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This was crazy: three Thanksgiving-related insurance coincidences took place just days before the holiday. 

On November 15, the Eastern District of North Carolina issued its decision in Great American E&S Ins. Co. v. Butterball, No. 18-113 (Nov. 15, 2018).  At issue was coverage for an environmental pollution claim under a policy that provides coverage for premises environmental liability.  Unknown liquids were leaking from tanks and the total remediation costs were going to be $3,500,000.  The decision in the declaration judgment was purely procedural – a forum fight as Butterball and the insurer had each filed their own coverage action. 

Then, the week before Thanksgiving, I received a homeowner’s insurance offer in the mail from Plymouth Rock Assurance.

 

I’ve reviewed the Lex Machina (a Lexis company) 2018 Insurance Litigation Report published in October.  The 24-page report contains a staggering amount of information and statistics – some of it eye-glazing -- concerning the 93,000 federal district court coverage cases filed between 2009 and 2017. 

The report goes well-beyond business liability cases.  It also includes information concerning  life insurance, auto, UM/UIM and homeowners (hurricane and non-hurricane).  The report excludes cases involving interpleader, surety bonds, subrogation, Medicare, Social Security and ERISA. 

I list below some of the findings that I believe will be of most interest to CO readers.  The upshot of the Lex Machina report is that it clearly provides data for both insurers and insureds to consider when deciding to go down the litigation road -- as well as how far to proceed.    

• The number of business liability cases filed, between 2009 and 2017, has hovered around 3,000 per year (closer to 2,500 for the past three years).

• In cases with a duty to defend finding, 80% are in favor of insurers (case terminations 7/1/14 to 6/30/18).

• In cases with a duty to indemnify finding, 85% are in favor of insurers (case terminations 7/1/14 to 6/30/18).

• Where the issue was the existence of an “occurrence,” the court found no occurrence about two-thirds of the time.

• In cases involving bad faith (case terminations 7/1/14 to 6/30/18), 90% found no bad faith on the part of the insurer (with about 75% resolved by summary judgment); at trial, bad faith findings were close to evenly split, with insurers winning slightly more.  

• While insurers won a lot more cases than they lost, that’s not to say that policyholders did not obtain coverage.  About two-thirds of cases involving business liability policies were resolved by a dismissal, which Lex Machina concludes was the likely result of a settlement (case terminations 1/1/09 to 6/30/18)

• For four jurisdictions the report looks at the median number of days for a case to reach summary judgment (case terminations 7/1/14 to 6/30/18): C.D. Calif.: 343; S.D. Tex.: 475; S.D.N.Y.: 524; N.D. Ill.: 567.

 

It's also interesting to see the similarities and differences between Ontario/Canadian law and U.S. insurance law. From time to time, Michael sprinkles in some U.S. law references in the Commentary’s footnotes noting their potential relevance to Canadian law.  I was flattered to see some references to this newsletter when he does that.

Michael advises that among the most interesting cases discussed in the latest edition are:
 

• Oliveira v. Aviva Canada Inc., in which the Ontario Court of Appeal upheld the application judge’s finding that the insurer had a duty to defend the privacy tort claim of intrusion upon seclusion, observing that the unauthorized access to hospital records was ‘precisely the sort of conduct [this professional and general liability] policy was intended to respond to’;

• The Ontario Court of Appeal’s decision in Usanovic v. Penncorp Life Insurance Company (La Capitale Financial Security Insurance Company), which was released just as the 2018 Commentary was going to press, upholding the motion judge’s dismissal of this LTD benefits action as limitation-barred because the insurer did not breach its duty of good faith by failing to inform the insured of the limitation period when it terminated his benefits as there was no statutory obligation to do so in Ontario; and

• Aviva Insurance Company v. Intact Insurance Company, where the Ontario Superior Court found that liability coverage was complementary and not overlapping, the insurer provided primary and not excess coverage, and was obliged to contribute to the costs of defence and settlement.

I can’t imagine someone, who has anything to do with Ontario insurance law (or, indeed, insurance law in Canada for that matter, particularly the common law provinces, but also Quebec where I understand some of the common law decisions have some application), not having Ontario Insurance Law & Commentary at their fingertips.  Congratulations Michael on the 2019 edition of this must-have book. 

More information, and how to order, is here.       

And, anyone interested in keeping abreast of Canadian (and particularly Province of Ontario), insurance and tort law may wish to check out the Blawg posts on Hughes Amys LLP’s website, at http://www.hughesamys.com/blawg.

 

 

The law of bad faith can be complex and it is certainly voluminous.  But, as a general principle, it arises in the context of an insurer that has failed to pay a claim that it otherwise should have.  But that’s not what happened in Higginbotham v. Liberty Ins. Corp., No. 18-747 (W.D. Pa. Nov. 27, 2018).  Here the insurer defended its insured under a reservation of rights, litigated coverage and then settled the claim.  End of story, right?  No.  The Pennsylvania federal court concluded that the insurer could still be in bad faith.

At issue was coverage for Erica Higginbotham, under a homeowner’s policy, for claims arising out of sexual abuse by her father-in-law of children whom Higginbotham was babysitting.  In particular, Higginbotham was sued for negligent supervision of the children and failing to recognize the risk that her father-in-law posed.   
  
Liberty Insurance, the homeowner’s insurer, undertook Higginbotham defense under a reservation of rights, citing several exclusions.  Liberty and Higginbotham each filed declaratory judgment actions on the issue of whether coverage was owed for defense and any liability.  Liberty filed in federal court.  Higginbotham went the state court route.  The court in the federal action declined jurisdiction on account of the parallel state action.  Liberty filed a counterclaim in the state action.  Liberty’s motion for judgment on the pleadings was denied.  An appeal to the Pennsylvania Superior Court was quashed.  The underlying action was settled by Liberty and the state court declaratory judgment action was now over.  Phew. 

But that wasn’t the end of the story.  Higginbotham filed a complaint against Liberty, in Pennsylvania state court, asserting a claim for statutory bad faith and contractual bad faith.  Liberty removed the bad faith action to federal court and filed a motion for judgment on the pleadings.  The court denied the motion with respect to both the contractual bad faith claim and statutory bad faith claim.

The parties competing positions were as follows: Liberty argued “that it was entitled to judgment on the pleadings because it did not act in bad faith (1) by filing the federal action and a counterclaim in the state action while providing Higginbotham with a defense in the underlying lawsuit, or (2) in its handling of the issues surrounding the underlying litigation.  In her response, Higginbotham argues that Liberty’s issuance of a ‘manipulative’ reservation of rights and use of the courts to delay resolution of the underlying litigation in order to ‘improve its negotiating position,’ was done in bad faith, and caused her to suffer emotional distress and bodily harm and to incur legal expenses to defend herself against Liberty’s unfounded declaratory judgment actions.” 

On the contractual bad faith claim, the court was mindful that “Pennsylvania Supreme Court precedent allows the insurer to defend subject to a reservation of rights [and] . . . applicable caselaw encourages insurers to file declaratory judgment actions.”  However, despite the fact that Liberty did both of these things, it was still not insulated from the possibility of bad faith: “It is undisputed that Liberty investigated the underlying lawsuit once the complaint was brought to its attention; that Liberty provided Higginbotham with counsel, subject to reservation of rights; that Higginbotham chose to hire private counsel to litigate Liberty’s declaratory judgment motions; and that the underlying lawsuit was ultimately settled. However, the thoroughness of that investigation, applicability of the exclusions relied upon by Liberty, and propriety of delaying settlement for two years to actively pursue declaratory relief against its insured present unsettled questions of fact. Viewing the evidence in the light most favorable to Higginbotham, a reasonable jury could find that Liberty’s actions, in the aggregate, constituted a bad faith breach of its contractual duties to Higginbotham, and could lead that jury to return a verdict in her favor.”

On the statutory bad faith claim -- 42 Pa.C.S. § 8371 – the court concluded that the “focus in section 8371 claims cannot be on whether the insurer ultimately fulfilled its policy obligations, since if that were the case then insurers could act in bad faith throughout the entire pendency of the claim process, but avoid any liability under section 8371 by paying the claim at the end.... [T]he issue in connection with section 8371 claims is the manner in which insurers discharge their duties of good faith and fair dealing during the pendency of an insurance claim, not whether the claim is eventually paid.”  (emphasis added).

At least at this stage, the court was not willing to say that there was no possibility of bad faith:  “The allegations in the pleadings demonstrate that there are outstanding material issues of fact which could lead a reasonable jury to conclude that Liberty’s investigation and claim-handling was motivated by its own self-interest, and in bad faith, regardless of the fact that the claim was ultimately paid.” 

I do not know enough about the “manner” in which the claim was handled by Liberty to address the decision in any detail.  Bad faith cases are often fact-driven.  And the court’s decision was on a motion for judgment on the pleadings – which could have a lot to do with it.  But, in general, when an insurer defends under a reservation of rights and files a declaratory judgment action (two things that are judicially encouraged) and then settles the underlying action, and can still face a subsequent bad faith claim, insurers should take notice.

 

 

Readers of Coverage Opinions know that I have been on a mission, of sorts – going back at least 6 years -- addressing the need for insurers to draft reservation of rights letters that “fairly inform” the insured of the reasons why the insurer, despite that it is providing a defense to the insured, may not in fact be obligated to provide coverage for certain claims or damages in a suit.  In other words, an ROR that cites some facts, and then quotes some policy provisions, and then says, viola, we reserve our rights, is at risk for being found to be ineffective.  Translation - the insurer has waived its defenses. 
 
Several decisions, from state appellate courts over the past few years, have found ROR letters to be ineffective for this reason.  And there are plenty of cases before these.  And this trend continued with the just-adopted ALI Liability Insurance Restatement, which includes this fairly inform standard in its ROR requirements section.

But there is another potential insurer-misstep when it comes to ROR letters.  And it is one that I see insurers fall afoul of not infrequently.  Moreover, it is a risk that exists even if the ROR does a great job satisfying the “fairly inform” standard.  An ROR may be ineffective if it is not sent to all insureds being defended under an ROR.  Think of the situation where a company, the named insured, is sued along with several employees.  The insurer undertakes the defense of the company and employees.  However, the ROR is only sent to the company and not the employees too.  In this situation, and analogous ones, court decisions have held that there is no ROR in place for the employees. 

For example, the Pennsylvania Superior Court held in Erie Insurance Exchange v. Lobenthal (2015) that a reservation of rights letter was never provided to an adult-defendant, who was a resident in her parents’ home, because the letter -- that was intended to be a reservation of rights -- was addressed to her parents.  The court held: “[W]e refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time.  Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter.  Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”  The fact that the ROR was sent to Michaela’s lawyer also did not save it.  Thus, despite that the insurer should have owed no coverage to the insured, on account of an exclusion, such was not to be the case, as no reservation of rights letter was ever sent to her. 

In reaching its decision, the Pennsylvania appeals court relied, in part, on Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678 (6th Cir. 1993), a decision that concluded that there was no reservation of rights in place for an employee, because the letter was not sent to him, despite the fact that it was sent to his employer. 

On October 23, 2018, in Starr Indem. & Liab. Co. v. Verticals, LLC, No. 16-2832 (M.D. Tenn. Oct. 23, 2018), the Tennessee federal court, for various reasons, declined to find that a reservation of rights letter was ineffective for failing to meet the “fairly inform” standard – although it made clear that that was the required test.  The court also declined to conclude that sufficient notice of the ROR was not provided.  However, in doing so, the court, with a citation to, and description of, Knox-Tenn Rental Co. v. Home Ins. Co., was clear that the “notice of an ROR to all insureds standard” applies.   

This can be an administratively complex issue – sending 3 or 4 or 5 ROR letters for a claim.  Thankfully my clients are used to this issue and we’ve worked out some ways to address it.  But can it be an administrative challenge?  Yes.  It’s just the nature of the ROR beast.  But to do all the work to satisfy the “fairly inform” standard, and then have the ROR be ineffective because it was not sent to all insureds, is an unfortunate situation.

 

 

It is an issue that often surprises policyholders.  Company A obligates Company B to name Company A as an additional insured on Company B’s liability policy.  Company B obtains a lability policy and secures a Certificate of Insurance that states that Company A, the certificate holder, is an additional insured on Company B’s liability policy.  It seems OK so far.  Then Company A seeks coverage, as an additional insured, from Company B’s liability insurer.  Company B’s liability insurer responds that, despite what the COI may say, about Company A being an additional insured, Company A is not in fact an additional insured.  Company A’s response is to be perplexed -- and then some. 

Insurers usually win these cases.  First, while the Certificate of Insurance states that Company A is an additional insured on Company B’s liability policy, the COI also likely states, six ways from Sunday, and some are written in all caps, that the COI is issued for information purposes only, does not amend the policy and confers no rights upon the certificate holder, especially additional insured rights.    

Another reason insurers usually win these cases is that the party that issued the COI was often-times not authorized to speak for the insurer in the first place.  For example, the COI may have been issued by the named insured’s broker, which had no authority to bind the insurer.  

Thanks to the Ninth Circuit’s request in T Mobile United States v. Selective Insurance, No. 17-35932 (9th Cir. Nov. 9, 2018), the Washington Supreme Court may resolve this additional insured issue:  A party is listed as an additional insured under a Certificate of Insurance.  And, importantly, the COI was issued by the insurer’s authorized agent, and not simply a broker for the named insured.  However, the COI also contains all of the language noted above stating that it confers no rights on the party seeking coverage as an additional insured.   

The Ninth Circuit concluded that this issue involves two principles of Washington insurance law that are at “loggerheads:” First, “under Washington law, an insurance company is bound by all acts, contracts, or representations of its agent, whether general or special, which are within the scope of [the agent’s] real or apparent authority. The second is that under Washington law, the purpose of issuing a [COI] is to inform the recipient thereof that insurance has been obtained.  Accordingly, under Washington law, a COI is not the functional equivalent of an insurance policy, and it therefore cannot be used to amend, extend, or alter the coverage provisions of an insurance policy.”

Noting that this critical question of Washington law is not settled, the Ninth Circuit certified the following question to the high court of Washington (which can accept it or not): “Under Washington law, is an insurer bound by representations made by its authorized agent in a certificate of insurance with respect to a party’s status as an additional insured under a policy issued by the insurer, when the certificate includes language disclaiming its authority and ability to expand coverage?”

 

 

I have discussed the Washington Supreme Court’s April 2017 decision in Xia v. ProBuilders Specialty Insurance Company a few times.  Briefly, the Washington high court held that carbon monoxide, released from a negligently installed vent, attached to a hot water heater, was a “pollutant.”  At issue were claims for bodily injury by a homeowner against a home builder.  However, the Xia court still held that the pollution exclusion did not apply.  The court got to this result by adopting the “efficient proximate cause” rule -- which provides that coverage is owed if a covered peril sets in motion a causal chain, the last link of which is an uncovered peril.  This is usually seen in property coverage cases.  However, the court noted that there was nothing to say it couldn’t apply to any type of policy. 

Applying the “efficient proximate cause” rule, the court held that the pollution exclusion did not apply.  The court determined that the efficient proximate cause of the injuries was the negligent installation of the hot water heater.  Because this was a covered occurrence, that set in motion a causal chain, that led to discharging toxic levels of carbon monoxide, being an excluded peril, the pollution exclusion was not applicable.  In other words, the pollution exclusion did not apply because two or more perils combined in sequence to cause a loss – one covered and one not -- and a covered peril was the predominant or efficient cause of the loss.

In the last issue of Coverage Opinions I discussed ISO’s recent filing of endorsements designed to address the Xia decision.  Essentially, the endorsements provide that, if an exclusion would have precluded coverage, but the exclusion is rendered inapplicable, on account of the efficient proximate cause rule from Xia, then the exclusion does not apply.  In other words, the endorsements accept that Xia may preclude the applicability of an exclusion.  However, in such case, while the claim may now be covered, it is subject to the newly created “Efficient Proximate Cause Aggregate Limit.”

But, despite all the hubbub about Xia, a Washington federal court recently declined to apply it to find coverage that would not have otherwise been owed.  In Safeco Ins. Co. v. Wolk, No. 18-5368 (W.D. Wash. Oct. 25, 2018), the court addressed the availability of homeowner’s coverage, for claims against a husband and wife (Ben and Michelle Work), for Ben’s alleged sexual assault of a minor female guest in the home (Ruby Nicholls).  The claim against Michelle was that she knew or should have known of Ben’s conduct and did not protect Ruby.

The insurer, Safeco, undertook a defense for Michelle (but not Ben) and reserved rights on several grounds, including no “occurrence” and certain exclusions.  Litigation ensued. 

The Wolks argued that, vis-à-vis Michelle, there was an “occurrence” and the exclusions did not apply because the claims against her were not intentional.  Rather, it was alleged that her liability was based on negligent supervision of her husband.  The court did not agree.  In doing so, it rejected the Wolks’ argument that Xia dictated coverage:

“The Wolks also argue that Michelle’s allegedly negligent supervision of her husband may be the efficient proximate cause of his sexual abuse of Nicholls.  There are at least two flaws with this argument, one legal and one factual. First, the efficient proximate cause rule provides coverage where ‘a covered peril sets in motion a causal chain, the last link of which is an uncovered peril.’ Xia, 400 P.3d at 1240.  While Xia may have suggested that the efficient proximate cause rule can theoretically apply in a broader-than-previously-thought range of insurance coverage cases, its actual holding was not remarkable: [discussion of Xia] . . .

Xia does not hold or suggest that the efficient proximate cause of an excluded intentional act can be negligence, or the negligent supervision of the intentional actor.  Nor does any other case discussing the efficient proximate cause rule suggest that it can or should be applied in such a manner.

The factual flaw in the Wolks’ argument is that Nicholls does not allege that Michelle’s negligence caused the sexual abuse, or that if she knew or should have known it was going to occur in the future.  Her complaint alleges that Michelle ‘knew or should have known of the behavior complained of herein’—Ben’s sexual abuse of Nicholls—and that she ‘had a duty to protect’ Nicholls, which she ‘failed to do.’  It is not possible that the efficient proximate cause of the sexual abuse was Michelle’s knowledge that it was happening and her failure to stop it.”
 

I do not see this decision as some sort of rejection of Xia.  Rather, it seems to have been dictated by the facts at issue concerning causation.  Indeed, the court observed that Xia itself was cause/fact driven.

 

 

I have always considered Pennsylvania to be a strict “four corners” state for purposes of determining an insurer’s duty to defend.  [An exception being that a court may be willing to ignore a “negligence” allegation if the complaint belies that a defendant-insured’s actions could have been negligent.] 

In the last issue of Coverage Opinions I addressed Lupu v. Loan City, LLC, No. 17-1944 (3d Cir. Sept. 10, 2018) (published), where the strictness of Pennsylvania’s “four corners” test was further stated.  The Third Circuit in Lupu acknowledged that Pennsylvania has long employed the “four corners” test for purposes of determining an insurer’s duty to defend.  The court also had no hesitation pointing out shortcomings of the four corners rule:  “[T]he inflexible application the ‘four corners’ rule allows an insurer to plead Sergeant Schultz’s ‘know nothing’ defense, and thereby successfully ignor[e] true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insureds defense.”  Further, the court conceded that “harsh consequences [] can be wrought by the ‘four corners’ rule, and no doubt a wooden application leaves would-be insureds in the lurch if a covered claim is not identifiable in the complaint.  But Pennsylvania courts tolerate this measure of concern in exchange for a clear rule’s benefit.”  The court acknowledged that, under the four corners rule, the party seeking insurance is left at the mercy of the manner in which the underlying plaintiff pleads its case.

Despite this, in Unitrin Direct Ins. Co. v. Esposito, 280 F. Supp. 3d 666 (E.D. Pa. 2017), the Eastern District of Pennsylvania held that, at least in one situation, an exception to the four corners rule applied.  But the Third Circuit recently put the kibosh on this when it reversed the District Court.

The District Court in Esposito had held that an insurer was obligated to defend its insured, Michael Esposito, for claims arising out of a bar fight.  The court found that there was no occurrence.  However, the insured argued that he was acting in self-defense of himself and his wife.  The court concluded that the self-defense exception to the “expected or intended” exclusion applied.    

The District Court saw it this way: “If a court could not look beyond the complaint in the underlying action alleging that the insured assaulted the plaintiff, an insured claiming self-defense could not invoke a duty to defend.  How else could a court determine that an insured was claiming self-defense if it could not consider what his defense was in the underlying action? It could do so only by considering his answer in the underlying case or his answer in the declaratory judgment action. Otherwise, the insurer could avoid its duty to defend under the exception to the exclusion.”

But the Third Circuit, in Unitrin Direct Ins. Co. v. Esposito, No. 17-3810 (3rd Cir. Oct. 17, 2018) reversed, holding that, once the District Court concluded that there was no occurrence, it should have stopped there.  At that point, the appeals court explained, the case was over, and there should have been no consideration of whether any exclusions, or exceptions to exclusions, applied. 

Nonetheless, the Third Circuit went on to address the self-defense exception, to the “expected or intended” exclusion, and concluded that it did not apply to create a duty to duty.  In the Third Circuit’s view, the test for determining an insurer’s duty to defend is “four corners.”  The complaint alleged that Esposito, without provocation, punched, kicked and injured the plaintiff.  Thus, the court concluded that there was no allegation in the complaint that Esposito acted in self-defense.  
       
But of course there wasn’t any such allegation. This was the point made by the District Court.  A plaintiff, in an assault and battery case, would not allege that the defendant acted in self-defense.  To do so would be an admission by the plaintiff that he or she was an aggressor.  This is why some “four corners” states apply an exception, that allows a defendant-insured to argue that self-defense can be considered when determining duty to defend, despite the absence of any self-defense allegations within the four corners of the complaint.  But the Third Circuit did not go down this road.  Four corners is four corners.  

 

 

Over the past few years liability insurers have been adding endorsements to attempt to limit their exposure for bodily injury claims on construction sites (not to mention for property damage).  One way that insurers have attempted to limit such exposure has been to amend their CGL policy’s “employer’s liability” exclusion to preclude coverage for bodily injury to employees of “any insured” -- as opposed to the standard language, which applies to preclude coverage for employees of “the insured.”  In this way, coverage may not be owed to general contractors, that are additional insureds under policies issued to subcontractors, for injuries to employees of the subcontractor. 

This is a common claim when there is a construction site injury.  Since the amended exclusion precludes coverage for bodily injury to employees of “any insured,” no coverage is owed to the general contractor – as an additional insured -- even though the injured party is not an employee of the GC.  In other words, it does not matter that the insured seeking coverage is not the employer of the injured party.  The injured party is an employee of the named insured (subcontractor), which qualifies as “any insured.”  There can be other variations of this scenario.  And there are sometimes issues whether this interpretation can be supported when a policy has a separation of insureds provision. 

Another tack insurers have taken has been to add exclusions that preclude coverage for bodily injury to an employee of any contractor at the site – period -- regardless of the employee’s relationship, or not, to a party seeking coverage.  That’s a broad exclusion for sure.

In Northfield Ins. Co. v. Herrera, No. 17-51080 (5th Cir. Oct. 24, 2018), the Fifth Circuit addressed an exclusion on this type and upheld the broad interpretation sought by the insurer.  A coverage dispute arose under the following circumstances.  Charles Herrera ran an elevator service company under the name Austin Elevator Consultants.  Austin Elevator and Herrera entered into a contract under which it would service, inspect, and maintain elevators in Austin Energy’s Sandhill Energy Center. 

Thomas McCoy, an Austin Energy employee, was injured on a Sandhill Energy Center (SEC) elevator.  He sued Herrera for negligence.  Northfield, Herrera’s general liability insurer, defended Herrera under a reservation of rights and filed an action seeking a declaratory judgment that it had no duty to defend or indemnify Herrera. 

Northfield argued that no coverage was owed to Herrera on the basis of the following exclusion:

This insurance does not apply to “bodily injury” to: ***
(3) Any person who is employed by, is leased to or contracted with any organization that:
(a) Contracted with you or with any insured for services; or
(b) Contracted with others on your behalf for services; arising out of and in the course of employment by that organization or performing duties related to the conduct of that organization's business; or ***

As Northfield saw it, the exclusion applied to the McCoy bodily injury suit as McCoy was an employee of Austin Energy, and, thus, was an employee of an organization that contracted with Herrera.  As Herrera saw it, the exclusion applied solely to so-called downstream employees, i.e., employees of a Herrera subcontractor.

The district court found in favor of Herrera, based on an interpretation of exclusion (3)(a) in the context of other provisions of the exclusion.  The court also “noted that Northfield’s ‘expansive reading’ of the exclusion would render its service ‘illusory,’ reasoning that ‘service-providing businesses like Herrera[‘s]’ purchase general liability insurance to cover bodily injuries to the employees of organizations that hire them.” 

The Fifth Circuit reversed, finding that the language of exclusion (3)(a) – focusing on the phrase “contracted with”--was clear.  While the court’s analysis included a detailed reading of the operation of paragraph (3)(a), in the context of other provisions of the exclusion – which I don’t address here, the court also noted that “[t]he policy does not indicate that the parties intended technical or industry-specific meanings for this phrase.”  Thus, giving the phrase its ‘plain, ordinary, and generally accepted meaning’ -- looking at dictionaries, leading treatises on grammar and word usage – the appeals court held that “[t]he phrase ‘contracted with’ can be used to refer to upstream and downstream relationships.”

Lastly, the Fifth Circuit also squelched the district court’s illusory coverage argument: “Finally, Herrera protests that excluding this claim will render the policy’s coverage ‘illusory’ because the elevator in question is a service elevator and, therefore, only used by Austin Energy employees.  Texas disfavors constructions of insurance contracts that render all coverage illusory.  But when an insurance policy will provide coverage for other claims, Texas courts are unlikely to deem the policy illusory.  Herrera will still be protected against claims brought by third parties, such as SEC’s vendors and visitors to the site.  He will also be protected from claims relating to his other job sites. Therefore, the policy’s coverage is not illusory.” 

 

 

I’ve read a lot of “number of occurrences” decisions.  There are a gazillion of them addressed in Insurance Key Issues.  They involve seemingly limitless scenarios for which the number of occurrences must be determined.  But there are also some that arise with regularity, including shootings, product failure, sexual misconduct, auto accidents, construction defect and exposure to asbestos and other hazardous substances.

In Auto-Owners Ins. Co. v. Long, No. 18A-CT-852 (Ct. App. Ind. Oct. 30, 2018) the Court of Appeals of Indiana addressed a number of occurrences scenario that I’ve never seen before.  The decision seems pretty obvious.  Yet the trial and appellate courts still disagreed.

Long involved coverage under the following circumstances.  In February 2009, an employee of The Art of Design mailed a box containing ten bottles of a chemical product.  The product contained toxic chemicals.  While at a postal service processing facility the box was passed through a conveyor system known as the Singulator.  The box broke open and a damaged bottle leaked onto a conveyor belt, releasing toxic fumes.  The box was not labeled to say that it contained hazardous materials and it had been sealed by only a piece of masking tape.  During the clean-up process, a postal employee was overcome by the fumes and went to the hospital.  The employee died in 2016.  His Estate claimed that he was permanently disabled as a result of injuries sustained by exposure to the chemical fumes and such exposure was a direct and proximate cause of his death in 2016.

The Postal Service determined that The Art of Design violated Postal Service regulations relating to both the labeling and packaging of hazardous materials.  Had the box been properly labeled, it would not have been put through the Singulator but, rather, would have been hand-sorted.

At issue was coverage for Art of Design for the injuries sustained by the Postal employee.  Specifically, number of occurrences – one or two -- which dictated the amount available for the claim -- $1,000,000 or $2,000,000 (presumably the aggregate limit). 

The trial court found two occurrences – the insured failed to both properly label and package the box.  But the appellate court, noting that a prior Indiana appellate court had adopted the “cause test,” for determining  number of occurrences, disagreed: “While the Insured failed to both properly label and package the box, there was only one accident that resulted from the Insured’s failure to take appropriate preventative measures to avoid a spill.  Stated differently, although the Insured did two things wrong in shipping the package, the wrongdoing resulted in one spill, i.e., ‘one proximate, uninterrupted, and continuing cause which resulted in’ Long’s injury.”