Curiously, The Wall Street Journal has recently had three separate articles looking at new products being offered by the insurance industry to address emerging risks. The insurance industry has long been adept at designing products to spread the risk of burgeoning exposures. For convenience, I set out below some quotes from the stories that address key aspects of the policies.

“More Schools Are Buying ‘Active Shooter’ Insurance Policies” (Tawnell Hobbs; August 2, 2018)

“Insurance underwriter McGowan Program Administrators, an Ohio-based leader in shooter insurance, has written over 300 active-shooter/workplace violence policies for school districts, charter schools, private schools and universities across the country since 2016, when it started offering the coverage. A company official said the company issued over 60 policies in July, and that it has paid out some policies. Shooter insurance is considered gap coverage, handling expenses not typically covered under general liability, such as funeral costs and death benefits. Annual premiums can range from about $1,800 for $1 million in coverage for small school systems to about $175,000 for $20 million in coverage for larger ones. Death benefits often are offered up to $250,000 per victim.”

“To set premiums, insurers consider factors including local crime data, student enrollment and district staff levels. They also consider what safety measures the schools have in place, says Paul Marshall, managing director for McGowan’s Active Shooter/Workplace Violence Insurance Program. He also considers whether schools are monitoring social media to spot potential threats and if schools offer active-shooter awareness training to students and staff.”

“Demand For Tuition Insurance Is Surging” (Douglas Belkin; August 20, 2018)

“Liberty Mutual Insurance started offering tuition-reimbursement policies this year, in part because of consumer demand. When a student drops out mid-semester parents are often ‘very surprised to learn that you may not get anything back,’ said Michele Chevalier, a senior director at Liberty Mutual.”

“Tuition insurance protects families in case their son or daughter has to drop out of school past the point at which a school offers tuition reimbursement, usually around halfway through the semester. Driving the increased demand are higher college costs and, to a lesser extent, rising mental-health disorders among college students that have raised concerns among parents that their children may struggle away from home.” [The plans generally do not cover dropping out for academic or disciplinary reasons.]

“Big Cities Insure Against Cyber Attacks” (Scott Calvert and Jon Kamp; September 7, 2018)

[There is nothing new about cyber insurance; but here is a look at a new trend in the customer base.]

“A majority of the 25 most-populous U.S. cities now have cyber insurance or are looking into buying it, according to a Wall Street Journal survey. A ransomware attack on Atlanta earlier this year—one of the biggest reported breaches of a city’s network—served as a warning to officials everywhere of the constant barrage from hackers. Cities and even library systems are being hacked more often than people realize, but many heard about Atlanta.”

“‘Compromise is inevitable,’ said Christopher Mitchell, chief information security official, at a Houston City Council hearing last month. His presentation helped persuade local lawmakers they needed a $30 million cybersecurity insurance plan with a $471,400 premium, an example of a burgeoning trend across the country. Policies vary, but insurance can cover hackers’ extortion demands, legal liabilities, computer-forensics expertise and costs for problems like having government services knocked off line.”

“‘I wanted A to Z to have it covered,’ said Mark Barta, risk management director in Fort Worth, Texas, which got a $5 million cyberpolicy with a $99,570 premium last year. ‘I didn’t want to be in a situation on a Monday morning hearing this happened, and saying, What do I do next?’”

I don’t often address cases in Coverage Opinions concerning the relationship between a primary and excess insurer. Frequently driven by their unique facts and policy language, they can be, at best, a Gala to Red Delicious comparison. At worst -- apples to washing machines. As a result, they do not offer takeaways that can be applied to other situations.

But Hunter v. AIG Property Casualty Co., No. 17-81020 (S.D. Fla. July 20, 2018) is a primary-excess case that I believe is suitable for discussion here as it offers a lesson to be learned. It involves coverage arising out of the following circumstances. In July 2012, Kara Walker was injured when she was struck by a firework caused by Kenneth Hunter’s alleged negligence. [The case does not address how this happened.]

Hunter was an insured under two policies. He had a homeowner’s policy with Tower Hill Insurance that was subject to a $100,000 liability limit. He was also insured under a group personal excess liability policy, issued by an AIG predecessor, to his employer. The policy’s limits were excess of $300,000 up to $5,000,000. You can see where this is going.

In January 2013, Tower Hill paid its $100,000 limit and negotiated a limited release for Hunter. In June 2016, Ms. Walker sued Mr. Hunter for negligence. AIG retained counsel, John Lurvey, to represent Hunter and instructed Mr. Lurvey to settle the action.

Hunter advised Lurvey that he did not agree to settling the claim. He made clear that he wanted to go to trial and requested that both he and his personal attorney be included in any settlement discussions. In May 2017, Hunter was informed that AIG settled the action for $750,000. Hunter and his personal counsel were not involved in the settlement. Hunter never consented to or signed any settlement agreement.

Next AIG demanded that Hunter reimburse it $200,000, representing the gap in coverage between Tower Hill’s $100,000 limit and the required $300,000 in required underlying limits under the AIG Policy. Hunter refused and filed the action seeking a determination that he is not legally obligated to reimburse AIG.

The court held that Hunter was not obligated to reimburse AIG. In doing so it set out a lot of policy language from the AIG policy. I’ll discuss what was critical in the context of the court’s decision.

First, the court noted that, pursuant to numerous aspects of the policy, AIG was liable only for amounts in excess of the required underlying limits of $300,000. The court also cited to several policy provisions making clear that Hunter “was required to maintain a minimum of $300,000 in underlying homeowners personal liability insurance or else run the risk of no excess coverage.” Reading all of this together, the court stated that “the intention is clear. Hunter was required to maintain $300,000 in underlying primary insurance limits or else forfeit his right to excess coverage under the [AIG] Policy.”

Clearly Hunter had not done so. Yet the court still held that Hunter was not obligated to reimburse AIG.

The court’s decision was tied to the language of the AIG Policy that addressed defense. Under the policy, AIG had a “duty” to defend and a “right” to defend: “The [AIG] Policy includes two distinctly different provisions regarding AIG’s duty to defend versus AIG’s right to defend. The first provision gave AIG the ‘right and duty to defend’ only once the underlying $300,000 limits were exhausted, whereas the second provision gave AIG ‘the right and...opportunity’ to participate in the defense of any claim ‘in all other instances’ which may create liability for AIG.”

With this distinction firmly in mind, the court held that “AIG had the right, but not the duty, to participate in Hunter’s defense in the state court lawsuit given that the underlying $300,000 limit was not yet exhausted. When the state court lawsuit began, $100,000 of the applicable $300,000 limit had already been paid out by Hunter’s only primary insurer to Ms. Walker. A fact AIG well knew. And while AIG may have had the right to then participate in and settle the state court lawsuit as AIG deemed expedient to protect its own interests under the [AIG] Policy, AIG does not now have the right to seek reimbursement from Hunter for a settlement that Hunter vociferously refused to take part in. (several citations and parentheticals omitted). Such an outcome would run contrary to the plain, ordinary, and proper reading of the [AIG] Policy. AIG, which acted to orchestrate the settlement with Ms. Walker without Hunter’s consent, plainly did not have the authority to bind Hunter. In the absence of such authority, Hunter never became obligated to pay the $200,000 gap in coverage. Thus, AIG is not entitled to the reimbursement it seeks.”

While primary-excess cases are frequently driven by their unique facts and policy language, this one involves policy language that is seemingly not unusual: numerous aspects of the excess policy state that the insurer is only liable for amounts in excess of the required underlying limits; several policy provisions state that the insured is required to maintain a certain minimum underlying limit; and the excess insurer’s “right and duty to defend” kicks-in only after the underlying limits are exhausted, as opposed to “the right and...opportunity” to participate in the defense in all other instances which may create liability for the insurer.

Thus, the decision offers a takeaway, for excess insurers, confronted with the opportunity to settle a case – and thereby limit its own exposure – but in the face of a known gap in underlying limits.

 

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.

Based on some recent decisions (discussed in Coverage Opinions), and now Anderson v. Nationwide Mutual Ins. Co., No. 12-1057 (E.D. Calif. Sept. 7, 2018), it seems that courts are trending toward applying a strict “sameness” test. [Of course, construction defect cases are not what ISO had in mind when it put pen to paper on the Montrose endorsement.]

Anderson is a somewhat lengthy and complex case. I’ll limit the discussion here to just enough needed to make the point about application of the strict sameness test.

At issue in Anderson was the availability of coverage for an insured for construction defects that it caused. [The facts are not set out in a simple manner.] The key date at issue is April 10, 2007. This is when a Century Surety policy went into effect. The key policy provisions were described by the court as follows:

“The policies provided coverage for property damage which occurred during the policy period. The policies also defined an ‘occurrence’ to mean an accident, and stated that all property damage arising out of such an accident or series of related accidents was ‘deemed’ to have taken place at the time of the first such property damage, even if the nature and extent of the damage changed; and even if the damage was continuous, progressive, cumulative, changing or evolving. Additionally, the policies provided that there was no coverage for property damage which was known to the insured prior to the inception of the policy. Stated otherwise, the policies provided coverage only for new and different damage caused by new and different occurrences which occurred for the first time during the Century policy periods (in other words, after April 10, 2007).”

This is not exactly “Montrose Endorsement” language (at least what’s shown), but it is close and akin to it.

The court held, a least for duty to defend purposes (which included the consideration of extrinsic evidence), that the insurer could not deny coverage on the basis that “all of the damage was (a) caused by events that occurred prior to April 10, 2007, or (b) was of the same nature or extent as the damage that had occurred prior to April 10, 2007.”

The issue is highly fact intensive. Thus, I’ll cite liberally here from the opinion to best demonstrate the court’s application of a strict sameness test:

“Mr. Lohse [insured’s expert] also testified that this new and different damage was caused by new and different occurrences for the first time after April 10, 2007: ‘The causes we saw in 2008 were different from the prior drainage causes.’ The causes prior to 2008 were ‘partially because the park was still being developed . . . so that means you have a lot of construction debris’ and partially from ‘drainage design problems that were corrected before 2008’ or ‘poor design.’ In contrast, the new and different damage which occurred for the first time during Century’s policy period was caused by ‘the failure to maintain the drainage system so the water would freely flow into the retention pond’ and ‘because the drainage wasn’t maintained, kept free of debris.’ ***

Thus, the foregoing exhibits and testimony constitute evidence that the occurrences which pre-dated the Century policies were caused by improper design of the drainage system, while the occurrences after the inception of the Century Surety Company policies were caused by the negligence of the insured in failing to properly maintain off-site drainage, and not the same design issues which had been corrected prior thereto. These occurrences are plainly not ‘exposure to substantially the same general harmful conditions.’ They are patently different harmful conditions.

In other words, substantial evidence demonstrated new and different occurrences that happened for the first time within the Century policy period. Substantial evidence also demonstrated new and different harm as a result thereof.”

Lastly, and significantly, the court went on to hold that the insurer could be liable for a stipulated judgment – in excess of the policy limits.

 

The increase of legalized marijuana over the past few years has led to several decisions addressing coverage arising out of its use. [See below: If Your Coverage Was Coppertone: Coverage Opinions In August: What You May Have Missed – “Policyholders Will Shout Doobious Decision: Marijuana Coverage And An Issue I’ve Never Seen Before”]

A marijuana-related real estate deal gone bad landed a coverage case in a California federal court’s lap. Black Mountain Center v. Fidelity & Deposit Co., No. 17-1776 (S.D. Calif. July 26, 2018) involved coverage arising under the following circumstances.

Black Mountain Center owned the Haidinger Center in San Diego and leased commercial space to Victoria DuPont and Jeff Droege to operate a medical marijuana dispensary – and no other purpose. The parties agreed that the tenants could operate the marijuana dispensary upon receipt of a Conditional Use Permit (CUP). In November 2014, the tenants obtained a tentative CUP. However, it contained onerous requirements that neither party anticipated. For example, the need for Haidinger to have armed guards on the property. In addition, Haidinger was unable to obtain insurance for the complex because of the existence of a medical marijuana dispensary.

Haidinger believed that the CUP conditions materially altered the deal and concluded that it could not go forward with the project nor consent to the CUP conditions.

The San Diego Planning Commission eventually approved the CUP. However, Haidinger refused to sign it and notified the tenants that it was terminating the lease.

Not surprisingly, the tenants did not take this sitting down. Following certain demands, the tenants filed suit against Black Mountain Center, alleging that Plaintiffs denied Tenants’ quiet enjoyment of the property and breached the lease when Haidinger failed to sign the CUP. Tenants sought damages in the amount of $3,200,000.

Fidelity, Black Mountain’s insurer, denied liability coverage. Litigation ensued. The principal issue was whether coverage was owed under the “personal and advertising injury” section of the policy. Specifically, “Personal Injury means injury other than bodily injury arising out of one or more of the following acts: c. wrongful entry into premises that a person or organization occupies or wrongful eviction of a person or organization from premises that the person or organization occupies.”

The court held that, at least for duty to defend purposes, there was a wrongful eviction that satisfied the definition of “personal and advertising injury.”

The principle, at the heart of the decision, was that, under California law, a wrongful eviction extends to both actual and constructive evictions. The court also rejected the argument that “wrongful eviction” should be narrowly construed and limited to situations in which the landlord expels the tenant though the legal process.

With these principles in place, the court seemed to have little problem concluding that the “wrongful eviction” requirement had been satisfied.

“Plaintiffs assert that the record establishes that Tenants set forth sufficient facts and allegations to give rise to a constructive eviction which occurs when the landlord engages in acts that render the premises unfit for occupancy for the purpose for which it was leased, or deprive the tenant of the beneficial enjoyment of the premises.”

The court agreed: “Haidinger represented that he would execute the preliminary CUP, a prerequisite for obtaining the final CUP; Haidinger refused to sign the CUP; Tenants were unable to operate the premises as a medical marijuana dispensary; and Tenants incurred substantial expenses in reliance upon the aforementioned representations. . . . The above facts strongly suggest a constructive eviction claim potentially covered by the policy [duty to defend].”

Lesson for insurers: Take care when your insureds are leasing a joint to be used for a marijuana dispensary.

 

In Foremost Signature Ins. Co. v. Silverboys, No. 17-20581 (S.D. Fla. Sept. 11, 2018), the federal court addressed coverage for defective construction of a home. With one exception, Silverboys resembles most construction defect coverage cases. The court addressed whether the CGL Insuring Agreement was satisfied, namely, was there “property damage” caused by an “occurrence,” with the court making a distinction between an insured’s own defective work and damage to other property caused by an insured’s own defective work. There was also the question whether there was “property damage” on a loss of use basis. Northing to see here folks. Move along.

But there is. In addition to the widely popular “property damage” and “occurrence” issues, the court also addressed a part of the Insuring Agreement that nobody ever pays attention to – the “coverage territory” requirement. Namely, any occurrence must take place in the “coverage territory.” It is the green and black Jujyfruits of the CGL Insuring Agreement.

Here’s why it mattered. The home at issue was in the Bahamas. The insurer argued that the policy’s “coverage territory” requirement was not satisfied. It provided in relevant part – just as in the standard ISO commercial general liability policy – that the coverage territory includes “[t]he United States of America . . . or [a]ll parts of the world if . . . the . . . damage arises out of . . . [g]oods or products made or sold by you in the [United States]; or . . . [t]he activities of a person whose home is in the [United States], but is away for a short time on your business.”

The insurer argued that the “coverage territory” requirement was not satisfied because any alleged property damage was caused by an occurrence that took place in the Bahamas, which is outside of the coverage territory. The counter-argument was that “the alleged negligent conduct that caused the damage occurred in the coverage territory since Designer [the insured] failed to supervise Whittingham [the architect], made billing mistakes, and drafted the designs in Miami.”

The court did not struggle to conclude that the “coverage territory” requirement was not satisfied. It borrowed from Florida’s number of occurrences case law, as discussed in the Northern District of Florida’s 2015 decision in Auto-Owners Ins. v. Globe International: “There, the underlying complaint alleged that the insured was negligent in failing to perform background checks on employees who sexually abused children at a home in Haiti. The bulk of the alleged negligent hiring/supervision occurred at the insured’s offices in Pensacola, Florida. The damage — in that case bodily injury—occurred in Haiti. The policy’s coverage territory was identical to the one in this action. The court, relying on the ‘cause theory’ set forth by the Florida Supreme Court in Koikos v. Travelers Insurance Co., held that when the insured is being sued for negligence, an occurrence ‘is defined by the immediate injury-producing act and not by the underlying tortious omission.’ As a result, the court held that the occurrence that caused the injury was not the insured’s negligence in Florida, but rather, the sexual abuse in Haiti. . . . The location of the alleged property damage in this action is in the Bahamas, outside of the coverage territory.”

Thanks to a case involving the Bahamas, the “coverage territory” requirement had a day in the sun.

 

Over the past several years there have been oodles of decisions addressing the meaning of right to privacy as used in the commercial general liability policy’s definition of “personal and advertising injury.” Many have arisen in the context of coverage for violations of the Telephone Consumer Protection Act, also known as junk faxes. The decisions have generally gone in two directions. In some cases, no coverage was owed because “privacy” means the right to secrecy -- to keep private facts private. And junk faxes don’t reveal private facts. Other courts found coverage to exist on the basis that privacy relates to a person’s right of seclusion -- to be left alone. And junk faxes interfere with that.

An Illinois federal court recently addressed the availability of coverage for an alleged violation of the right to privacy. The case did not involve junk faxes. But, since the relevant law provided coverage for junk faxes, an attempt was made by the insured to make the issue akin.

Before the court in NuWave, LLC v. Cincinnati Specialty Underwriters, No. 16-4504 (N.D. Ill. Sept. 5, 2018) was coverage for NuWave, for a suit filed against it by the West Virginia Attorney General, alleging that the company engaged in a variety of illegal telemarketing practices concerning the sale of its products. Most notably, it was alleged that NuWave used tactics to keep customers on the phone longer, to subject them to sales presentations.

NuWave sought coverage from Cincinnati, under CGL policies, on the basis that the West Virginia AG’s suit alleged “personal and advertising injury,” specifically, for injury arising out of “oral or written publication, in any manner, of material that violates a person’s right to privacy.” Cincinnati disclaimed coverage. NuWave filed a coverage action. The parties filed motions for summary judgment.

The court posed the issue this way: “Whether the consumer’s right to privacy could possibly include the right to be free from prolonged phone calls.”

NuWave argued that it did, pointing to the Illinois Supreme Court’s 2006 decision in Valley Forge Insurance Company v. Swiderski Electronics. Here, the Illinois high court held that coverage was owed, for sending junk faxes, on the basis that the right to privacy included the right to seclusion. NuWave attempted to extend Swiderski: “According to NuWave, this holding can be extrapolated to also find that, in a situation where the insured prolonged a phone call that the consumer voluntarily and intentionally made to the insured, the insured violated the consumer’s right to privacy. NuWave characterizes the Valley Forge holding as extending the right to privacy in this context to include the ‘right to be free from nuisance.’” However, the court was not convinced that, despite a couple of uses of the term “nuisance” in the Swiderski opinion, it was equating privacy and nuisance.

Instead, the court addressed the issue under the two generally accepted possible meanings of privacy – intrusion upon seclusion or disclosure of private facts -- and held that neither were caused by NuWave’s telemarketers. Simply put, as the court saw it, “[k]eeping a consumer on the phone longer than he wants to be, after he voluntarily and intentionally called, does not match the type of situation that qualifies as an intrusion on seclusion.”

Query: Would the outcome have been the same if the issue were your mother-in-law keeping you on the phone longer than you wanted?

On one hand, NuWave involves unique circumstances. So the decision could be seen as interesting, but with little chance of impacting future cases. Or perhaps not. Junk fax coverage litigation has led to two possible meanings of privacy. Broadly speaking, NuWave teaches that, going beyond the junk fax context, is not a basis to go beyond these established definitions.

 

There is something funny about California when it comes to coverage for construction defects. Not funny ha-ha, but funny strange. Despite the prevalence of construction defect litigation in the Golden State, California courts have generally not approached the coverage issues in the traditional manner. More specifically, most states that address coverage, for construction defects, start with the fundamental question – does an insured’s faulty workmanship qualify as an “occurrence?” The answer to that question then sets the stage for addressing the possible application of various exclusions and determining which particular property damage may be covered.

But California courts have generally approached the topic in a more principled, and less policy language-centric, manner. In other words, the courts address coverage for construction defects with no mention of the “occurrence issue.” This is sometimes done with a citation to the 1990 California Court of Appeal’s seminal decision in Maryland Casualty Co. v. Reeder, which explained that “liability policies . . . are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or products.” But, quite recently, see Global Modular, Inc. v. Kadena Pacific, Inc., 15 Cal. App. 5th 127 (2017) (calling it a decision that rejected an invitation “to ignore policy language in favor of a general principle against insuring against ‘business risks’”).

Not long ago a California federal court took up construction defect coverage in First Mercury Ins. Co. v. Kinsale Insurance Co., No. 18-71 (N.D. Cal. Aug. 21. 2017). At issue was coverage for contractors, for construction defects associated with the renovation of a large residence in San Francisco. The alleged defects included “a black, viscous substance oozing from various window and door assemblies,” as well as oxidation (rusting) and discoloration of stucco and the paint that had been applied to the stucco.

The court addressed some of the issues you would expect to see in a case of this type, such as the “your work” exclusion and determining covered vs. uncovered damages. It did so with a nod to Reeder, no mention of the “occurrence issue” and a quick pivot to the possible application of exclusions.

I’ll skip the discussion of these California issues. Those who swim in this pond can check them out. The issue addressed here, which may offer lessons wider than simply California, is how the court resolved trigger of coverage.

One of the insurers, First Mercury, sought a determination that any potentially coverage damage, i.e., outside the business risk exclusions, such as, the discoloration to surface paint applied to stucco, is not covered because it did not occur during the First Mercury policy periods. As First Mercury say it, its policy period ended in November 2014 and the paint damage was both alleged and proven to have occurred in late 2016 or early 2017. An insured and another insurer opposed First Mercury’s motion for summary judgment.

In making its argument, First Mercury acknowledged that California’s Montrose decision applied, to wit: “where the damage at issue is alleged to be a continuous and progressive injury, the date of discovery of the damage or injury is not controlling. It is only the effect -- the occurrence of bodily injury or property damage during the policy period, resulting from a sudden accidental event or the ‘continuous or repeated exposure to conditions’ -- that triggers potential liability coverage.”

However, First Mercury’s argument was, essentially, that paint discoloration is not in the nature of a continuous injury: “First Mercury asserts, without citation, that ‘[p]aint discoloration, unlike, for example, structural damage to a home, is not a latent defect. Consequently, the date on which the paint discoloration was first observed is at least presumptively the date of occurrence absent the presentation of evidence to the contrary.’”

First Mercury’s argument had the sense of “we know what the continuous trigger is designed to addressed, and this isn’t it.” And maybe it’s not. But summary judgment was not the right place for it.

But the court was not convinced: “First Mercury’s argument rests on the assumption that the Sluskys [homeowners] observed the paint discoloration at the same time when it first occurred. But there remains the possibility that the paint discoloration occurred earlier. As with ‘improper piling of dirt against [a] building’ that results in dry rot damage or a crack in a swimming pool that eventually leads to leakage, it is possible that here the occurrence of the paint damage began far earlier than when the Sluskys first observed it.” Thus, First Mercury’s motion for summary judgment was denied.

The continuous trigger was born out of a legal fiction. At least one court has said as much. “The continuous trigger theory is a legal fiction permitting the law to posit that many repeated small events occurring over a period of decades are actually only one ongoing occurrence. In cases where property damage is continuous and gradual and results from many events happening over a long period of time, it makes sense to adopt this legal fiction for the purposes of determining what policies have been triggered.” Pub. Serv. Co. of Colo. v. Wallis & Cos., 986 P.2d 924, 939 (Colo. 1999).

So perhaps it is no surprise that paint discoloration could trigger multiple policies, despite that it can be identified with the naked eye, unlike many other types of construction defect-related property damage, the happening of which cannot be.

 

Coverage Opinions was on hiatus in August. Lots of people were on vacation and I needed a break from the task of putting together a full-blown issue, including the time-consuming interview. But I didn’t want CO to go completely silent. So I did some mini issues – a case here and a case there, here a case, there a case…. In case you were more focused on sun and sand, than coverage, in August, here’s what you missed in the Coverage Opinions mini issues.

Very Interesting Development: Ohio Legislature Says No To The ALI Restatement of the Law, Liability Insurance

On July 30th, Ohio Governor John Kasich signed into law SB 239. According to the Governor’s press release, it modifies the law concerning regional councils of governments to clarify that a municipal corporation eligible to designate a tourism development district may designate more than one district. Obviously, that’s important to someone.

SB 239 also names certain highways after people. For example, a portion of Interstate Route 270 in Franklin County is now designated the “Officers Anthony Morelli and Eric Joering Memorial Highway.”

But SB 239 doesn’t stop there. It then adds this provision: Sec. 3901.82. “The Restatement of the Law, Liability Insurance’ that was approved at the 2018 annual meeting of the American law institute does not constitute the public policy of this state and is not an appropriate subject of notice.”

I couldn’t locate much in the way of legislative history for this. A footnote in the Bill Analysis states: “Restatements of Law are nonbinding treatises on legal subjects that seek to inform judges and lawyers about general principals [sic] of common law. The American Law Institute is an organization of judges, legal academics, and practitioners that publishes the Restatements. The General Assembly may set the public policy of the state while the judicial power is vested in the courts of Ohio. Ohio Const., art. IV, sec. 1.”

On its face, the Ohio legislature’s statement, that the just-approved ALI’s Restatement of the Law, Liability Insurance does not constitute the public policy of Ohio, and is not an appropriate subject of notice, is not a big dent in the Restatement. Look, I love Ohio. I even had my picture taken a few years ago with the Red’s Mascot, Mr. Redlegs. Really. I can send you the picture. But Ohio is just one state.

But this Ohio action is still very significant. The insurance industry’s displeasure, with the Liability Insurance Restatement, has been well-documented. This legislative achievement demonstrates just how strong that objection to the Restatement is. Will other states follow suit? Are there any other efforts like this underway?

More broadly, what does this mean in Ohio for the ALI’s many other Restatements that it has adopted over the past many decades?

Does the Ohio legislature’s statement, that the General Assembly may set the public policy of the state and judicial power is vested in the courts of Ohio (cite to the Ohio Constitution) mean that the ALI’s other Restatements do not constitute the public policy of Ohio and are not an appropriate subject of notice? After all, the legislature’s statement addressed Restatements in general, vis-a-via the role of the General Assembly and courts, and did not speak to any specific concerns about the Insurance Restatement. Based on a Lexis search, Ohio courts, not surprisingly, have addressed Restatement provisions of all stripes in thousands of cases.

Most Insane Duty To Defend Decision I’ve Ever Seen
Insurer Would Have Benefitted From The New ALI Insurance Restatement

Sometimes there is little doubt that an insurer has a duty to defend. Other times there is a lot of doubt. Nonetheless, the court concludes that a defense is owed on account of the operation of legal principles. For example, the court decides that a defense is owed because the duty to defend is broad. So long as there is some possibility of coverage, the court explains -- even if it’s the same possibility as me beating LeBron at one-on-one – a defense is owed. Or a defense is owed because the court, in reaching its decision, was constrained by the allegations in the complaint, i.e., the four corners rule. No matter how clear it may be that extrinsic facts negate a duty to defend, the court simply could not consider them. It was forced to wear blinders. Its hands were tied.

Late last month a Texas appeals court concluded that an insurer was obligated to defend its insured for the later reason. But here the court’s rote application of the four corners rule led to an absurd result. It may be the most insane duty to defend decision I’ve ever seen. As insane as using the self-serve check-out at the supermarket when you have fruit.

Ironically, while insurers have spared no criticism of the ALI’s recently adopted Restatement of Liability Insurance, here, application of the Restatement would have benefited the insurer.

In Avalos v. Loya Insurance Co., No. 04-17-00070 (Tex. Ct. App. July 25, 2018) the court addressed whether an insurer had a duty to defend a motor vehicle accident.

Rodolfo Flores was moving his wife’s vehicle, outside their home, when he collided with the vehicle owned by the Hurtados. Flores’s wife, Karla Guevara, was insured under a policy issued by Loya Insurance Co. But the policy contained a named driver exclusion for Flores. Oh, that’s a problem. Solution -- the Hurtados, Guevara and Flores reported to the police and insurance company that it was Guevara – and not Flores – who was driving the vehicle at the time of the accident.

The Hurtados filed suit against Guevara, the supposed driver, for their injuries. Loya Insurance Company retained counsel to defend Guevara. Loya eventually figured out that Guevara was not the driver, but, rather, Flores was. Loya disclaimed coverage based on the named driver exclusion. Defense counsel retained by Loya withdrew and judgement was rendered against Guevara for $450,000.

The Hurtados, as assignees of Guevara, filed suit against Loya for a host of things – negligence, breach of contract and Texas statutory violations. The Hurtados alleged that Loya breached its duty when its counsel, retained for Guevara, withdrew. Loya filed a counter claim for fraud and a declaration of no coverage for a defense and indemnity.

In a Motion for Summary Judgment, Loya attached the deposition testimony of Guevara where she admitted that Flores was driving the vehicle at the time of the accident. For reasons not detailed in the opinion, the trial court granted Loya’s Motion for Summary Judgment.

The Texas Court of Appeals reversed.

The court’s description of the competing arguments were just what you would expect:

The Hurtados argued that a defense was owed based on the allegations in the complaint. Period. End of story. The court explained: “The Hurtados assert that under the eight-corners rule, an insurance company’s duty to defend its insured in a lawsuit is determined by looking to the allegations contained in the petition and the terms of the insurance company’s policy. According to the Hurtados, because they alleged Guevara was negligently operating her vehicle in the underlying car accident and she is covered by the insurance policy, Loya Insurance Company had a duty to defend Guevara in the negligence suit the Hurtados filed against her.”

Loya argued that all bets were off when Guevara lied about the driver of the car. The court explained: “Loya Insurance Company argues, however, it did not owe a duty to defend Guevara in the negligence suit filed against her. According to Loya Insurance Company, its duty to defend did not arise because Guevara breached the insurance policy prior to the filing of the Hurtados’ negligence suit against her. Loya Insurance Company contends that Guevara breached the policy by falsely representing to the police and insurance company that she was driving the car in the accident.”

Ruling: The court held that Loya had a duty to defend Guevara. Its decision was based on an unwavering, no exceptions allowed, application of Texas’s eight corners rule [which is the Texas equivalent of the four corners rule, except everything is bigger in Texas.]

The court stated: “Under the eight-corners rule, an insurer’s duty to defend is determined by the third-party plaintiff’s pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations. When applying the eight-corners rule, we resolve all doubts regarding the duty to defend in favor of the existence of a duty and liberally construe the allegations in the petition in favor of the insured. Even if the allegations in the petition are groundless, false, or fraudulent, an insurer is obligated to defend. The duty to defend is not affected by facts that may be ascertained before suit or developed during the course of ligation. Thus, facts outside the pleadings are not material to the determination of the duty to defend even if those facts directly contradict the allegations in the underlying petition.” (citations and internal quotes omitted).

The court was also influenced in its decision by the Texas Supreme Court not having adopted an exception to the eight corners rule where the “extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage in the truth or falsity of any facts alleged in the underlying case.” This is a long-standing issue/debate in Texas coverage.

My take on it -- While a duty to defend may be owed even if the allegations in the petition are groundless, false, or fraudulent, this cannot apply to a situation where the insured’s admitted-to fraud, not to mention with active participation by the plaintiff, was the basis for the petition being false or fraudulent.

A concurring judge agreed [concurring only because the Texas Supreme Court has not adopted the extrinsic evidence exception]. The concurring judge noted that the Texas Supreme Court has suggested in dicta that there is a fraud exception to the eight corners rule: “Loya’s duty under the policy to provide a defense to Guevara was for her benefit and to protect her by providing a defense even to untrue allegations. But surely the benefit and protection afforded to Guevara under the policy are intended to benefit and protect her from untrue allegations in the pleadings that are within the control of the pleader, and not from untrue allegations that are brought about by her own fraud and collusion. In this case, the untrue allegations came about as a result of collusion and fraud perpetrated by Guevara, the insured. She should not be able to benefit from her own deceptive, fraudulent acts to the detriment of Loya. . . . [A]n exception to the eight-corners rule should exist in a situation like this one where the undisputed evidence shows the insured participated in collusion and fraud solely to create a duty to defend.”

This is as head-shaking of a duty to defend decision as I’ve ever seen. Robotic application of a rule, with no regard to common sense, especially when the end-result is to reward fraud, may be just the situation needed to get the Texas Supreme Court to adopt an exception to the eight corners rule. The issue has been brewing for a while.

Impact of the ALI’s recently adopted Restatement of Liability Insurance

While the ALI’s recently adopted Restatement of Liability Insurance may not have made a difference here, because the Texas Supreme Court has not adopted an exception to the eight corners rule, it would have at least given the insurer an additional argument. However, and more importantly, the Restatement may very well have made a difference if this scenario arose in a state where the court had more flexibility to adopt an exception to the four/eight corners rule.

Section 13 of the Liability Insurance Restatement adopts a duty to defend standard that is based on the complaint allegations and extrinsic evidence. However, section 13 also sets forth certain exceptions to the duty to defend, including if:

(3) “[F]acts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;” ***

Admittedly, neither of these exceptions apply to Avalos on their face. However, a comment to section 13 offers this: “Courts in a few states have recognized a broader, general exception to the complaint-allegation rules that allows insurers to refuse to defend based on their unilateral assessment of any facts that are not at issue in the legal action for which coverage is sought. Although this Section does not recognize this broader exception, a court following this Section could recognize other narrow exceptions on a case-by-case basis, reasoning by analogy to the exceptions stated in subsection (3).” (emphasis added).

Clearly the situation in Avalos v. Loya Insurance Co. is analogous to these four corners exceptions set out in Section 13 of the Liability Insurance Restatement.

Determining Covered Vs. Uncovered Claims: Court Slams The Door On One Insurer’s Effort

Sometimes I think everyone wants to know if it’s covered, until someone tries to find out.

It is a coverage issue that has long confounded me. The determination whether an insurer has a duty to defend is relatively straightforward. That’s not to say it’s easy. But at least the process is pretty clear-cut. The issue generally arises at the same time – a complaint is filed against the insured and an answer or some response is due. The test for determining whether the insurer must retain counsel is well-defined in just about every state. And the insurer typically has a finite universe of information that it can consider in making its determination – the allegations in the complaint or, in some states, the allegations in the complaint and certain other information. And when the issue is litigated, it is often able to be resolved by way of motion for summary judgment or judgment on the pleadings.

But for the insurer that agrees to defend, the subsequent question, whether it has a duty to pay any settlement or verdict for its insured, can be a far more complicated, and less well-defined, task. The question can arise anywhere along the underlying litigation path – not just at the end -- as it would if a settlement opportunity presented itself. And unlike the duty to defend, where the question is based on a finite set of facts, the duty to indemnify is based on the totality of information developed in the underlying case. That could be a lot to consider. Or the facts needed to determine the duty to indemnify may not even arise in the underlying case. Now what?

Of course many courts are quick to tell insurers that they should file declaratory judgment actions to have these determinations made. But despite their usefulness, DJ actions do not always have the right timing vis-à-vis the underlying action or they can present procedural or other challenges when coupled with an ongoing underlying action. In general, DJs on duty to defend, with only a complaint at issue, can be a lot simpler than those addressing duty to indemnify. There is also the cost factor.

Some courts advise insurers that they should intervene in the underlying action, to seek special jury interrogatories, to have outcome determinative coverage-facts resolved. Policyholders often object to this procedure. And even if intervention is permitted, it may not obviate the need for a DJ action. Some courts are quite opposed to the use of the intervention procedure to have coverage-facts determined.

Here’s my point. The most important and frequently asked question in liability insurance coverage is this: Is it covered? Yet, despite this, and notwithstanding that liability coverage is a world of court made rules, not to mention governed by contract terms, there should be more clear-cut procedures for ensuring that the most important of all questions is answered. Even more confounding – there is nowhere near as much case law as you would expect addressing such an important question. To be sure, the process is never going to be rote. But there is room for improving it.

On August 10, a Florida appeals court addressed one insurer’s effort to determine whether, or to what extent, it owed coverage for a construction site bodily injury. Coverage turned on a fact issue in the underlying case. The insurer sought to intervene to have this issue resolved. Seems simple enough. But it didn’t go well for the insurer.

Houston Specialty Ins. Co. v. Vaughn, 2018 Fla. App. LEXIS 11197 (Fla. Ct. App. Aug. 10, 2018) involved coverage for All Florida Waterproofing. Enoch Vauhn, while applying a protective coating to a mobile home’s roof for All Florida, fell and was rendered a paraplegic. Mr. Vaughn sued All Florida. All Florida had a commercial general liability policy with Houston Specialty. An exclusion eliminated coverage for bodily injury to All Florida’s employees and an endorsement reduced the limits of any coverage if Mr. Vaughn was an independent contractor.

Houston Specialty moved to intervene in the suit to submit special interrogatories and verdict forms relevant to Mr. Vaughn’s employment status. The court described Houston’s purpose this way: “Houston feared having to relitigate the entire tort lawsuit in its declaratory judgment action if a jury found in favor of Mr. Vaughn. Thus, Houston asserted that limited intervention was proper to avoid conflicting findings or verdicts and inconsistent results. All Florida . . . opposed intervention, insisting that permitting Houston to intervene as a party would potentially inflate any damages award.”

Caveat: There are some complex procedural issues here and collateral litigation was going on, including two DJ actions filed by the insurer. This may not be the paradigm case to address an insurer’s effort to use intervention, in the underlying action, to resolve factual issues that affect coverage. However, the court’s discussion, of the insurer’s effort to use intervention, does not read like it was affected by anything about the case before it. It comes across as a general rebuke of the insurer’s effort to use the process.

Putting aside what happened with the trial court, the Florida appeals court ruled that intervention was not permissible. At the heart of intervention is whether the party seeking to intervene has an appropriate interest in the case.

The court concluded that Houston Specialty did not: “Houston has no direct and immediate interest in the state court lawsuit. Houston’s claimed interest is based upon the ‘[t]he fact that [Houston]’s intervention is dismissed would prevent [Houston] from being able to contest that final judgment’ that may be entered in the future between Mr. Vaughn and All Florida and Messrs. Fulford, Mendenhall, and Pflieger. To be sure, however, no judgment has been entered below. If a judgment is entered, it would operate upon Mr. Vaughn and the All Florida defendants. They are the only parties with a direct and immediate interest; they stand to either gain or lose by direct legal operation of that judgment. At this point in the state court lawsuit, Houston has nary a direct or immediate interest. Rather, akin to the insurer in Harbor Specialty, Houston possesses a speculative or contingent interest that will come to fruition only if the trial court enters a judgment against the insured parties and then either Mr. Vaughn or the insured parties through separate legal action seek enforcement of the judgment against Houston through claims of breach of contract or insurer bad faith. Of course, Houston may then assert the legal defenses it deems appropriate.”

The court was not persuaded that the possibility of having to pay the underlying verdict gave Houston Specialty a sufficient interest to warrant intervention: “If the possibility of owing up to the policy limits based upon entry of an adverse judgment was itself a sufficient basis to allow intervention, insurers would be permitted the unhindered and unfettered opportunity to intervene in innumerable tort cases. That is exactly what Houston wants; it seeks to interject itself directly into Mr. Vaughn’s tort lawsuit. We cannot countenance such a result in light of the legislature’s intent to prevent the introduction of such prejudicial information from being introduced to the jury.”

Here the court was referring to the age-old prohibition against the introduction of insurance information into a tort trial. Although I suspect that folks are clever enough to find a way to get the questions in without revealing that they are insurance-based.

Resolving coverage issues, especially in the context of a fluid underlying action, is going to have some challenges. It is complex and no two cases are alike and it does not lend itself to neat and tidy rules as much as other issues do. But it seems that the Florida appeals court was too quick to dismiss intervention as one possible way to address a coverage dispute tied to a fact that could be resolved in the underlying action.

Like I said, sometimes I think everyone wants to know if it’s covered, until someone tries to find out.

First Court Decision Post-ALI Restatement Adoption

Well that didn’t take too long. On August 9th a court issued what I believe to be the first decision addressing the ALI’s Restatement of the Law of Liability Insurance post-adoption.

At issue in Catlin Specialty Ins. Co. v. CBL & Assocs. Props., 2018 Del. Super. LEXIS 342 (Del. Super. Ct. Aug. 9, 2018) was an insurer that secured a determination that it had no duty to defend its insured, in an underlying action, under a Contractor’s Protective, Professional and Pollution Liability Policy. With that win in hand, the insurer now sought reimbursement of the defense costs that it had paid while defending it insured under a reservation of rights.

The issue was to be decided under Tennessee law. The insurer’s position was that it reserved the right to seek reimbursement when it agreed to defend and the insured accepted the defense under that reservation. The insurer relied on the 2007 Tennessee federal court decision in Cincinnati Ins. Co. v. Grand Pointe LLC which it maintained supported its position.

Grand Pointe did support the insurer’s position. And there had been no subsequent Tennessee cases on the issue. So the insured argued that Grand Pointe was a decade old and it did not “reflect the more recent trend away from the then-majority position.”

The court accepted that there has been a trend toward not permitting insurers to seek recovery of defense costs following a no duty to defend determination. The court even noted: “True, most recently, the American Law Institute has revised its Restatement of the Law on Liability Insurance to reflect such a shift. But just as Tennessee state courts had never before directly spoken on this reimbursement issue, they have also not yet adopted the new Restatement’s rule. Moreover, the Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”

The court followed Grand Pointe and held that the insurer was entitled to reimbursement of defense costs.

This seems to be a typical situation in which the ALI’s Restatement of the Law of Liability Insurance will be in play in a coverage case. One party had no applicable case law on point so it turned to the RLLI for support. But while the court discussed the RLLI, and seemingly factored it into the analysis, it did not rely on it because it was persuasive only. In essence, while Grand Pointe is not a precedential statement of Tennessee law, on an insurer’s right to reimbursement of defense costs, it was seen as a more important source of guidance than the RLLI.

As the court noted, “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law.” Translation - Look to see the RLLI most in play in situations where applicable case law is non-existent or sparse.

Had Grand Point not been there, and the Tennessee slate clean, it would not have been all that surprising to see the court rely on the RLLI to deny the insurer’s right to reimbursement.

Policyholders Will Shout Doobious Decision: Marijuana Coverage And An Issue I’ve Never Seen Before

Come on, who doesn’t love a coverage case about property damage caused by a marijuana growing operation? That’s what’s at issue in KVG Properties, Inc. v. Westfield Ins. Company, No. 17-2421 (6th Cir. Aug. 21, 2018). Bud KVG Properties doesn’t stop there. It rolls on and the court then addressed an issue I’ve never seen before in a coverage case. The whole thing is just jointly fascinating.

At issue was coverage for KVG Properties, under a commercial property policy, for damage to a property caused by its commercial tenant. The property had been rented for general office or light industrial business. But the tenant used the property to grow marijuana, causing nearly $500,000 in damages. KVG sought coverage from Westfield under a commercial property policy.

Under the policy, Westfield agreed to pay for “direct physical loss of or damage to Covered Property . . . caused by or resulting from any Covered Cause of Loss,” which is any “risk of direct physical loss.”

The court noted that this “generous insuring agreement” [“Indeed, one would struggle to think of damage not covered by this language”] “is tempered by a litany of exclusions.” The exclusion at issue provided: Westfield “will not pay for loss or damage caused by or resulting from” any “[d]ishonest or criminal act by you, any of your partners, members, officers, …” (“Dishonest or Criminal Acts Exclusion”).

Westfield argued that the Dishonest or Criminal Acts Exclusion precluded coverage as KVG’s tenants’ conduct was criminal under either state or federal law. The court agreed. But it wasn’t so simple, as the court noted: “Cultivating marijuana is a crime under federal law, see, e.g., 21 U.S.C. § 841(b)(1)(A)(vii), but it is protected by Michigan law under certain conditions [medical marijuana].”

Thus, as the court saw it, KVG might have had a strong federalism argument in favor of coverage. “In diversity cases, we act as faithful agents of the state courts and the state legislature. . . . Exercising the Michigan courts’ common-law power to interpret public initiatives, we would hesitate before reading a Michigan insurance policy to bar coverage for a ‘criminal act’ when Michigan law confers criminal and civil immunity for the conduct at issue [citing Michigan’s medical marijuana law].”

However, the court did not go down this interesting federalism vs. states’ rights road and how it could affect coverage. Rather, the court took a seemingly simpler path: “[T]he record contains evidence that KVG itself claimed, in Michigan court, that its tenants violated the law. In its eviction pleadings against each tenant, KVG repeatedly claimed that the ‘[t]enant illegally grew marijuana’ in the unit and stated that the ‘[i]llegal growing of marijuana’ was a ‘continuing health hazard.’ These pleadings were signed by KVG’s lawyer, who sought and obtained immediate possession of the premises under Michigan’s summary eviction statute. . . . Pleadings are binding legal documents that can be admitted as evidence against that party in subsequent proceedings. Furthermore, neither party disputes that federal agents raided the premises as part of a criminal investigation.”

The court also considered that, while the feds generally do not get out of sorts when individuals are acting “in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana,” this does not halt all federal inquiry into marijuana growing that complies with state law. The court presumed that the DEA did not ignore this when deciding to raid KVG’s property.

The court held that, “[t]aken together, these facts are sufficient to meet Westfield’s prima facie case of proving a criminal act by the preponderance of the evidence. It thus falls to KVG to identify record evidence suggesting that its tenants complied with the Michigan Medical Marihuana Act. It has not done so.”

Thus, the court affirmed the trial court’s decision that the Dishonest or Criminal Acts Exclusion applied to bar coverage. The court also held that the exclusion applied even if the tenants had not been convicted.

The Great Insurance Policy Mystery

There are some things in life I just don’t get. Like, why would anyone buy Regular Strength Tylenol when Extra Strength is right next to it on the shelf? Is it for people who want to get better -- but just not right away?

There are also things in insurance policies that I just don’t get – such as how the ISO commercial general liability policy treats loss of consortium. The policy defines “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” Then, in the Insuring Agreement -- 12 pages away – the policy adds that “[d]amages because of ‘bodily injury’ include damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘bodily injury.’”

Wouldn’t it make more sense to include this language, which is addressing loss of consortium, as part of the definition of “bodily injury?” Including what is essentially a definition, in the Insuring Agreement, is out of place enough. But, to do so, when there is an existing definition in the policy, where this language concerning loss of consortium could be placed, just leaves me scratching my head. I get a headache trying to figure out why.