Texting while driving is outrageously dangerously. And even more foolhardy when you consider the unimportant subject matter that people are risking life and limb to communicate. Even people who can agree on nothing, such as political foes or acrimonious opposing lawyers who could disagree on what day of the week it is, would surely at least find common ground on the texting while driving issue. While the statistics vary on the extent that texting while driving plays in motor vehicle accidents, they have one thing in common. It’s staggering.

A Vermont trial court’s recent decision is as unusual of a texting while driving coverage case as you’ll ever see. Richard Downey and Carl Pressman were both texting when Pressman rear-ended Downey. But here’s the even crazier part, they were texting each other. And they weren’t sending smiley face emojis.

Downey and Pressman had arrived at a four-way intersection in Burlington, Vermont at almost the exact time. Downey believed he got there first and made a left hand turn. However, Pressman was of the opinion that he had, and was outraged when Downey made the turn before Pressman could proceed straight. Pressman now turned and began to follow Downey.

Downey and Pressman actually knew each other. Their five year old sons had just been on the same t-ball team – the Polar Bears. And there had been bad blood between the fathers. Pressman believed that Downey’s son, Justin, cost the Polar Bears the league championship. The bases were loaded with one out in the bottom of the last inning with the Polar Bears holding a one run lead. An easy ground ball was hit to Justin at second base. But he had been opening a bag of M&Ms at the time and the ball went through his legs. He missed an easy double play opportunity and two runs scored. Squirrels 9. Polar Bears 8. Both teams got a trophy and ice cream. But only the Squirrels were allowed to get jimmies.

As Pressman proceeded to follow Downey’s vehicle he sent him a text – “Nice move back at that stop sign. You pay as much attention to driving as your kid does at second base.” Downey responded: “You are insane. It was t-ball. They are five years old.” Pressman back to Downey: “Make sure your kid knows in which direction to run on the football field this season.” Downey’s response: “You need help man.” And back and forth it went -- Pressman insulting Downey’s five year old son and Downey telling Pressman that he was pathetic.

After ten minutes of texting, with Pressman still following Downey, Downey stopped at a red light. Pressman, with his attention focused on his phone, plowed into the rear of Downey’s car. Downey was seriously injured. Needless to say, he couldn’t file suit fast enough.

Downey settled with Pressman’s insurer, Maple Syrup Mutual, for policy limits of $100,000. However, this was not adequate for the injuries sustained and Downey did not have a UIM policy. So Downey took an assignment of Pressman’s rights under Pressman’s homeowner’s policy with Maple Syrup Mutual. Needless to say, Maple Syrup denied liability coverage on the basis of the homeowner’s policy’s “Motor Vehicle” exclusion.

But here’s where it got interesting. Downey argued that coverage was not excluded because his injuries were not “arising out of” Pressman’s use of a motor vehicle, as stated in the exclusion, but, rather, Pressman being distracted by texting at the time of the accident.

And the court in Downey v. Maple Syrup Mutual, No. 16-823 (Vt. Super. Ct., Chittenden, April 28, 2017) agreed with Downey’s argument. And the court didn’t seem to think it was even a close call. The court relied on the Vermont’s doctrine of concurrent causation: “Under that doctrine, if the liability of an insured arises from concurrent but separate nonvehicle-related and vehicle-related negligent acts, and the nonvehicle-related act is an included risk under the insured’s homeowner’s policy, coverage exists even though the policy contains an automobile exclusion. In other words, if an occurrence is caused by a risk included within the policy, coverage may not be denied merely because a separate excluded risk was an additional cause of the accident.”

As the Downey court saw it, the texting, even foolishly and inappropriately – and this “takes the cake,” the court added -- was an occurrence (accident) under the Maple Syrup policy. Thus, because a “nonvehicle-related act was an included risk under [Downey’s] homeowner’s policy, coverage exist[ed] even though the policy contain[ed] an automobile exclusion.”

Maple Syrup Mutual is a sticky decision for homeowner’s insurers as texting plays a greater role in automobile accidents.

You’ve seen those stories about insurance policies covering celebrities’ one-of-a-kind traits. The one that seems to get mentioned most-often is a policy supposedly covering Liberace’s hands. A Google search reveals that insurance policies have also supposedly been taken out on Tom Jones’s chest hair and Michael Flatley’s legs. These seem like policies half-designed for a real purpose (akin to disability) and the other half just to generate media attention – which they seem to do.

A recent Reuters story reported that these days some insurers in China are also issuing policies covering unusual risks. But unlike policies that focus on celebrities’ unique qualities, China’s gimmicky policies cover risks confronted by average folks. According to the Reuters story, insurance is (or was) available for such things as your bride becoming pregnant before the honeymoon, your team being knocked out of the World Cup, burning your tongue eating hotpot (cooking raw meat and vegetables in a boiling pot of soup at the center of a table) and naughty child insurance to protect against your child throwing a tantrum and smashing something.

The article reported that the policies are motivated by stalled premium growth and seen as a way to engage with new customers. However, some of the policies do not sit well with Chinese insurance regulators, who see them as more akin to the Chinese love for gambling.

I got to thinking. If Chinese insurers can provide financial protection for burning your tongue eating hotpot, then imagine the opportunities that exist for U.S. insurers taking a similar tack with everyday gastronomic hazards:

• Your Nana pleads with you: “Eat, eat, you’re skin and bones.” You then get sick after your fifth bagel with lox.

• The pop-up thing in the turkey malfunctions and your Thanksgiving bird is as dry as a Steven Wright bit.

• You buy chicken stir fry at the Whole Foods prepared foods counter but don’t notice the sign that it’s tofu faux-chicken.

• A little too much wasabi sticks to a California roll and you stop breathing.

• You eat too much of your 8 year-old daughter’s Halloween candy and she sues you for conversion (or worse, tells mommy).

• A Slurpee brain-freeze causes the loss of 10 IQ points.

• You make a big losing investment in the stock market because a fortune cookie said that you’ll soon have great wealth.

• You die from eating Pop Rocks.

• You are attacked by PETA protestors after eating animal crackers.

Paul Rosner And Steve Soha: Is Washington Really As Bad For Insurers As Everyone Says?

I have long heard people say that such and such state is “bad for insurers.” I have never bought into the idea that an individual state can be labeled in that way. There are just too many issues, and too many decisions, for such a sweeping generalization about a state to be accurate. If you name a state that is supposedly bad for insurers, I am sure that I can find lots of cases that insurers have won. California is sometimes referred to as bad for insurers. But I can think of a couple of issues where California is extremely favorable for insurers and, in fact, instances where insurers wish that that they were in California.

But when it comes to people proclaiming that such and such state is “bad for insurers,” Washington is usually most frequently cited. In fact, it is cited so often for this proposition that I have often wondered whether it’s the one exception to this not-a-rule.

“This milestone is important to the Philadelphia region, as it underscores the caliber of our businesses and output from our area. It also serves as recognition of INA’s positive influence on the community, and across the nation, and even stretching into the international marketplace,” said Councilman Mark Squilla, District One, Philadelphia, during the dedication ceremony.

INA has operated in the Philadelphia area uninterrupted since 1792, and served as a cornerstone of Philadelphia's "Insurance Row" (Walnut Street between 2nd and 6th Streets), which was once the acknowledged center of the U.S. insurance industry. INA has been a subsidiary of Chubb (formerly ACE Group) since 1999.

INA has a storied history in the North American insurance industry; some firsts include introducing:

• the first stock insurance organization in the United States;
• the first fire insurance company to insure contents of a building from fire; and,
• the first insurance company to appoint a network of agents to represent it on the U.S. frontier.

“Today is a very special milestone for our company, and we’re proud of our company’s heritage and legacy here in Philadelphia,” said Robert Poliseno, Mid-Atlantic Regional Executive Officer, Chubb. “Additionally, Philadelphia continues to be a vibrant insurance marketplace and an important hub for our North American operations. As a global insurer, we operate locally to serve our distribution partners and customers.”

According to the PHMC's nominating criteria, INA “had a significant impact on its times, and has statewide and/or national historical significance.” After its dedication, the marker will be owned and maintained by the PHMC.

“Each PHMC marker establishes an important link to the past. I hope that this marker provides encouragement for further study and discussion as we celebrate the important role INA played in establishing the insurance industry when the United States of America was still in its infancy. Additionally, the marker recognizes INA’s numerous marketplace innovations over its long history,” said Nancy Moses, PHMC Chair.

City Representative Sheila Hess also delivered a Mayoral Citation on behalf of Mayor Jim Kenney.

The ceremony coincided with the 2017 Risk Management Society (RIMS) annual conference, the insurance industry's premier gathering to discuss influential themes and trends affecting the industry. The RIMS conference was held at the Philadelphia Convention Center.

SOURCE Chubb

The American Law Institute’s Restatement of the Law, Liability Insurance has been an on-going project of the Institute for seven years. With the approval of the ALI membership, at its annual meeting, it will be complete at the end of May.

While the Restatement was relatively unknown in the early years, that hasn’t been the case for the past several. To the contrary, the ALI’s Insurance Restatement has been the most talked-about, and controversial, topic in liability coverage circles – being the subject of countless articles, as well as being discussed and debated at numerous insurance conferences. The ALI Insurance Restatement has been the Kardashians of insurance coverage.

So it seems curious that on April 5, 2017, Dean Cameron, Director of the Idaho Department of Insurance, sent a letter to the ALI, stating that his office has just learned about the Restatement for the first time.

Director Cameron stated that “not only are the proposed revisions and rules of concern to the insurance industry and policyholders, they may also be of concern to regulators. The proposed changes could significantly alter the course of doing business ergo, its regulation. The Idaho Department of Insurance respectfully requests that the finalization of the Restatement, Liability Insurance project be delayed to a date later than May 2017, allowing state regulators the opportunity to weigh in on important issues raised by the proposed Restatement.”

I would agree with Director Cameron that there is a place at the table for the views of state insurance regulators when it comes to a discussion of the issues in the Restatement of Liability Insurance. But how is it that the Idaho Department of Insurance is only now hearing about a project of this magnitude that has been in the oven for seven years?

Stephanie Middlemen, Deputy Director of the ALI, told me that, as far as she knows, Director Cameron is the first state insurance regular to contact the ALI about the project. So, in fact, it turns out that Idaho may be more informed about the Restatement than lots of other state Insurance departments. Admittedly, some state insurance departments may have been aware of the Restatement and just never provided comments.

Ms. Middleton responded to Director Cameron’s letter with her own on April 18. She indicated that the ALI would be grateful to know which sections of the Restatement are of most concern to him. She also indicated that ALI would like to hear from other state regulators. Ms. Middleton requested a response by May 7th, so that any specific concerns could be considered at the ALI’s Annual Meeting on May 22-24. As of May 12th the ALI had not received a response from Director Cameron’s office.

As this article was going to press I learned that the National Conference of Insurance Legislators sent a May 5th letter to the ALI, stating that it too just recently learned of the Restatement, setting out some specific concerns and asking that the upcoming vote to approve it be deferred.

On the subject of regulatory considerations and the Restatement, this was recently addressed in a paper by Debevoise and Plimpton lawyers Eric Dinallo and Keith Slattery. Mr. Dinallo was New York State Superintendent of Insurance from 2007 to 2009. Mr. Slattery held senior positions with AIG from 1998 to 2007. The authors acknowledge that financial support for their paper was provided by the National Association of Mutual Insurance Companies.

Dinallo and Slattery argue that, “[i]f adopted by courts, the draft Restatement could create market disruption in the form of an uncertain and unpredictable pricing and reserving environment, increased claim handling costs and litigation, inflated settlements, increased premiums, and the potential for market exits by insurers and reinsurers, as well as carrier insolvencies.” “The Draft,” they maintain, “changes longstanding and fundamental precepts in key areas that form the foundation for policy coverages, rates, reserving, claim handling and reinsurance, while insurers are recast as quasigovernmental financial guarantors under the Draft’s proposed rules which are designed to force insurers to defend and pay for all claims. Absent corrections, adoption of the Draft may result in the cost of insurance becoming more unaffordable to many, leaving people and companies uninsured or underinsured.”

Restatement Reporters Tom Baker and Kyle Logue responded to the Dinallo and Slattery paper with one of their own that explains that the sky is not falling. Professors Baker and Logue maintain that the assertions by Dinallo and Slattery are “false, unsupported by any proffered evidence, or confused and misleading. Every rule of insurance law adopted in the Restatement is grounded in existing case law; most of the rules have been adopted in most jurisdictions; and all the rules, as well as all the commentary supporting those rules, are the product of the famously thorough ALI Restatement process, which includes many opportunities for experts in the field to review, comment on, and suggest revisions to drafts. Moreover, none of the rules adopted in the Restatement encroach or usurp the role of state insurance regulators. To the contrary, as demonstrated by the fact that all the rules the Restatement adopts are already in effect in multiple jurisdictions, those rules are compatible with, and complementary to, the regulatory role of state offices of insurance regulation. Further, D&S do not offer any evidence in support of their claim regarding adverse effects on the insurance market. All they offer is their own opinions, which are grounded in the mischaracterizations and confused analysis that we describe.”

Discussing these competing regulatory issues further is well beyond the scope here. It’s something I hope to do in a subsequent issue of CO.

There has been much talk lately about reservation of rights letters being ineffective because they do not 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.

For a recent and stark example of this, see Harleysville Group Insurance v. Heritage Group Communities, No. 27698 (S.C. Jan. 11, 2017): “These [reservation of rights] 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.”

But there is another important reservation of rights issue that should not be overlooked…

You’ve just written the greatest reservation of rights letter in history. You’re singing Eye of the Tiger in your head as you drop it in the mail. But there’s one problem - it didn’t address coverage for all of the insureds that are defendants in the action. For example, consider a complaint that names several insureds as defendants, such as a named insured company and several of its employees. Here an insurer could overlook the employee-insureds, and send a reservation of rights letter to only the named insured company, and limit the discussion of coverage to the named insured. There are many other examples of scenarios where a reservation of rights letter can be sent to an entity-insured, but not related individuals who are also insured-defendants.

The Pennsylvania Superior Court’s decision in Erie Insurance Exchange v. Lobenthal, 114 A.3d 832 (Pa. Super. Ct. 2015) demonstrates the situation of not sending an ROR to all insureds and the consequences for the insurer were harsh. A letter that was a reservation of rights letter was now not a reservation of rights letter.

Lobenthal involved coverage for a motor vehicle accident. I’m going to skip some of the details and focus on the overarching lesson from the case. Kory Boyd suffered injuries in a motor vehicle accident while a passenger in a car driven by Devin Miller. An underlying complaint alleged, among other things, that Michaela Lobenthal engaged in “negligent, careless, reckless, outrageous, willful and wanton conduct” and concerted tortuous conduct in that she permitted the possession and consumption of controlled substances by Defendant Miller at a property owned by Defendant Lobenthal’s parents which was covered by [the Erie] insurance policy.”

Putting aside some details, Erie defended Michaela Lobenthal -- being an insured as a resident of her parents’ household. But there was a coverage issue – the potential applicability of a “controlled substances” exclusion. Despite Erie sending two reservation of rights letters, the issue before the Pennsylvania appeals court was whether Michaela Lobenthal was being defended under a reservation of rights.

Here is how that issue could be: “In the instant case, Erie sent two reservation of rights letters, one on April 28, 2011, prior to the underlying complaint being filed, and another on February 7, 2012. Both letters were addressed only to the named insureds, Michaela’s parents, Adam and Jacqueline Lobenthal; neither letter mentioned the defendant in the underlying tort action, Michaela Lobenthal, who had attained majority status as of November 20, 2010. These letters reserved Erie’s right to disclaim coverage and liability for any judgment ‘that may be rendered against yourself,’ i.e., against Adam and Jacqueline Lobenthal. Furthermore, only the second reservation of rights letter, sent approximately three and one-half months after the preliminary objections were decided, referenced the controlled substances exclusion in the policy.” [Preliminary objections resulted in the covered claims, providing alcohol, being dismissed.]

The opinion notes that Michaela’s parents were voluntarily dismissed from the underlying action in June 2011, i.e., they were not defendants when the second reservation of rights letter – at the time that the case was in suit -- was sent.

The court had little trouble concluding that, despite the February 7, 2012 reservation of rights letter being addressed to the named insureds, Michaela’s parents, as well as being sent to her defense counsel, Michaela was not being defended under a reservation of rights.

The court’s decision was as follows: “Erie’s reservation of rights letter was addressed solely to the named insureds, Adam and Jacqueline Lobenthal, not to Michaela. The letter made no mention of Michaela. As in [citation omitted], we will not impute notice to Michaela based on the fact the letter was sent to counsel where the letter was addressed to her parents and made no reference whatsoever to Michaela. By the same token, we refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time. Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter. Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”

Thus, despite that Erie should have owed no coverage to Michaela, on account of the controlled substances exclusion – the court made that point clear – such was not to be the case, as no reservation of rights letter was ever sent to her.

There is much that can be said about this opinion.

Since Michaela’s parents were not defendants when the second reservation of rights letter was sent, a letter addressed to them, stating that Erie was reserving its right to disclaim coverage and liability for any judgment “that may be rendered against yourself,” i.e., against Adam and Jacqueline Lobenthal, certainly lacked precision.

But the overarching take-away from Lobenthal is that, when an insurer sends a reservation of rights letter, no matter how well-drafted it is, it must address coverage for all insureds and be sent to or on behalf of them. There are opportunities for this to be missed. If so, a lot of effort that is put into a reservation of rights letter may be for naught if some insureds are overlooked.

The duty to defend is broad. We all know that. But it’s one thing to state that principle in the abstract. And quite another to see it in action. Dove v. State Farm, No. 34,932 (N.M. Ct. App. Mar. 28, 2017) may be the best example ever of the breadth of the duty to defend.

Betsy Joyce owned a property that consisted of two rental units: a front main house and a studio unit in back that was rented by Jenny Dove. Each unit had a private yard separated by a fence and there was also a common yard in the front that contained large trees and planting beds. Joyce lived in California and utilized the services of several third parties to manage and maintain the property in her absence.

David Tapia, an employee of Public Service Company of New Mexico, was reading the electrical meter at the Joyce property. He was injured by Dove’s 150-pound Bullmastiff. At the time Tapia was injured, Dove had been in the common yard watering the plants. On a prior visit, Joyce had asked her to do this.

Tapia sued Joyce and Dove. Joyce had a rental dwelling policy with State Farm. Dove sought a defense under Joyce’s State Farm policy. Not surprisingly, State Farm denied a defense to Dove because she was not an insured under Joyce’s policy. Tapia and Dove entered into a settlement for $107,000 and Dove assigned to Tapia and of her rights under the State Farm policy – which seem like nothing. In a suit against State Farm, the court ruled that Dove, a tenant, was not an insured.

But the New Mexico Court of Appeals reversed. As the court saw it, Dove could have been an insured on the basis of being a real estate manager for Joyce. The policy conferred insured status on an insured’s real estate manager. Real estate manager? Huh? Dove was watering some plants as a favor for Joyce. She was just being a nice person -- to both Joyce and the plants. How does that make her a real estate manager?

The court was not unmindful that this seemed like a dubious proposition. However, the court pointed out that “at the time of the incident, Dove was not in her private yard—she was watering in the common yard. Dove stated that she was not watering on her own initiative—in which case she might be less characterizable as a real estate manager than as a conscientious tenant—but had been asked by Joyce to water the common area in order to ‘make sure things stayed alive.’ Considered in sum, the asserted facts suggest that Dove could very well have been acting as Joyce’s real estate manager when Tapia was injured.”

The key to the case is not whether Dove was in fact a real estate manager for Joyce. Rather, since the issue was whether a duty to defend was owed, the question to be answered was simply whether Dove was “potentially” a real estate manager for Joyce. This is the New Mexico standard for determining if an insurer is obligated to defend its insured: “an insurance company is obligated to defend when the complaint filed by the claimant alleges facts potentially within the coverage of the policy.”

Here is where the trial court got it wrong according to the appeals court: “Here, the district court addressed the underlying merits of the question of coverage—i.e., whether Dove was a ‘real estate manager’ and thus covered by the policy—rather than the less exacting question on which declaratory judgment was sought. This difference is not analytically trivial because Defendant’s duty to defend depended not on whether Dove was actually covered but rather on whether she was potentially covered.” (emphasis in original).

And the appeals court concluded that Dove was potentially Joyce’s real estate manager: “[E]ven if the complaint itself was devoid of specificity regarding facts that tend to give rise to Defendant’s duty to defend, unpleaded facts later revealed during the course of discovery—or that Defendant could have discovered through reasonable investigation, which it was required to undertake—further establish Dove’s potential coverage under the policy. Indeed, deposition testimony taken shortly after Defendant refused Dove's request for a tender of defense demonstrated the following facts: (1) Joyce lived in California and was not involved in the day-to-day management of the property; (2) Nathan, one of the people with certain real estate management responsibilities for the property, had no involvement in gardening or maintaining the landscaping at the property; (3) Joyce hired a gardener to maintain the common yard in front, including watering; (4) sometime during the summer of 2007, Joyce visited the property, observed that one of the trees in the common yard was not getting enough water, and asked Dove to water the tree and flowerbeds; (5) Dove had a private yard adjacent to her back unit, which was separated from the common yard by a fence; (6) Dove did not typically spend time in the common yard because the main house's windows faced the common yard and Dove wanted to respect the privacy of the main house's tenants; and (7) at the time Tapia was injured by Dove's Bullmastiff, Dove was watering in the common yard per Joyce’s request. These alleged or discoverable facts all tend to suggest that Dove was arguably, if not definitively, acting as Joyce’s real estate manager (even if but one of several) at the time of the incident and, therefore, covered as an ‘insured’ under the policy.”

You are probably thinking that it takes a lot more than a tenant watering some flowers to make them even potentially a “real estate manager.” And the court addressed this: “While things such as professional qualifications, prior management experience, a contract for services, one’s title or self-identified profession, and compensation may be evidence that one is a real estate manager, the absence of any or all of these indicators is not dispositive of the question of whether one is acting as a real estate manager at a given time. The policy itself does not limit construction of the term ‘real estate manager’ to only those who have a ‘legal relationship’ with a property owner, receive compensation, or are professional property managers. And if Defendant had wished to so limit the policy’s coverage by defining ‘real estate manager’ more narrowly, it could have done so. Because it did not, we construe the term against Defendant and hold that the facts tended to show that Dove was at the very least potentially acting as Joyce’s real estate manager at the time of Tapia’s injury and was therefore arguably within the policy’s coverage.”

Yep, the duty to defend is broad.

I’m not going to pile on United Airlines about its dragging a passenger off a flight last month. That horse has been beaten to death. When I first saw the video of that poor United passenger kicking and screaming I thought someone was trying to take away his copy of Coverage Opinions.

On the same day that United released its report, describing all of the reasons and shortcomings that led to the reaccomodation of Dr. David Dao, it lost an insurance coverage case. What a coincidence. Because of this, I may have addressed the case here even if it weren’t interesting. But, in fact, the case involves an important coverage issue.

In United States Aviation Underwriters v. American Home Assurance Co., No. 1-16-1630 (Ill. Ct. App. April 26, 2017) the court addressed coverage for United Airlines as an additional insured under a policy issued to Air Wisconsin. Air Wisconsin operated flights, under United’s “United Express” mark, in cities where it was uneconomic for United to operate such services.

In December 2004, a pilot, James Reiners, slipped on a ramp, and hurt his back, while exiting a United Express flight that had landed at O’Hare Airport. The flight was operated by Air Wisconsin. Reiners filed suit against United, alleging that United’s negligence caused his injuries. He alleged that United was negligent in failing to provide a safe path of travel from the airplane to the indoor area, and for lots of other reasons.

United tendered its defense to American Home Assurance Company, the insurer for Wisconsin Air, seeking coverage as an insured. AHAC denied a duty to defend or indemnify. For reasons beyond the scope here, the court explained that United qualified as an insured, under the AHAC Policy, only to the extent that the claims against United arose out of Air Wisconsin’s negligence, reckless and willful misconduct, and gross negligence. However, the court determined that the complaint did not allege any negligence, reckless or willful misconduct or gross negligence by Air Wisconsin. Therefore, United was not an insured under the AHAC Policy.

The court’s decision was based on a simple and easy to see fact: Reiners’ complaint did not name or reference Air Wisconsin in any manner. It only mentioned that, on the date of his injury, Reiners was piloting an airplane that belonged to Air Wisconsin. “Reiners’ complaint does not name or reference Air Wisconsin in any manner. Air Wisconsin is not named as a defendant, and Reiners made no allegations of direct negligence against Air Wisconsin. Rather, United was the only named defendant and Reiners alleged that only United was negligent. . . . Not even under the most liberal of constructions can these allegations be viewed as allegations of negligence, reckless and willful misconduct, or gross negligence on the part of Air Wisconsin.”

The opinion does not address this, but it seems possible that the reason why Air Wisconsin was not named in the suit is because pilot Reiners was an employee of Air Wisconsin, and, therefore, was unable to name Air Wisconsin as a defendant because of the workers compensation bar.

In the recent Third Circuit decision in Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660 (3d Cir. 2016), the court addressed an additional insured endorsement where, for a party to be an AI, the underlying plaintiff’s injuries must have been ‘caused, in whole or in part’ by the named insured’s acts or omissions. But the injured party was an employee of the named insured. So, because of the worker’s compensation bar, the injured party’s complaint said nothing about the named insured – since it was not a defendant. And this happened in a “four corners” state, where the court is precluded from considering anything but the complaint to determine duty to defend. Despite the absence of allegations in the complaint of any acts or omissions of the named insured – and a four corners mandate -- the court held that it was proper to consider the effect of the Workers’ Compensation Act. The court explained that the four corners rule did not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts.

While the court in American Home Assurance looked at the possibility of considering extrinsic evidence, to determine whether United could be liable for the actions of Air Wisconsin, it did not consider that the worker’s compensation bar may have been the reason why there were no allegations in the complaint against Air Wisconsin.

Insurers that rely on exclusions in their policies, to eliminate coverage for their insureds’ projects that are covered under wrap-up policies, have much to take away from Thompson v. National Union Fire Insurance Company, 14-259 (D. Conn. Apr. 6, 2017) (applying Georgia law). The court held that a wrap-up exclusion, contained in a commercial umbrella policy, was ambiguous, and, hence, did not apply to a $13.5 million exposure. The case is brief. But when it comes to judicial opinions – size does not matter.

Thompson involves coverage for a contractor, Bluewater Energy Systems, that was sued following a power plant explosion. Individuals and estates that were harmed by the blast obtained a judgment for $13.5 million and brought an action against Bluewater’s umbrella insurer.

The insurer maintained that no coverage was owed on account of the policy’s “wrap-up” exclusion, which provided: “This insurance does not apply to . . . any liability arising out of any project insured under a wrap-up or similar rating plan.”

The insurer’s position was that no coverage was owed because the power plant project was insured under a contractor controlled insurance program, which the insurer contended is a type of “wrap-up” program.

The plaintiffs -- those affected by the explosion -- argued what you would expect: there are lots of reasonable interpretations of the wrap-up exclusion, and, because it was drafted by the insurer, the operative language must be read strictly against the insurer and in favor of providing coverage. The court agreed that the wrap-up exclusion was ambiguous.

A couple of the plaintiffs’ arguments, that led to this finding of ambiguity, are specific to the case. Those certainly offer lessons. But one of the plaintiffs’ arguments was very general. And that one should cause insurers, that rely on wrap-up exclusions, to sit up and take notice.

As for the issues specific to the case, the plaintiffs argued that the project had only a partial contractor controlled insurance program and it did not provide coverage to all of the project’s participants and did not provide property damage or “builders risk” coverage. “If defendant wanted to exclude coverage for any project that ‘involves’ a wrap-up or is ‘in any way’ affiliated with a consolidated insurance program, it should have explicitly included such limitations and defined the term ‘wrap-up.’” Second, because the contractor controlled insurance program at issue has been exhausted, no coverage remains. Hence, the plaintiffs’ remaining claims are not “insured under” the program.

But the court’s reason for finding the wrap-up exclusion ambiguous, that should cause insurers the most concern, is this: “Plaintiffs contend that defendant has failed to show that ‘wrap-up’ has one peculiar meaning and cannot legitimately argue that ‘wrap-up’ has one, unambiguous meaning when its own policies and witnesses define the term in a number of distinct ways.”

It’s one thing not to define a term in a policy. Not every term in any insurance policy can be defined (despite what some policyholders and courts sometimes say). But if in fact an insurer’s own policies and witnesses define a term in a number of distinct ways, the court’ job -- especially when it’s reading a policy strictly against the insurer -- is being made easy.

Policyholders being defended under a reservation of rights sometimes seek for their insurer to pay for independent counsel, as opposed to taking insurer-appointed counsel. This often comes about when a complaint contains both covered and uncovered claims. You know the drill. The complaint contains a negligence cause of action and one for intentional conduct. The insured argues that insurer-appointed counsel, because he or she is getting assigned lots of cases from the insurer, or would like to, may be motivated to curry favor with the insurer and “steer” the case toward the uncovered claims. Putting aside how insulting this accusation is to defense lawyers, how could a lawyer even go about doing this? And especially without it being detected. This is a complete mystery to me. In any event, courts sometimes permit independent counsel on this basis.

An Illinois federal court recently addressed an insured’s right to independent counsel based on an argument other than so-called “steering.” The insured’s argument was that, because its potential exposure exceeded its policy limit, it was entitled to independent counsel. The court agreed. But, here are the rubs – the court acknowledged that the insured’s risk of exposure, in excess of its limits, was “slim” AND the insured was being defended without a reservation of rights.

DePasquale Steel Erectors was one of nine subcontractors, named by a general contractor, as third-party defendants in a construction defect suit. The total damages at issue were in excess of $1.7 million. DePasquale’s insurer, Gemini, undertook its defense without a reservation of rights. Depasquale demanded independent counsel, at Gemini’s expenses, on the basis that the jury demand exceeded the limits of the Gemini policy. Gemini declined. Litigation ensued.

The court explained that, under Illinois law, “a conflict necessitating independent counsel exists when the insurer’s and the insured’s interests in the conduct of the tort action are in serious conflict and the insurer and the insured are complete adversaries on a crucial issue which would necessarily be decided either one way or the other if liability was imposed.”

However, independent counsel may also be owed, the court noted, when an insurer has an interest in providing a less than vigorous defense.

It seems odd that Gemini would not provide a vigorous defense when it is on the hook for $1 million of a $1.7 million exposure. Nonetheless, the court concluded that such possibility existed. The court held as follows (despite its conclusion that “DePasquale’s odds of finding itself on the hook financially because of the $1 million ceiling on Gemini’s exposure would appear slim”): “In the underlying lawsuit Triumph makes different claims against the nine subcontractors according to their respective roles in the planning, development and construction of the warehouse. Under Illinois law any defendant whose fault is determined to be more than 25 percent of the total fault is jointly and severally liable for the total damages (735 ILCS 5/2-1117). And the input -- or more precisely, the lack of input -- from the parties leaves this Court unable to predict whether DePasquale’s share of the blame will clear that threshold, so that there is no basis to conclude as a matter of law whether or not a conflict of interest exists between the parties such as to require independent counsel.”

While the case was decided on a summary judgment standard, based on the particular facts at issue, the court added this concluding line which may go beyond the matter at hand: “Gemini [has not] offered any explanation as to how its own interests would be disserved by being represented by a well-qualified counsel who would be chosen by DePasquale (which has every incentive to select first class representation) and who would also owe fiduciary responsibility to Gemini.”

Interestingly, as an aside, California’s Cumis statue specifically provides that “[n]o conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.” Cal. Civ. Code § 2860(b).

I’ve been saying this for a while. In general, insurers have had mixed results in construction defect cases when it comes to enforcing the Montrose (known loss) endorsement. Some courts have interpreted them narrowly and applied a strict “sameness” test (my term) between the “property damage” that existed pre-policy inception date and that which took place during the policy period, for which coverage was being sought. Further, it is the “property damage” itself that must be known by the insured prior to the policy period and not the cause of the “property damage.” You could put it this way – if it looks like a mallard duck, and quacks like a mallard duck, it’s only a mallard duck and not a perching duck. [Of course, construction defect cases are not what ISO had in mind when it put pen to paper on the Montrose endorsement.]

In Alkemade v. Quanta Indemnity Co., No. 14-35605 (9th Cir. Apr. 20, 2017), the insurer failed in its effort to exclude coverage based on a Montrose Endorsement. And, as in other cases with the same result, the court reasoned that the “property damage” that existed pre-policy inception date, and that which took place during the policy period, for which coverage was being sought, was not sufficiently the same. Further, the court concluded that knowledge of the risk of property damage is not the same as knowledge of property damage.

Meltebeke Built Paradise Homes, Inc. sold a new home to the Alkemades. It had an inadequate crushed rock foundation that sat atop expansive soils. For nine years, the Alkemades’ home suffered extensive structural damage. Eventually, Meltebeke repaired all existing damage and hired an engineering firm to install a helical pier foundation. Nobody disputed that the helical piers would have prevented any future damage to the Alkemades’ home had they been installed correctly. However, they were not. As a result, the Alkemades’ home suffered the same type of structural damage. The Alkemades sued for the damage caused by Meltebeke’s negligent supervision of the helical pier installation.

Two of Meltebeke’s insurers refused to defend Meltebeke, arguing that, based on the Montrose Endorsement, Meltebeke’s knowledge of the damage, caused by the original, defective construction, prevented coverage.

Following a settlement and assignment between the Alkemades and Meltebeke, the Alkemades sued Meltebeke’s insurers. The insurers prevailed before the Oregon District Court: “Meltebeke’s knowledge prior to the policy period of expanding soils, which caused structural damage . . . , means Meltebeke knew of a risk of property damage from expanding soils prior the policy periods. . . . The same type of structural property damage, from the same danger Meltebeke knew of - and attempted unsuccessfully to address - for 10 years prior to the policy period, necessarily means that according to the terms of the policy, Meltebeke knew of the property damage prior to the policy period.”

However, the Ninth Circuit -- calling the case one of first impression in Oregon -- reversed, holding that damage sustained because of a negligent repair is not a continuation, change or resumption of the original property damage. Hence, Meltebeke did not have the requisite knowledge of property damage, before the policy period, to preclude coverage under the Montrose Endorsement.

To be sure, the court noted that it was applying a “low bar” to the Alkemades’ task: they simply needed to establish that their interpretation of the Montrose endorsement was plausible and reasonable. The court concluded that it was.

The court reached this conclusion for a few reasons:

“[W]ithin the context of the known damages provision, words of limitation are used to assess whether ‘the . . . ‘property damage’’at issue was a ‘continuation, change or resumption’ of ‘such . . . ‘property damage’’ previously known. Use of the definite article ‘particularizes the subject which it precedes’ and indicates that the claimed damage must be the same as the known damage,’ i.e., that ‘the claimed damage must be related to the known damage.’ The Alkemades’ interpretation is reasonable because it requires a causal relatedness between the previously known damage and the damage at issue.”

“[T]he Alkemades’ interpretation avoids reading new terms into the policy. Under the interpretation adopted by the district court, Meltebeke’s knowledge of ‘a risk of property damage’ meant Meltebeke ‘knew of the property damage prior to the policy period.’ But the known damages provision does not say knowledge of a ‘risk’ prevents coverage. The plain language says knowledge of ‘property damage’ prevents coverage.”

“[T]he Alkemades’ interpretation fits with Oregon’s right to repair statutes and others mandating insurance coverage for contractors. Property owners in Oregon are not allowed to commence legal action related to construction defects against a contractor unless the property owner has notified the contractor of the mistake and given him or her an opportunity to propose a solution. See Or. Rev. Stat. §§ 701.565, 701.570(5)(c)(A), 701.580. Contractors must also carry insurance for this work. See id. § 701.073(1). Under Quanta’s or GFIC’s interpretation, any repair contractor’s knowledge of the conditions that led to the need for a failed repair would preclude coverage. But repair contractors must know of the damage they are asked to repair. Under Quanta’s or GFIC's interpretation, such a contractor’s knowledge of the previous property damage would preclude coverage for a later negligent act even though that contractor would not have been liable for the previous damage.”

Vacated: Cosgrove v. National Fire & Marine (CO, Special Issue May 1)
The May 1st Special Issue of Coverage Opinions discussed the April 10, 2017 decision, from an Arizona federal court, in Cosgrove v. National Fire & Marine Insurance Company. The court held that insurer-appointed defense counsel, in a reservation of rights-defended case, used the attorney-client relationship to learn that his client did not use subcontractors on a project. When defense counsel did so, he knew, or had reason to know, that his client’s policy contained a Subcontractors Exclusion and that the insurer may attempt to deny coverage based on the exclusion. Thus, the court held that the insurer was estopped from asserting the Subcontractor Exclusion as a coverage defense. The court reached this decision despite the existence, or not, of subcontractors being a pretty routine, and obvious, and not secret, fact in a construction dispute. My conclusion: “[I]t is easy to see the dramatic impact on attorney reporting and litigation management, in reservation of rights defended cases, that Cosgrove could have if it took hold.”

Note that on May 5th the opinion in Cosgrove was vacated and sealed.

Policyholder Counsel Gets A+ For Effort in School Coverage Case
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 a pair of twos. That’s how I would describe the situation that confronted the plaintiff’s counsel in its pursuit of coverage in State Farm v. Dawson, No. 16-6356 (10th Cir. May 3, 2017).

A teacher was seeking coverage under his homeowner’s policy for claims arising out of an inappropriate relationship with a student. The student withdrew from school and finished her high school education through on-line courses. Coverage was only triggered for damages because of bodily injury or property damage. The court concluded that the student did not sustain bodily injury.

But what about “property damage?” Huh? How? Despite the insured’s counsel getting an A+ (and even a gold star) for effort, the court had the same reaction: “Accepting [the insured’s] assertion that the student’s right to a public education was damaged because she had to finish high school on the internet, rather than in brick and mortar high school, we still agree with the district court that he cannot prevail on his claim against State Farm. An education cannot be felt, it lacks physical form, and one cannot take possession of the right to it. Accordingly, it is not tangible property. And the fact that students typically obtain their public education in a tangible physical setting, using tangible items such as textbooks, does not change that conclusion. The right to a public education is intangible.”