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Coverage Opinions
Effective Date: March 7, 2018
Vol. 7 - Issue 2

Declarations: The Coverage Opinions Interview With Former New York Governor George Pataki
From Farmer To Governor: Two Jobs With No Term Limits

I visited George Pataki, the former three-term Republican governor of New York, at his law office in Midtown Manhattan to ask him about a quarter century in politics and nearly a half century as a lawyer. An hour later I left sure of one thing. Despite the importance of his two careers, he is defined by neither. Pataki had a great sense of humor. It was on display when I asked him if he knew how to use the office photo copier.

Randy Spencer’s Open Mic
Insurance Company Spokespeople That Actually Make Sense

The King Reads Coverage Opinions

Thisclose: The 4th Edition Of “Insurance Key Issues”
New Edition To Be Released Any Day Now

Making Easy The Coverage Issue That “Would Tax Socrates”

Oh, Canada! Toronto Court’s Unique Foul Ball Injury Case

Postscript: Domino’s Pizza Carryout Insurance

It’s Still Going: That Crazy Cosgrove Case

Encore: NCAA Tournament And Courts (Of Law)

The Greatest CGL Mystery

Pennsylvania Policyholder Finally Cracks The Kvaerner/Gambone Nut

Applying The Wrong Duty To Defend Standard = Bad Faith

Insurer Knows That Insured Has Been Sued. Insured Does Not Request A Defense. What’s Insurer To Do?

How Much “Loss Of Use” Is Needed For “Property Damage”?

Follow Form Excess Policy: Is There An Inconsistency Between Primary And Excess Terms?

Tapas: Small Dishes Of Insurance Coverage
• Get Stopped For Driving Without Insurance – Buy A Policy While Sitting In The Car
• Insured Cannot Sue Defense Counsel -- Even When It Was Staff Counsel -- For Malpractice

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



Vol. 7, Iss. 2
March 7, 2018


Insurance Company Spokespeople That Actually Make Sense



Next week the NCAA Men’s Basketball Tournament will be in full swing. Besides the players on the court and fans in the stands, your television will also show lots of team mascots and their shenanigans. There will be giant heads of every size, shape and stripe. You’ll see Clemson’s adorable tiger, who looks like Tony the Tiger’s brother. The Michigan State Spartan will be there, as long as he’s not in court fighting a copyright suit by USC’s Trojan. Duke’s masked Blue Devil, who is disliked as much as Duke, will also be in attendance.

While mascots are usually associated with sports, there are plenty in the insurance world too. They are probably better called spokespeople, but their purpose is similar. You know who there are. Their companies have spent billions of dollars over the years to make sure of it. I enjoy the characters that some insurance companies have developed over the past few years to promote their brands. I love the Gecko -- and follow him on Twitter. Allstate’s Mayhem Man keeps my interest. I’m a big fan of the Farmer’s Guy and have thought about getting that tweed jacket and vest combination. And as long as we’re on the subject…. Progressive’s Flo is getting a little long in the tooth. It’s time for her pension to vest.

But what I find curious about these insurance spokespeople is that they have no connection to insurance. What does a talking lizard have to do with auto insurance? Snoopy is the Fonz of dogs, but I don’t think about life insurance when I see him on the Met Life blimp.

Wouldn’t it make more sense for insurers to use characters whose appearance actually have a connection to the insurance policy that they are trying to sell. Consider these insurance spokespeople that insurers should be using:

Take an insurer trying to sell high level excess policies. If I saw the Jolly Green Giant I would definitely think to myself – You know, maybe I should buy coverage excess of $50 million.

And who better to sell the $1 million primary policy in that new $100 million tower? The Oomph Loompahs of course.

And what about a spokesperson for car insurance that actually has something to do with cars? Kitt from Knight Rider can talk and he probably isn’t too busy these days. Give him something more to do than just sitting around Hoff’s driveway.

Fire insurance policies? “Hi there, this is Smokey the Bear for Fire Mutual. You shouldn’t play with matches, but, if you do…."

If McGruff the Crime Dog told me to buy a fidelity policy I couldn’t sign up fast enough.

Bob the Builder was born to hawk builder’s risk policies.

If a company can’t sell life insurance with the grim reaper as its spokesperson then it should get out of the business.

Travel Insurance – Waldo (of Where’s Waldo fame) should be all over that!

Flood Insurance – So easy. Noah

Pet insurance? Scooby Doo is perfect with all that hijinks he and Shaggy get into. And you could get him for practically nothing. He would take payment in Scooby Snacks.

If Goofy can’t sell professional liability policies, who can?

If you are trying to sell pollution liability policies there could be no better spokesperson than a guy who has spent his entire life in a trash can. Get me Oscar the Grouch on the line

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


Vol. 7, Iss. 2
March 7, 2018

The King Reads Coverage Opinions

I have always said that Coverage Opinions has a diverse readership. Meet GCH CH Maplewood’s Blue Suede Shoes At Piccino. Or, as he’s known to his close friends, Elvis.

Elvis was the “Best of Breed” winner for Italian Greyhounds at the venerable Westminster Kennel Club Dog Show held last month in New York City. As “Best of Breed,” Elvis appeared on the show’s prime-time broadcast, vying to win the Toy group category. Here is the king of Italian Greyhounds – with breeder--handler Marcy Caton, of Maplewood Italian Greyhounds in Phillips, Maine -- strutting his stuff on the floor of Madison Square Garden


When Elvis isn’t sniffing the spot where Ali-Frazier’s Fight of the Century took place, he likes to sit back, chew on a bone and catch up on the latest in insurance news from Coverage Opinions. Elvis is a long-time CO reader. His favorite cases are about notice. After all, Elvis loves to tender!

Congratulations Elvis!




Vol. 7, Iss. 2
March 7, 2018

Making Easy The Coverage Issue That “Would Tax Socrates”

I recently took up the issue of the tri-partite relationship with the students in my insurance coverage class at Temple Law School. This semester has been my first foray into teaching insurance to law students. It’s been a neat experience. My objective has been simple – OK, you guys had Torts. You learned about finding someone liable. Now, let’s talk about the real issue – where’s the money going to come from to satisfy that judgment?

I was concerned about tackling the tri-partite relationship with the students. After all, it has a reputation for being pretty complex. The Mississippi Supreme Court put fear in me with Hartford v. Foster (1988), saying this about the tri-partite relationship: “The ethical dilemma thus imposed upon the carrier-employed defense attorney would tax Socrates, and no decision or authority we have studied furnishes a completely satisfactory answer.” And then there’s Finley v. The Home Ins. Co. (Haw. 1998) which had this to say about the tri-partite relationship: “The magnitude of the difficulty in resolving the issue is reflected in the volume of litigation nationwide, and, in the instant case, the number of amicus curiae briefs representing divergent views.”

So it was with trepidation I entered classroom 7B at 10 A.M. on a recent Monday and took a deep breath. But, to be honest, it wasn’t so tough. I don’t see what all the fuss is about. I drew a simple picture on the board and, viola, this supposedly super-duper complex concept was as easy to explain as a hot knife through butter. If Socrates owned a magic marker he would have been fine.


Vol. 7, Iss. 2
March 7, 2018

Oh, Canada! Toronto Court’s Unique Foul Ball Injury Case

Regular readers of this publication (and I thank you for that) know that I have a soft spot for cases involving fans seeking recovery for injury sustained by being hit by a foul ball (or a tossed-into-the-stands hot dog) at a baseball game. The fans virtually always lose on account of the so-called court-created “baseball rule.” The baseball rule generally provides that a baseball stadium operator is not liable for a foul ball injury as long as it screens the most dangerous part of the stadium and provides screened seats to as many spectators as may reasonably be expected to request them.

But despite the challenge of overcoming the baseball rule, many injured fans still try. The cases generally involve an effort to find an exception, of some sort, to the rule.

My thanks to CO reader, and Toronto coverage lawyer Michael Teitelbaum, of Hughes Amys, LLP (author of “Ontario Insurance Law & Commentary” (2018)) for sending me a copy of the Ontario Superior Court of Justice’s late January decision in Legacy v. The Corporation of the City of Thunder Bay. It is a baseball injury case, but unlike any I’ve ever seen.

Lorrinda Maureena Anne Legacy was driving past Port Arthur Stadium, in Thunder Bay, Ontario, when her driver’s side window shattered. An object hit her head. She pulled over and discovered a baseball on the floor of her car. The baseball had been hit from inside the stadium during batting practice. [I have dreamed of catching a foul ball at a baseball game. I’d even take it this way.]

Ms. Legacy filed suit. But here’s the rub. The stadium was the home ballpark for the Thunder Bay Border Cats. However, the ball had been hit by a player on the visiting team – the Deluth Huskies. The Huskies argument was that a visiting baseball team cannot be liable for injury caused by a baseball being hit out of the home team’s stadium. The opinion does not say this specifically, but, surely, the argument is that a visiting team has no duty to maintain or operate the stadium to keep fans or someone like Ms. Legacy safe. The Huskies cited a House of Lords decision stating that “playing baseball is not a tort.”

I’ve never seen this “visiting team” issue raised in a foul ball injury case. Maybe because it’s so obvious that the visitors are not liable, even if a visiting player hits the foul ball that causes injury. And maybe that will be the outcome here. But the court concluded that it was premature to make that decision. The City (the owner of the stadium) and the Huskies had not yet delivered statements of defence (Canadian spelling – and my spell check gives me the squiggly red line to tell me I’m an idiot).

The court noted a couple of peculiarities about the case that could serve as basis to find liability on the visiting Huskies. First, the protecting netting had large gaps or holes in it. Second, the visiting Huskies players were allegedly hitting balls from third base and not home plate. Based on these circumstances, the court concluded as follows:

“If the Duluth Huskies players knew that they were hitting baseballs out of the stadium onto a busy city street because, for example, the protective netting which was obviously there to prevent such a mishap, was, to their knowledge, rendered ineffective because of gaps or holes, could they be liable?

If the Duluth Huskies were hitting balls out of the park from the vicinity of third-base, rather than home plate, rendering the stadium safety design features ineffective because of their choice of batting position, could they be liable?

These scenarios are within the allegations of negligence pleaded by the plaintiff and may be sufficient to trigger a duty of care.”

The court did not discuss the baseball rule or something similar. I do not know if it’s as difficult for a plaintiff to prevail in a foul ball injury case in Canada as it is in the U.S.

Legacy is an usual case because it involves a claim against a visiting team. And even if that should be an easy no-liability situation, it may be that, with facts like these, liability can be found on the visitors.


Vol. 7, Iss. 2
March 7, 2018

Postscript: Domino’s Pizza Carryout Insurance

In the last issue of Coverage Opinions I poked fun at Domino’s Pizza’s “Carryout Insurance Program.” As the pizza chain has been touting in television ads of late, it will replace a carryout customer’s pizza that is somehow damaged on the way home.

It’s a silly idea, of course. But that’s the point. It’s a fun gimmick. But, apparently, not everyone got that. Cathy O’Neill, founder of an algorithmic auditing company (whatever that means) had this to say about the Domino’s offer in a Bloomberg “Viewpoint” piece titled “No, Thank You, I Don’t Want to Insure My Pizza”: “The winner of my personal stupid prize [for recent television commercials that she has seen]: Domino’s ‘pizza carryout insurance,’ which offers a free replacement if you somehow manage to destroy your pizza on the way home. This is just the latest in a long line of products that distort people’s understanding of what insurance should be. Somebody has to put their foot down, and that somebody is me. Let’s remind ourselves what insurance actually is. It’s protection against calamity. It’s something that pays out only in unusual circumstances — and sometimes never — but definitely only when you would not be able to afford the loss.”

Jeez Louise, take it easy Cath. [Can I call you Cath?] It’s a joke. A PR stunt. And it worked. Domino’s got me to talk about their pizza. And you. And now me again.

Ms. O’Neill goes on to rail against what she calls “so called insurance” -- products where the premium is too high relative to the risk transferred, such as for an iPhone. Maybe she’s right about some of that. But she lost me at “[i]f you can buy a pizza, pretty much by definition you can afford the loss of a pizza. You don’t need insurance.”

Get a slice, Cath.



Vol. 7, Iss. 2
March 7, 2018

It’s Still Going: That Crazy Cosgrove Case

Last summer an Arizona federal district court issued 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 Subcontractor 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.

Needless to say, this was a very troubling decision for insurers (and appointed defense counsel). Very shortly after the court’s decision the parties settled. As part of the settlement, the court agreed that it would vacate and seal the summary judgment decision. Sure enough, you can’t get the decision on Pacer and the insurer arranged for it to be removed from Lexis and Westlaw. I have a copy of the decision. I’m happy to send it to you. Just promise to bake me a cake with a file in it.

As I reported in the December issue of Coverage Opinions, on November 3rd, the policyholder advocacy group United Policyholders filed a Motion to Intervene to unseal and reinstate the decision. UP said in its brief that what the insurer did was an “impermissible tactic” – one “commonly employed by insurers in an attempt to reshape case law in their favor after an adverse ruling.” UP says that the insurer, faced with an adverse decision, is “seek[ing] to hide the court’s opinion.” The insurer filed a response, providing many reasons for denial of intervention – UP has no standing; the case is over; the judge agreed to vacate and seal the decision as a condition of settlement; the various requirements of the Intervention rule have not been satisfied….

Update: On January 18th the court, in a five and a bit page opinion, denied UP’s motion to intervene, citing such reasons as lack of jurisdiction, it is not a party to litigation that shares questions of law or fact to the case, untimeliness and prejudice to the parties.

Update 2: On February 8th UP filed a notice of appeal to the Ninth Circuit. Maybe the known-for-being-liberal Ninth Circuit will be sympathetic to UP’s objective here. But it seems UP chose a difficult test case given the delay in intervention.


Vol. 7, Iss. 2
March 7, 2018

Encore: NCAA Tournament And Courts (Of Law)

[This article appeared in the March 22, 2017 issue of Coverage Opinions. It is republished here, with minor changes to account for its timing now versus then.]

If you are reading this, then, at this moment, you have temporarily stopped working on your algorithm to fill out your NCAA Tournament bracket next week. And once the Tournament starts you’ll be ruminating over the fact that Gladys from H.R. is in first place in the office pool – despite that she spelled Xavier with a Z and has never 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.

The NCAA Men’s Basketball Tournament in fact 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. 7, Iss. 2
March 7, 2018

Pennsylvania Policyholder Finally Cracks The Kvaerner/Gambone Nut

For the past ten-plus years the insurers’ record in Pennsylvania faulty workmanship coverage cases has resembled that of the Harlem Globetrotters. The Pennsylvania Supreme Court’s 2006 decision in Kvaerner Metals v. Commercial Union Ins. Co. and the Superior Court’s 2007 decision in Millers Capital Ins. Co. v. Gambone Bros. Dev. Co. have been a one-two punch denying coverage to policyholders for construction defects. Kvaerner held that faulty workmanship does not constitute an “occurrence” under a commercial general liability policy. Gambone subsequently held that even consequential damages of faulty workmanship does not constitute an “occurrence.”

Well, the Washington Generals finally won. The Pennsylvania Superior Court recently decided J.J.D. Urethane Co. v. Westfield Ins. Co., No. 1440 EDA 2017 (Pa. Super. Ct. Feb. 9, 2018) (unpublished). It reads like most Pennsylvania faulty workmanship coverage cases -- until you get to the end.

The Borough of Bedford hired Howard Robson, Inc., a construction company, to upgrade the Borough’s wastewater facility. Robson hired J.J.D. Urethane, as a subcontractor, to supply and install urethane foam insulation, to the annular space on digester tanks, to create a seal against the tank walls. A few years later the Borough discovered that one of the digester tanks had been damaged. Robson had failed to correct it. The Borough sued Robson, who, in turn, filed a joinder complaint against J.J.D., claiming that “J.J.D. had improperly handled expanding foam insulation which was the ultimate cause of the damage to the digester tank.”

J.J.D. sought coverage from Westfield under a commercial general liability policy. Westfield disclaimed coverage and J.J.D. filed a declaratory judgment action. The trial court held that Westfield “did not have a duty to defend either the breach of contract or the breach of warranty claims in the joinder complaint since the claims were premised upon faulty workmanship, which does not constitute an ‘occurrence’ under the parties’ policy. [citing Kvaerner] However, the court found that the language in the Authority’s complaint and the joinder complaint regarding property damage that ‘occurred as a result of conduct outside of the scope of the [Authority’s contract with Robson] and J.J.D.’s Subcontract[,]’ could be considered an ‘occurrence’ under the policy, which could potentially fall within the policy’s coverage. Simply put, the trial court found that Westfield has a duty to defend, and potentially indemnify, Robson where it ‘carelessly allowed foam insulation to enter the digester [t]ank.’”

Westfield appealed to the Superior Court. The appeals court was not at all unmindful of the limitations placed on coverage for faulty workmanship by Kvaerner and Gambone. However, like the trial court, the appeals court also identified negligence outside the plans and specifications of the project; a possible scenario that the court noted was identified in Gambone.

The court held that “the complaint against the insured, J.J.D. (or, the joinder complaint), alleges negligent handling of the foam insulation and careless/negligent installation of the foam not in accordance with the plans and specifications of the project. Therefore, while the [Borough’s] complaint [against Robson] was grounded in allegations of defective workmanship, Robson’s joinder complaint does allege claims of negligent and careless work and work outside of the scope of the parties’ contract. Under such circumstances where the complaint ‘might or might not’ fall within the policy’s coverage as an ‘occurrence’, the insured is obligated to defend.” (emphasis added).

For sure the J.J.D. court could have done a better job of explaining this distinction, between work performed within the contract and outside of it. The court could have been more specific in this regard. Nonetheless, has the Superior Court – with its “work outside of the scope of the parties’ contract” concept -- just provided a way for underlying claimants to plead into long-denied construction defect coverage for their contractors -- at least for a defense. And with a defense in hand, the insured may have taken the first step to get its insurer to provide indemnity.


Vol. 7, Iss. 2
March 7, 2018

Applying The Wrong Duty To Defend Standard = Bad Faith

When it comes to what to consider when determining an insurer’s duty to defend, it generally works like this. About 33 or so states require an insurer to consider, besides the complaint, information contained outside the complaint – so-called extrinsic evidence. The rest limit the duty to defend determination to the information within the four corners of the complaint. In addition, when a state requires an insurer to consider extrinsic evidence, it is almost always a one-way street. In other words, the insurer must consider extrinsic evidence to possibly find a duty to defend, but may not use extrinsic evidence to deny a duty to defend.

That last part is what got the insurer in 2FL Enterprises, LLC v. Houston Casualty Ins. Co., No. 17-676 (W.D. Wash. Feb. 5, 2018) in trouble. At issue was an insurer’s duty to defend a construction defect suit. MCS retained a construction company, 2FL Enterprises, to make improvements on an apartment building. Leaks were discovered and MCS sued 2FL. 2FL sought a defense from Houston Specialty, which had issued several general liability consecutive policies to the construction company. The insurer took no action and a default judgment was entered against 2FL. The insurer then denied coverage on several grounds. 2FL sough coverage from another insurer and that insurer undertook its defense and had the default vacated. Houston Specialty agreed to defend but 2FL rejected the defense.

Coverage litigation ensued and the court addressed whether Houston Specialty owed and breached its duty to defend, and, if so, whether the breach was in bad faith.

The court held that the insurer breached the duty to defend. When assessing whether a defense was owed, the claims administrator for the insurer visited the website of the King County Assessor’s Office and learned that the present use of the building at issue was “Condominium: Residential.” The policies at issue contained a Condominium Exclusion. The insurer used this as one of its justification for denying coverage.

But here are the problems with this, as the court saw it: “Williams Court is not a condominium complex, it is an apartment building (which is covered under the policy). The second problem is that, under Washington law, an insurer is not permitted to utilize information extrinsic to (a) the complaint or (b) the insurance policy to arrive at a decision regarding denial of a tender of defense. The insurer may not rely on facts extrinsic to the complaint to deny the duty to defend - it may do so only to trigger the duty. (citation omitted) (As noted supra, the complaint described the building as the ‘Williams Court Apartments.’).” (emphasis in original).

Putting aside some other issues, the court turned to the question whether the insurer’s denial of coverage was in bad faith. The court concluded that evidence of bad faith “abounds here:” “There are a number of instances throughout the chronology of this event where Defendant acted in contravention of Washington law. The first and most egregious is its use of extrinsic evidence (e.g., the determination, based on the King County Assessor’s website, that Williams Court was a condominium building) to deny a defense to its insured- a violation of Woo. Additionally, HSIC claimed in its declination letter that Plaintiff began and concluded its work outside of the coverage periods, and that Plaintiff's subcontractors did not maintain CGL insurance, information which is found nowhere in the complaint.”

Lastly, the court rejected the insurer’s argument that it successfully rebutted the presumption of harm to the insured that was imposed upon the finding of bad faith. As the insurer saw it, the presumption of harm was rebutted because the underlying litigation was still ongoing and the default judgment had been vacated.

However, the court was unconvinced that this took care of any harm sustained by the insured: “The Court can conceive of numerous harms underlying a lengthy delay which culminates in a non-meritorious decision to deny coverage - e.g., the expenditure of time and effort to find another carrier to defend against the claims, the damage to financial credit that the existence of a default judgment and/or judgment lien (even a temporary one) can wreak on a business enterprise, and the damage to credibility and goodwill that the existence of such a judgment can impose (even if it is ultimately withdrawn). Defendant has done little or nothing to dispel the presumption of harm which its behavior has created, and Plaintiff is entitled to summary judgment on that issue.”

Determining whether an insurer has a duty to defend can be challenging. But knowing what standard to apply – four corners or extrinsic evidence – should not be.


Vol. 7, Iss. 2
March 7, 2018

Insurer Knows That Insured Has Been Sued. Insured Does Not Request A Defense. What’s Insurer To Do?

Anyone who does insurer-side coverage on a regular basis has faced this scenario. Suit has been filed against an insured. The insurer is well aware of it. But, for whatever reason, the insured has not sought a defense. What’s the insurer’s obligation here? Step in and address coverage and undertake a defense, if warranted. Or do nothing until the insured asks the insurer to do something?

This was the question before the Texas appeals court in Egly v. Farmers Ins. Exchange, No. 03-17-467 (Tex. Ct. App. Feb. 15, 2008). Ismael Hernandez was involved in a motor vehicle accident with Victor Egly. Hernandez was insured under an automobile policy issued by Farmers Insurance. Egly sued Hernandez. While Hernandez never notified Farmers of the suit, Egly’s attorney did – several times. “Egly’s attorney warned Farmers that Egly would obtain a default judgment against Hernandez if no answer was filed. Farmers sent messages to Hernandez inquiring about the case, but Hernandez never responded to those messages.”

True to his word, Egly obtained a default judgment against Hernandez. Egly sued Farmers to collect. Farmers filed a motion for summary judgment, maintaining that it owed Egly nothing because Hernandez never informed Farmers of the suit as required by the policy. The trial court granted Farmers’s motion for summary judgment and Egly appealed.

The parties’ competing positions, before the Texas appeals court, were simple – “Farmers argues that it did not receive notice from Hernandez concerning the accident and Egly’s suit and that it was prejudiced by this lack of notice. Egly responds that, because Farmers undisputedly had actual notice of Egly's suit against Hernandez, Farmers failed to establish as a matter of law that it suffered prejudice.”

The Texas appeals court affirmed, pointing to ample precedent for its decision. The court looked to the Texas Supreme Court’s 2008 decision in National Union v. Crocker, where the Texas high court held that “[m]ere awareness of a claim or suit does not impose a duty on the insurer to defend under the policy; there is no unilateral duty to act unless and until the additional insured first requests a defense—a threshold duty that the insured fulfills under the policy by notifying the insurer that the insured has been served with process and the insurer is expected to answer on its behalf.” (emphasis in original).

The court’s decision was tied to a prejudice determination and it looked at the notice provision in the policy as having two purposes: “Here, the first purpose of the notice requirement is satisfied, because Farmers had actual notice of Egly’s suit and could have prepared a defense. However, the second purpose is not satisfied, because Hernandez never notified Farmers that he ‘expect[ed] the insurer to interpose a defense’ or was ‘looking to the insurer to provide a defense.’ Therefore, Farmers had no duty to defend against Egly's suit. And because Farmers had no duty to represent Hernandez, it cannot be liable to Egly under the policy. . . . Because Hernandez never notified Farmers of Egly’s suit or requested representation, and because Egly obtained a default judgment against Hernandez that it sought to enforce against Farmers, Farmers has established as a matter of law that it was prejudiced by this lack of notice.”

I am fairly certain that policyholder and claimant attorneys find this decision to be unnerving.

[Note: Elvis, my favorite canine CO reader, would not have acted like Hernandez. Elvis loves to tender. See nearby article “The King Reads Coverage Opinions.”]


Vol. 7, Iss. 2
March 7, 2018

How Much “Loss Of Use” Is Needed For “Property Damage”?

Most general liability coverage cases, that address whether “property damage” has taken place, focus on the “physical injury to tangible property” aspect of the definition. That’s a more common scenario than whether there has been a “loss of use” of property (the other component of the definition of “property damage”). In addition, whether there has been “physical injury” is usually answerable with the naked eye (or with some assistance). You can see that a building is no longer standing or that water intrusion has caused damage. On the other hand, whether there has been a “loss of use” of property can be more esoteric. So, between “physical injury” cases being more common, thereby providing more guidance, as well as involving a more easily identifiable injury, it is not surprising that “loss of use”-based “property damage” cases can be challenging.

This was on display in Mid-Continent Casualty Co. v. Adams Homes of Northwest Florida, No. 17-12660 (11th Cir. Feb. 13, 2018). It is a construction defect case, but with an unusual aspect.

Putting aside the non-relevant corporate background, Adams Homes of Northwest Florida built homes on land that had originally been designed for golf courses and holding ponds. Homeowners sued Adams seeking damages for Adams’ alleged negligence in failing to ensure the installation of adequate drainage.

Adams sought coverage under a general liability policy issued by Mid-Continent. Mid-Continent denied coverage in 2009. Then, in 2015, Mid-Continent agreed to defend Adams, under a reservation of rights, after an 8th amended complaint was filed. Wow. Persistence.

Mid-Continent filed a declaratory judgment action. At issue was whether there was “property damage” alleged. The definition of “property damage” was the one frequently seen in CGL policies: “a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it.”

As the District Court saw it -- there was no “property damage” alleged as there was no “physical injury to tangible property.” The court stated: “In none of the one hundred and forty-seven paragraphs . . . is it alleged that Adams did anything that physically damaged [Homeowners’] homes.”

The Eleventh Circuit concluded that it did not need to decide whether that was correct, as the lower court failed to consider the “loss of use of tangible property that is not physically injured” aspect of the definition of “property damage.”

The Homeowners alleged that, on account of the manner of Adams’s construction – on land meant for retainage lakes -- “the streets adjacent to their homes, and the common areas they have access to, are now prone to flooding,” which has made “[Homeowners’] ordinary use or occupation of their property physically uncomfortable” and “disturb[ed] the [Homeowners’] free use . . . of their property.”

As the Eleventh Circuit saw it, these allegations created a factual issue whether the Homeowners alleged “property damage” on a “loss of use” basis. Thus, Mid-Continent had a duty to defend Adams.

The Eleventh Circuit went to the dogs for guidance in reaching its decision. It turned to the 1999 Florida appeals court decision in McCreary v. Florida Residential Property and Casualty Joint Underwriting Association. There the court held that an insured’s failure to control, supervise, and confine its dogs to its own premises was an “ongoing clear and present danger to the health, safety and comfort of [a neighbor]” that ultimately rendered him “unsafe and insecure in the use and enjoyment of his own property.” This, the McCreary court held, created a factual issue as to the loss of use of the neighbor’s property.

The court analogized the situation faced by the homeowners with the dog-fearing neighbor in McCreary: “These allegations [by the homeowner’s], fairly read, create a factual issue as to loss of use. Mid-Continent contends water is relatively harmless, unlike the McCrearys’ dogs, which entered Rebalko’s property and ‘caus[ed] an immediate danger to [Rebalko] and his pets.’ But the absence of allegations that the storm water run-off is placing Homeowners in immediate danger does not counsel a different result. Physical discomfort in the use of property, like insecurity and unsafety in the use of property, raises the specter of loss of use. Although it is unclear whether the physical discomfort caused by the run-off is severe enough to prevent Homeowners from using their property, the same was true of Rebalko’s allegations in McCreary. Rebalko did not allege he stopped using his property because of the McCrearys’ dogs; rather, Rebalko alleged he felt insecure and unsafe in its use. Like Rebalko, Homeowners are entitled to have any ambiguity about whether the physical discomfort caused by the run-off was severe enough to cause loss of use resolved in their favor. If the allegations of the complaint leave any doubt as to the duty to defend, the question must be resolved in favor of the insured.”

The take-away: In essence, at least for duty to defend purposes, the court read “loss of use” of property as “loss of enjoyment” of property.


Vol. 7, Iss. 2
March 7, 2018

Follow Form Excess Policy: Is There An Inconsistency Between Primary And Excess Terms?

It is well known that a follow form excess policy is subject to the terms of the underlying policy, except when they are inconsistent. In that case, the terms of the excess policy control. But how do you know when the terms of the two policies are inconsistent?

This was the issue before the court in Praetorian Ins. Co. v. Western Milling, LLC, No. 15-557 (E.D. Cal. Feb. 2, 2018). The facts stated by the court are thin. All we are told is that the case involves the availability of coverage for damaged cattle and, at issue, is the applicability of a “care, custody or control” exclusion. The exclusion in the primary policy precludes coverage for property in the “care custody or control of the insured.” The exclusion in the excess policy precludes coverage for property in the “care custody or control of any insured.”

In the matter at hand, the excess policy, standing alone – with its “any insured” verbiage -- would preclude coverage. However, the primary policy contained a severability of interests clause and the excess policy did not. The issue before the court was whether the excess policy, as a follow form policy, included the severability of interest clause. If so, then the excess policy’s “any insured” care, custody or control exclusion, in conjunction with the now-included severability of interest clause, would be read as care, custody or control of “the insured.” In that case coverage would be owed.

The insured argued that the primary policy’s severability of interest clause was included in the excess policy since it was not inconsistent with the excess policy. Indeed, the excess policy did not have a severability of interests clause. So how could it be inconsistent? The insured maintained that “a provision of the primary policy is only inconsistent if it is in direct conflict with another term found in the excess policy: for instance, the excess policy requires notification of a claim ‘promptly in writing,’ whereas the primary policy requires notification of a claim ‘as soon as practicable.’”

But the court did not see it that way. It examined whether the provision in the primary policy, to be incorporated into the excess policy, is facially inconsistent with a term in the excess policy. Using that test, the court found a facial inconsistency: “The severability provision of the primary policy states that the policy applies ‘[a]s if each Named Insured were the only Named Insured.’ The ‘care, custody, or control’ exclusion in the excess policy excludes coverage for losses to ‘[p]ersonal property in the care, custody or control of any insured.’ The severability provision of the primary policy therefore purports to treat each insured’s coverage separately, while the exclusion of the excess policy applies collectively regardless of which insured is claiming the loss and which insured had control of the property at issue. The inconsistency is apparent on the face of the primary and excess policies.”

Accordingly, on account of this inconsistency, the court held that the severability provision of the primary policy was not incorporated into the excess policy. Therefore, the excess policy’s exclusion, for property in the “care custody or control of any insured” applied in “full force.”

Vol. 7, Iss. 2
March 7, 2018

Get Stopped For Driving Without Insurance – Buy A Policy While Sitting In The Car
This is remarkable. Robert Weaver, Jr. was stopped by the Pennsylvania State Police at 5:22 P.M. on November 26, 2016. He was cited for operating a motor vehicle while his operating privilege was suspended and for operating a motor vehicle without the required insurance. No problem. During the course of the stop Weaver used his phone to purchase a Safe Auto policy (I “signed up for it right then and there,” he said.) Seventeen minutes after being stopped Weaver was insured under an automobile policy. Really, I’m not making this up. See Weaver v. Commonwealth, No. 1115 (Pa. Commw. Ct. Feb. 15, 2018).

Weaver was convicted of both citations and did not appeal that. Then the Pennsylvania Department of Transportation suspended his operating privileges for three months for operating a motor vehicle without insurance. That Weaver appealed to the trial court – and won! The DOT appealed to the Pennsylvania Commonwealth Court, which handles appeals in cases involving state agencies. But then the trial court changed its mind. Anyway it’s procedurally confusing. In any event, the Commonwealth Court held that Weaver could not produce clear and convincing evidence that his vehicle was insured at the time that it was driven. Weaver admitted that he did not obtain the required liability insurance until 17 minutes after the traffic stop was initiated. The decision seems pretty obvious. But Weaver gets credit for trying. I can only imagine the Pennsylvania State trooper’s response [no doubt an all-business – no joking around type] if Weaver handed him his phone and said “what do you mean I’m not insured?”

Insured Cannot Sue Defense Counsel -- Even When It Was Staff Counsel -- For Malpractice
In Kapral v. GEICO, No. 17-11511 (11th Cir. Jan. 23, 2018), the federal appeals court held that an insured, under a GEICO automobile policy, could not maintain a malpractice action against the defense counsel retained by GEICO to defend him, even when counsel was the insurer’s “staff counsel.” The court cited two Florida decisions (the relevant state) holding that an insurer cannot be liable for the negligence of counsel that it retains for its insureds. Of note, the fact that the case at hand involved “staff counsel” did not dictate a different result: “Although it appears that the [two decisions] involved outside counsel, not salaried staff counsel, nothing in those decisions indicates that the result would be different in a case involving staff counsel. Nor should the result be different because under Florida law an insurer has no more right to exercise control over staff counsel’s professional conduct and independent judgment than it does over outside counsel's conduct and judgment.” The court added that its decision did not preclude the insured from pursuing a legal malpractice claim against the attorney.