity for this suit as covered ‘hosts’ under this policy. In the alternative, if such coverage is not provided, they bring a claim against Airbnb for breach of contract or negligence as a result of its failure to provide insurance coverage.”

Here’s where it gets tricky.

Airbnb sought “to compel arbitration of the claims asserted by Schwarzhoff, Hamilton, and American Empire in the Third-Party Complaint. Airbnb alleges that Schwarzhoff, in creating an account on Airbnb’s website, agreed to its Terms of Service. These terms include an arbitration provision.” Even though Hamilton and American Empire were not parties to an arbitration agreement, they did not oppose the Motion. So the third-party claim by the hosts and their insurer, against Airbnb, for breach of contract or negligence as a result of its failure to provide insurance coverage, is in arbitration.

And still more tricky: “United Specialty argues that if the third party claims asserted against Airbnb are sent to arbitration, the third-party claims against it should likewise be sent to arbitration. United Specialty cannot, however, point to any arbitration agreement between it and the Third-Party Plaintiffs. Indeed, the Third-Party Plaintiffs’ claims against United Specialty are based on the fact that ‘hosts’ are named insureds in its policy. Third-Party Plaintiffs allege that they are therefore owed coverage, defense, and indemnity relative to the claims asserted against them by Plaintiffs. Importantly, this liability is not premised on any liability of Airbnb, but rather the Third-Party Plaintiffs' alleged status as insureds under United Specialty's policy.” Arbitration was denied.

So, to sum it up, the hosts and their liability insurer now have claims, in Louisiana Federal Court, seeking a defense from Airbnb’s insurer -- on a primary and contributory basis. However, if that’s not provided, the hosts and their liability insurer have claims against Airbnb, in arbitration, for breach of contract or negligence as a result of its failure to provide insurance coverage.

The case is a little complex because of the various parties. But it demonstrates a couple of issues that can arise in a sharing economy claim – disputes between the hosts’ own policy and the policy issued to the organization that facilitated the sharing arrangement and the impact of an arbitration clause (not surprising) in the agreement between such organization and its host-member.

Vol. 6, Iss. 3
March 22, 2017

Coverage Counsel Sanctioned In Failure To Cooperate Case

I don’t keep track of how often coverage lawyers get sanctioned for litigation conduct. I suspect not too often. And when it does happen it probably involves a discovery issue or some heated battle that went too far. So I mention American Access Casualty Company v. Alcauter, No. 1-16-0775 (Ill. Ct. App. Feb. 9, 2017) here because it involves a coverage lawyer being sanctioned for conduct that went directly to a coverage issue.

There is a lot of who knew what and when in the case. That court needed to get bogged down in all of that, but I’ll focus on the big picture.

Kimberly Krebs and Jose Alcauter were involved in an automobile accident. Krebs filed an arbitration action against Alcauter. American Access Casualty Company was Alcauter’s insurer. Alcauter did not appear at the arbitration hearing and Krebs was awarded $10,000. AACC filed an action seeking a declaratory judgment that it was not required to provide coverage to Alcauter on the basis that he “willfully failed to cooperate with an arbitration hearing pursuant to the policy’s cooperation clause.” However, “at trial on AACC’s declaratory-judgment action, it was revealed that, at the time of the arbitration hearing, Alcauter was in jail for an unrelated offense. Consequently, Alcauter could not possibly have willfully failed to cooperate with the arbitration.” Krebs filed a motion for sanctions against AACC and its coverage counsel arguing that “she had informed [coverage counsel] of Alcauter’s arrest and detention prior to trial and that AACC proceeded to trial anyway. The trial court granted Krebs’s request for sanctions.” [$12,678 in attorney’s fees and $865 in costs].

AACC appealed, arguing that [coverage counsel] “reasonably relied on the representations of counsel assigned to represent Alcauter at the arbitration that Alcauter had been contacted about the arbitration.” The Illinois appeals court affirmed the imposition of sanctions: “The record shows that, well before the scheduled trial date, [coverage counsel] was informed of the possibility that Alcauter had been incarcerated. Yet [coverage counsel] did no serious investigation of that possibility and failed to forthrightly bring Alcauter’s arrest to the attention of the trial court. Instead, AACC and [coverage counsel] elected to proceed to trial, knowing that its declaratory-judgment claim lacked factual support.”

Here is a little more detail, as explained by the court: “[Coverage counsel] failed to forthrightly bring Alcauter’s incarceration to the court’s attention when he learned of it. Krebs’s counsel sent the evidence of Alcauter’s incarceration to [coverage counsel] on April 13, 2015, as evidenced by the certified mail receipt signed by [coverage counsel]. For 29 days, [coverage counsel] did nothing. Then, instead of bringing Alcauter’s incarceration to the court’s attention—or at the very least, asking for more time to investigate the possibility that Alcauter had been in jail—[coverage counsel] filed a witness and exhibit list in anticipation of going to trial. [Coverage counsel] then proceeded to put Krebs through the process of a bench trial on May 20, 2015, all the while knowing that he had no factual basis to support AACC’s position. The trial court did not act unreasonably in concluding that counsel violated Rule 137 by failing to bring Alcauter’s incarceration to its attention and subjecting Krebs and the trial court to the time and expense of proceeding to trial.

AACC claims that [coverage counsel] did not have sufficient time to investigate the possibility that Alcauter had been in police custody before the case went to trial. We reject the notion that, in the six weeks that [coverage counsel] knew of the possibility that Alcauter was incarcerated, he could not have found out that Alcauter was incarcerated. [Coverage counsel] could have easily checked the IDOC [Illinois Department of Corrections] website, as Krebs’s counsel did, or obtained any number of public documents chronicling Alcauter’s arrest, conviction, and subsequent incarceration. But [coverage counsel] did not do that. While the criminal case listed Alcauter’s name as ‘Jose Alcauter-Cruz,’ [coverage counsel] made little effort to ascertain whether Alcauter had, in fact, been incarcerated. Critically, [coverage counsel] did not even request to continue the trial so that he could investigate the information that Krebs’s counsel sent him. Instead, he went to trial as if nothing had happened. Newman’s conduct represents the kind of vexatious and unreasonable behavior that Rule 137 is aimed to punish.”

All this over a $10,000 verdict.

Vol. 6, Iss. 3
March 22, 2017

Incredibly Tragic Case – Incredibly Unique Issue

One of the occupational hazards of doing coverage work, and reading coverage decisions, is being confronted with tragic situations. It’s the nature of the beast since, by definition, insurance comes into play when things go wrong. And sometimes horrifically wrong. That’s what happened in Trustgard, Ins. Co. v. Old National Wealth Management, No. 15-258 (S.D. Ind. Feb. 24, 2017). While the case is very sad, I mention it here because one of the coverage issues is very unique. In fact, I can’t imagine that the issue has ever come up before -- or ever will again.

The Old National court addressed coverage under the following circumstances. George Samson shot and killed Kelly Ann Ecker in front of her son L.O.E. Mr. Samson then killed himself. Incredibly, Ms. Ecker and Mr. Samson had participated in a wedding ceremony the day before. It was held at Mr. Samson’s home, where the shooting took place.

Suits were brought against Mr. Samson’s estate. Mr. Samson’s homeowner’s insurer, Trustgard, filed an action seeking a declaratory judgment that it owed no coverage for claims arising out of the death of Ms. Ecker or injuries sustained by L.O.E.

The court addresses several issues, including the potential applicability of the “Resident Relative Exclusion,” which provides as follows:

Bodily injury to:
a. you;
b. your relatives residing in your household; and
c. any other person under the age of 21 residing in your household who is in your care or the care of a resident relative.

Trustgard argued that the Resident Relative Exclusion applied because “Mr. Samson and Ms. Ecker were married right before Mr. Samson killed Ms. Ecker and that L.O.E., who was under 21 years old at the time, lived in the residence with his mother at the time of her death.”

However, while Mr. Samson and Ms. Ecker had a marriage ceremony the day before the shooting, whether they were, in fact, married, wasn’t so simple, as demonstrated by the court’s denial of the insurer’s motion for summary judgment: “Defendants have presented facts that call into question whether Mr. Samson and Ms. Ecker were legally married. First, there is no record at Vigo Superior Court of the marriage license and marriage certificate ever being filed. The only procedural mechanism under Indiana law to recognize a marriage if the individual who solemnized the marriage does not file the marriage license and certificates is if either party files a declaratory judgment with the court in order to recognize their marriage. See Ind. Code 31-11-4-17. This would not be possible, given that Mr. Samson and Ms. Ecker are deceased. Ms. Schafer also testified that Ms. Ecker never intended to go through with the marriage and that she went through with the wedding ceremony under duress.” [On the duress issue, there is a lot of discussion in the opinion about the tumultuous relation between Mr. Samson and Ms. Ecker, Mr. Samson’s alleged abuse of Ms. Eckert and whether Ms. Ecker went through with the wedding ceremony because she was afraid not to.]

As I said, this coverage issue – whether a marriage exists, following a wedding ceremony, for purposes of a Resident Relative exclusion -- is probably once in a lifetime.

[The court did hold that exclusions for intentional acts, expected or intended and criminal acts applied.]

Vol. 6, Iss. 3
March 22, 2017

Court Calls Policy Ambiguous – But Insurer Still In The Game

When a court declares an insurance policy provision ambiguous it is often said that it’s game over for the insurer. Cue the noise of Pac-Man being touched by Blinky, Pinky, Inky or Clyde. But that need not be the case. While, obviously, it’s not a good thing for an insurer to have a policy provision be found ambiguous, sometimes an insurer still has a page left in its playbook. Namely, an ability to use extrinsic evidence to demonstrate that the provision is not ambiguous.

This was the situation in American Commercial Lines v. Water Quality Insurance Syndicate, No. 16-91 (2nd Cir. Feb. 10, 2017). The District Court concluded that a provision in an insurer’s policy was ambiguous, costing the insurer over $3 million. But the Second Circuit remanded the case to the District Court, to determine ambiguity, now in the context of the consideration of extrinsic evidence.

A barge owned by American Commercial Lines spilled 300,000 gallons of oil into the Mississippi River. ACL’s primary insurer was Water Quality Insurance Syndicate. At issue was the extent of WQIS’s liability. To understand the decision requires examining the specifics of two parts of the policy.

Coverage A provided $5 million of coverage per vessel for liability associated with the discharge of oil.

Coverage C provided coverage for “[c]osts and expenses incurred by [ACL] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A . . . .” The Policy also provided: “The amounts payable for costs and expenses incurred by [ACL] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A . . . shall be in addition to the limits of liability stated in ARTICLE A(1) of PART II [$5 million per vessel].

Basically, the policy says that it pays $5,000,000, per vessel, for an oil spill, plus supplemental defense costs.

The parties agreed that WQIS’s liabilities under Coverage A reached the $5 million limit on a date certain. But here’s the rub.

ACL sought coverage for at least $2 million in defense costs incurred and that would continue to be incurred after the $5 million limit was reached. The District Court found in favor of ACL, awarding it over 3.5 million in defense costs.

How can this be you say? Supplemental – on top of limits – defense costs is one thing. But defense costs being required to be paid after the policy limit has been exhausted? No. That’s not how it works. The insurer appealed to the Second Circuit.

The appeals court concluded that the policy was ambiguous as it had more than one possible meaning: “While Coverage A and Coverage C could be read, as the district court concluded, as operating independently of each other, a reasonably intelligent person who has considered the context of the Policy as a whole and who is cognizant of the customs and practices of the trade could conclude that WIQS’s liability under Coverage C ceased once the Coverage A limit was reached.”

However, instead of game over, the court threw the insurer a lifeline, allowing for the consideration of extrinsic evidence to support the insurer’s argument that the parties could not have intended that the insurer’s obligation to pay defense costs continued after the limit of liability was exhausted.

The appeals court remanded the case to the District Court, to assess extrinsic evidence, as well as any further evidence adduced through discovery and give effect to the intent of the parties. And, interestingly, the court noted that the insurer had extrinsic evidence on its side: “[T]o the extent extrinsic evidence is relevant – and we think it is -- the record contains extrinsic evidence to support WQIS’s assertion that the parties could not have intended that its obligation to pay for defense costs under Coverage C continued after it exhausted the limits under Coverage A. For example, WQIS submitted two affidavits by its Vice President of Claims declaring that, after WQIS exhausted its $5 million of liability under the Policy, (1) its employees withdrew from the oil spill response and cleanup efforts; (2) plaintiffs separately hired WQIS’s spill response team, with WQIS’s permission, to continue managing the oil spill response and cleanup efforts; (3) the excess insurers fully reimbursed ACL for all incurred defense costs; (4) ACL did not request or receive WQIS’s consent prior to incurring the defense costs; and (5) ACL did not submit a claim for defense costs to WQIS until after filing this action. The record also includes an affidavit from the representative of an excess insurer stating that WQIS ceased its active participation in ACL’s claims after reaching $5 million of liability under the Policy. The parties’ actions after the $5 million limit was reached provide some evidence of their intent and the customs and practices of the industry.”

Vol. 6, Iss. 3
March 22, 2017

For Those Of You Who Follow Kvaerner In Pennsylvania
Pennsylvania’s available coverage for construction defects is, to say the last, narrow. Pennsylvania courts hold that faulty workmanship is not an “occurrence.” That, in itself, is not uncommon. Many states say the same thing. But then Pennsylvania courts go a step further, holding in the well-known Gambone case that the natural and foreseeable acts of faulty workmanship “also cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’ for the purposes of an occurrence based CGL policy.” That is unique. These decisions have resulted in an absence of coverage for many construction defect suits – often times involving water damage and intrusion that is a consequence of faulty construction.

In State Farm Fire & Cas. Co. v. Jumper, No. 15-02389 (M.D. Pa. Mar. 3, 2017) a Pennsylvania federal court applied Pennsylvania’s construction defect rules to a less common situation: “In essence, the Underlying Action alleges that Weidner hired Defendant to repair the circuit breakers at Weidner's home, Defendant ‘improperly’ repaired the electrical system, and Defendant caused damage to Weidner’s home. The Underlying Action alleges nothing fortuitous about the fire originating in the electrical wiring or the resulting damage to the home.”

Oregon: Pollution Exclusion Applies To Carbon Monoxide
An Oregon federal court held that a pollution exclusion precluded coverage for bodily injury caused by exposure to carbon monoxide from a natural gas swimming pool heater. Colony Ins. Co. v. Victory Constr. LLC, 16-00457 (D. Ore. Mar. 9, 2017): “This Court does not even get to the point of considering the exclusion’s drafting history, multiple reasonable interpretations of the policy, or the policyholder’s reasonable expectations, because the plain meaning of the words ‘irritant’ and ‘contaminant’ resolve the case. This Court must follow the interpretative framework set out by the Oregon Supreme Court.”

New York Court Allows Reimbursement of Defense Costs (Slight Twist)
There are a bunch of New York federal decisions that have permitted an insurer to recover attorney’s fees for an insured’s defense, following a determination that no defense was owed, provided that the insurer reserved such right. So the fact that the court in United Specialty Ins. Co. v. CDC Housing, No. 16-406 (S.D.N.Y. Feb. 9, 2017) said just that is not a stop the presses moment. However, as a small aside, the insured argued that the insurer was not entitled to reimbursement because it reserved its rights to get back “costs,” and did not specifically say “attorney’s fees.” The court rejected the argument. But it’s a good thing to keep in mind. If an insurer is reserving the right to seek reimbursement of attorney’s fees, it should say just that. After all, “costs” does have a specific legal meaning. So why open up the door to an argument that the reservation of rights was meant to apply to something other than the fees incurred by defense counsel.