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Declarations: The Coverage Opinions Interview With The Honorable Jack Weinstein
The Legendary New York Federal Judge Still Doing It His Way At 97
At age 97, Judge Jack Weinstein has been serving on the Eastern District of New York for nearly 52 years. Before that he was RBG's evidence professor in law school and his name appears on the NAACP's brief in Brown v. Board of Education. Weinstein's work as a judge and scholar is well known. I traveled to Brooklyn for a different purpose -- find out what makes him tick. "Should I lie down on my couch?," the legendary jurist asked me.

Randy Spencer’s Open Mic
Insurance Coverage New Year’s Resolutions

At Last: Insurance Key Issues Back In Stock On Amazon!

Ten Most Significant Insurance Coverage Decisions Of 2018

Introduction: 18th Annual List Of The "Ten Most Significant Insurance Coverage Decisions Of the Year"
The "Top 10" Turns 18: Will Hopefully Move Out Of The House!

Keodalah v. Allstate Ins. Co. (Washington Court of Appeals, Review Granted)
Court Holds That An Insurance Adjuster Can Be Liable For Bad Faith
Guest Author: Paul Rosner, Soha & Lang, Seattle

Gilbane Building Company/TDX Construction Corp. v. St. Paul Fire & Marine Ins. Co. (New York Court of Appeals)
Court Rejects Additional Insured Coverage In A Commonly Sought Scenario

Northfield Insurance Company v. Ht. Hawley Insurance Company (New Jersey Superior Court Appellate Division)
Most Substantive Guidance In 56 Years On One Of New Jersey's Most Important Issues

McCain v. Promise House, Inc. (Court of Appeals of Texas)
Insurer Has Right To Settle. But Insured Refuses To Sign The Settlement Agreement: Now What?

American Law Institute Adopts The Restatement Of The Law, Liability Insurance
Four Potential Landmines For Insurers

Berry Plastics Corp. v. Illinois National Ins. Co. (7th Circuit Court of Appeals)
Court Opens The CGL Door To Coverage For Lost Future Profits

Atain Specialty Ins. Co. v. Reno Cab Co. (District Court of Nevada)
Court Provides An Answer To Attacking The Assault & Battery Exclusion

Philadelphia Indemnity Insurance Company v. Hollycal Production, Inc. (Central District of California)
First Decision On Coverage For Injury Or Damage Caused By A Drone (What To Make Of Policies With Drone Exclusions?)

Century Surety Company v. Andrew (Nevada Supreme Court)
Non-Bad Faith Breach Of The Duty To Defend Could Lead To Insurer Liability in Excess Of Limits
Most Significant ALI Restatement Case To Date

Moore v. GEICO General Insurance Co. (11th Circuit Court of Appeals)
One Insurer Settles A Claim. Can That Fact Be Used By A Different Insured, Against A Different (Non-Settling) Insurer, As Evidence Of Bad Faith?

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




Vol. 8 - Issue 1
January 3, 2019


Insurance Coverage
New Year’s Resolutions




Randy Spencer is ringing in the new year in Provence. I asked him to mail in his insurance coverage new year's resolutions for this month's column. He did – the same ones from two years ago. And there were baguette crumbs in the envelope. As Spencer put it, the best thing about breaking your new year's resolutions in that you don't have to think of new ones. And, besides, as he reminded me (for the umpteenth time) – "It's not like you're paying me to write this."


Well, it's that time of the year – New Year's Resolution season. All over the country people are resolving to get in shape, stop smoking and cut down on their emoji usage.

Surely there are also ways for those in the coverage world to make this the year for getting better at something, fixing something or doing something different in their approach to handling claims. Who among us can't make one of these a resolution for 2017:

• While it's true that anything can happen in a case, and it's better to be safe than sorry, I resolve to stop citing the Nuclear Exclusion in all of my reservation of rights letters.

• I resolve to decide whether the words insured, insurer, plaintiff and defendant should be capitalized in my reservation of rights letters -- and then be consistent.

• I resolve to fix the auto-correct on my computer so that when I type CNA it doesn't change to CAN. [Who am I kidding? I've been talking about doing this for years.]

• I resolve to eat fewer snacks at mediations.

• I resolve to stop reading Insurance Key Issues while driving. It can wait.


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




Vol. 8 - Issue 1
January 3, 2019


At Last: Insurance Key Issues Back In Stock On Amazon!


For a couple of weeks there Insurance Key Issues was not immediately available on Amazon.  I am delighted that the book sells well, but it was really frustrating to see the long shipping delay.  Thankfully the book is now in stock -- and with Amazon Prime shipping.
Insurance Key Issues provides in-depth 50 state surveys (plus D.C.) of 20 of the most important liability coverage issues (and about half of the issues are relevant to professional liability claims as well as GL).  At close to 1,000 pages, these are not charts or one-line answers as are some 50 state surveys.
To learn more about the book, and to order, visit the Insurance Key Issues website:








Vol. 8 - Issue 1
January 3, 2019


Keodalah v. Allstate Ins. Co., 413 P.3d 1059 (Wn. App. 2018), review granted 191 Wn.2d 1004 (2018)

Court Holds That An Insurance Adjuster Can Be Liable For Bad Faith 

Guest Author: Paul Rosner, Soha & Lang, Seattle

Cases addressing whether an insurance adjuster (and not simply the insurer) can be liable for bad faith don’t come about every day.  But they are not total eclipses either.  However, when this type of bad faith question does arise, it often involves the conduct of an outside adjusting company.  But in Keodalah v. Allstate Insurance Co., the Washington Court of Appeals examined whether an adjuster, employed by an insurer, could be liable for bad faith.  The answer – yes (as well as for violation of the state’s Consumer Protection Act).

Keodalah is now before the Washington Supreme Court.  So it could become much ado about nothing (or quite the opposite).  But even if the Washington high court reverses, I believe that the decision, which is probably the most publicized on the adjuster/bad faith issue, shed a light on it. That could make it more mainstream and increase the frequency of policyholders nationally asserting it.  In fact, just the threat of asserting bad faith, against an adjuster, could be influential in the claims process.  Might an adjuster, facing the threat of a personal bad faith claim, and all that will flow from that, have a change of heart in its handing of a claim?  Policyholders will no doubt try to exploit that.  For these reasons, Keodalah, despite its final outcome being in limbo, merited inclusion as one of the year’s ten most significant coverage decisions.

To examine Keodalah I turned to a guest author – Paul Rosner of Seattle’s Soha & Lang.  Paul knows Washington coverage law like the place knows apples.  I’m thrilled to have one of Washington’s brightest coverage lights discuss Keodalah and its potential impact here.         


Paul Rosner, J.D., CPCU, has worked in the property and casualty field since 1989.  He is a former casualty adjuster, large loss property adjuster, claims supervisor, and claims manager.  In 2005, he received his J.D., summa cum laude, from Southwestern Law School, where he served as Lead Articles Editor for the Southwestern Law Review.  As an attorney, he focuses his practice on property and casualty insurance coverage and bad faith litigation in both Washington and Oregon.  He has also served as an expert witness on insurance bad faith and claims handling. 

Paul earned the designation of Chartered Property Casualty Underwriter (CPCU) in 2008.  Since then, he has been an active member of the CPCU Society both locally and nationally.  He served as President of the Pacific Northwest (Seattle) Chapter and is currently Chair of the CPCU Society’s Coverage, Litigators, Educators, & Witnesses (CLEW) Interest Group. 

Paul is also an active member of the Claims & Litigation Management Alliance (CLM).  He has served as President of the Seattle CLM Chapter, CLM’s State Co-Chair, and Education Director. 

Paul is a frequent author and lecturer on insurance coverage and bad faith issues including chapter co-author for the Washington Motor Vehicle Accident Insurance Deskbook (2008 Supplement), co-author of the Oregon and Washington chapters of “Insurance Bad Faith, A Compendium of State Law” (2010 and 2015 Editions), and co-author of Chapter 8, “Insurance-Specific Issues in Coverage and Bad-Faith Litigation” in “Washington Insurance Litigation Practice Guide” (2014-2015 Edition).  He is a regular contributor to the Soha & Lang, P.S. Coverage Blog and the Around the Nation column of Claims Management Magazine.  His lectures include presentations to attorneys and insurance professionals. 

When not practicing law Paul enjoys spending time with his family, running, hiking, camping, and mountain biking.

On March 26, 2018, Division One of the Washington Court of Appeals held in Keodalah v. Allstate Ins. Co. that an individual insurance adjuster, as distinct from the employing insurer, may be liable for common law bad faith and violation of the Washington Consumer Protection Act (“CPA”).  In Keodalah, the court analyzed RCW 48.01.030 which “imposes a duty of good faith on all persons engaged in the business of insurance,” and found that the definition of “person” included individual adjusters acting within the scope of their employment.  The court similarly found that individual adjusters could be liable for violating the CPA because application of the statute did not require proof of a consumer transaction between the parties.  The court therefore reversed and remanded the trial court’s dismissal of claims brought by the insured against the Allstate insurance adjuster who handled Keodalah’s claim. 

The Court of Appeals decided the issue at the pleading stage based on the insured’s allegations, which were as follows.  The claim at issue was tendered to Allstate seeking underinsured motorist (“UIM”) coverage after its insured was involved in a collision where a motorcyclist struck his truck while crossing an intersection, killing the motorcyclist and injuring Keodalah.  The facts uncovered by the Seattle Police Department (“SPD”) investigation, Allstate’s witness interviews, and the accident reconstruction firm hired by Allstate to analyze the collision all suggested that the motorcyclist was at fault and that his “excessive speed” caused the collision.  Keodalah requested that Allstate pay him the $25,000 limit of his UIM policy.  Allstate refused, making a series of offers to settle the claim.

Keodalah filed suit asserting a UIM claim.  During discovery, the adjuster was designated as Allstate’s Civil Rule 30(b)(6) deposition representative.  The adjuster contradicted the conclusions reached by the SPD and Allstate’s accident reconstruction analysis by claiming, for example, that Keodalah had run the stop sign and had been on his cell phone at the time of the accident.  At trial, Allstate continued to contend that Keodalah was 70 percent at fault.  The jury determined that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20 for his injuries, lost wages and medical expenses.

Keodalah filed a second lawsuit against Allstate that included claims against the adjuster for bad faith and CPA violations.  Allstate moved to dismiss the claims on the pleadings under CR 12(b)(6).  The trial court dismissed the claims against the adjuster and certified the issue for interlocutory appeal.  The Court of Appeals disagreed and concluded that the bad faith and CPA claims against the adjuster could proceed.  The Court found that Washington law imposes a duty of good faith on the adjuster, not just the employer, and applies equally both to individuals and to corporations acting as insurance adjusters.  The Court of Appeals similarly found that the adjuster could be liable for a CPA violation even absent the existence of a contractual relationship between Keodalah and the adjuster.

Keodalah constitutes an expansion of the law.  In reaching its conclusion, the Court of Appeals declined to follow prior intermediate appellate court and federal trial court decisions that had reached the opposite result.  Keodalah is troubling on multiple levels and raises practical concerns about the adjustment process and coverage litigation in Washington and beyond.  In litigation, primary motivations for suing claim handlers may include intimidation and the destruction of federal court diversity jurisdiction when the adjuster resides in Washington State.  Thus, the impacts may be tactical and procedural. 

Indeed, relying on Keodalah, two Washington federal district courts have remanded cases that insurers had removed to federal court after the insureds added claims against the individual adjusters.  Tidwell v. Gov’t Employees Ins. Co., No. C18-318RSL, 2018 WL 2441774 (W.D. Wash. May 31, 2018); Mort v. Allstate Indem. Co., No. C18-568RSL, 2018 WL 4303660 (W.D. Wash. Sept. 10, 2018).  It remains to be seen whether out-of-state insurers will shift claims handling responsibilities to out-of-state adjusters to preserve diversity jurisdiction.

In addition to destroying diversity when a claims handler is a Washington resident, policyholder counsel may seek a strategic advantage by holding the insurer’s employee hostage to the financial and collateral consequences of being a defendant in a civil suit for damages.  Moreover, adding claims handlers as defendants will increase the complexity, contentiousness, and cost of litigation.

Insurers can ameliorate the financial impact on their employees by agreeing to defend and indemnify adjusters when they are sued.  However, the threat of being personally named as a defendant in a lawsuit may intimidate individual adjusters and other claims professionals, which could result in slowing down the claims handling process as claims handlers become even more cautious in their claims handling decisions.  Decision makers may proactively file declaratory relief actions more frequently to protect themselves and their employees.  Keodalah may also impact the industry’s efforts to recruit millennials. 

Keodalah is especially troubling because, unlike most states where bad faith requires more than negligent conduct, as noted by Washington Supreme Court Justice Madsen in Xia v. ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 196, 400 P.3d 1234 (2017), the Washington Supreme Court has found bad faith as a matter of law when an insurer merely failed to “anticipate whether and how the law might change.”  It is bad enough that insurers are held to such an unreasonable standard in Washington.  Holding adjusters to such a standard is even more unjust and unconscionable. 

There is some good news, however.  First, the Washington Supreme Court has accepted review of Keodalah.  Although the Washington Supreme Court is no friend of the insurance industry, the Court may be persuaded that justice is not served by foisting bad faith claims on individual adjusters and that insurers should be encouraged rather than discouraged from using in-state adjusters.  

Second, Keodalah appears to be another Washington anomaly unlikely to be widely adopted.  Most courts that have addressed the issue have rejected attempts to impose liability on insurance adjusters.  See 14 Steven Plitt et al., Couch on Insurance § 208:10 (3d ed. 2005 & Supp.2014) (“Liability for conduct of adjusters and investigators employed by the insurer directly generally falls primarily on the insurer in its status as the employer, and personal liability is unusual.”)  The author is aware of only two states besides Washington, Alaska and New Hampshire, that have held that an adjuster owes a duty of care to an insured. C.P. ex rel. M.L. v. Allstate Ins. Co., 996 P.2d 1216 (Alaska 2000) (holding that adjuster has a duty to exercise reasonable care in connection with claims by insureds that are assigned to adjustor for investigation, evaluation and settlement.) Morvay v. Hanover Ins. Companies, 127 N.H. 723, 506 A.2d 333 (1986) (holding that claims adjusters owe a duty to the insured to conduct a fair and reasonable investigation of an insurance claim.)  Accordingly, while some states that have not addressed the issue may adopt this minority rule, the impact of the decision outside of Washington should be limited. 

Hopefully, the Washington Supreme Court will rule there is no basis for adjuster liability under common law agency principles, the common law bad faith tort, or under RCW 48.01.030.



Vol. 8 - Issue 1
January 3, 2019


Gilbane Building Company/TDX Construction Corp. v. St. Paul Fire & Marine Ins. Co., 97 N.E.3d 711 (N.Y. 2018)

High Court Rejects Additional Insured Coverage In A Commonly Sought Scenario

As important as additional insured decisions can be, I rarely report on them in Coverage Opinions.  Their outcomes are often dictated by specific policy language, or facts, or both.  As a result of their sui generis nature, additional insured decisions often-times do not offer easily discernable or wide-reaching lessons nor have the ability to influence other courts nationally.  So for this reason it is even more unusual that I would include an additional insured decision as one of the year’s ten most significant.   

But the New York Court of Appeals’s decision in Gilbane Building Co./TDX Construction Corp. v. St. Paul Fire and Marine Ins. Co. is an exception.  The additional insured policy language at issue is widely used, the scenario at issue arises with frequency in the construction context and there are few decisions addressing it.  Thus, the decision has the makings to influence other courts nationally.  Toss in that it comes from an influential court and rejected an obvious counter-argument.  For these reasons, Gilbane Building is in a special category of additional insured decisions.  [Incidentally, Gilbane Building is the King of Additional Insured decisions.  A Lexis search of decisions, with the name “Gilbane” in the caption, and “additional insured” in the body, gets 18 hits.]       

In “Gilbane No. 18,” the New York high court addressed the following additional insured scenario.  As is often the case, when it comes to AI decisions, there are various parties and contracts at issue.  It can be confusing to the reader.  The players are as follows:

Dormitory Authority of the State of New York (DASNY) (Owner) contracted with Samson Construction Company, a general contractor, for construction of a new forensic laboratory for New York City. 

“DASNY also contracted with a joint venture between Gilbane Building Company and TDX Construction Corporation (‘Gilbane JV’) for Gilbane JV to be the construction manager for the project. 

DASNY’s contract with Samson provided that Samson would obtain general liability insurance for the job, with an endorsement naming as additional insureds: ‘DASNY, the State of NY, the Construction Manager [Gilbane JV] and other entities specified on the Sample Certificate of Insurance provided by DASNY.’”

Samson secured general liability coverage from Liberty Insurance Underwriters.  The Sample Certificate of Insurance listed as “Additional Insureds under General Liability as respects this project: . . . Gilbane/TDX Construction Joint Venture.”

To clarify, Samson Construction Company, a general contractor, has a CGL policy that purports to provide additional insured coverage for Gilbane JV.      

Next, DASNY sued Samson and Perkins Eastman, Architects, P.C., the project architect, alleging construction defects.  Perkins commenced a third-party action against Gilbane JV.  Gilbane JV sought defense and indemnity, as an additional insured, under the Liberty policy, for the Perkins suit.  Liberty denied coverage and Gilbane JV filed suit against Liberty.  Following trial court and appellate division decisions, the case made it to Albany.

The additional insured endorsement at issue provided as follows:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.”  (emphasis added).

So, any person or organization with whom Samson (being “you”) agreed to add as an additional insured, by written contract, is an additional insured (but only with respect to liability arising out of your operations or premises owned by or rented to you).

But here’s the rub – Gilbane JV has no contract with Samson.  Rather, Samson had a contract with DASNY -- and that’s the source of Gilbane JV’s additional insured rights.

Gilbane JV did not see this as a problem, arguing: “[T]he phrase ‘by written contract’ modifies ‘to add,’ and argues that it refers to the act of the named insured, Samson, agreeing to add an additional insured. Put differently, Gilbane JV argues that ‘by written contract’ means only that any agreement by Samson to add an additional insured must be memorialized in a writing — not necessarily a writing between Samson and the purported additional insured. Thus, according to Gilbane JV, the contract between DASNY and Samson — under which Samson agreed in writing to procure a general liability insurance policy for the construction project and to name Gilbane JV as an additional insured — was sufficient to confer additional insured status upon Gilbane JV.”

But the New York high court agreed with Liberty that Gilbane JV was not entitled to additional insured coverage: “[T]he endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization ‘with whom’ Samson has a written contract.” 

To be more specific, the court held that “the endorsement would have the meaning Gilbane JV desires if the word ‘with’ had been omitted.  Omitting ‘with,’ the phrase would read: ‘. . . any person or organization whom you have agreed by written contract to add . . .’, and Gilbane JV’s position would have merit.  But Samson and Liberty included that preposition in the contract between them, and we must give it its ordinary meaning.  Here, the ‘with’ can only mean that the written contract must be ‘with’ the additional insured.”

The dissenting opinion reached the opposite conclusion by focusing on an alternative policy reading and concluding that the endorsement is ambiguous, or, at best, has two reasonable interpretations.

More importantly, the dissent argued, in vain, that Gilbane JV was an additional insured based on principles of risk transfer in the construction context: “Consistent with this risk transfer regime, a blanket additional insured endorsement generally provides coverage for any person or organization to whom or to which the named insured is obligated to name as an additional insured by virtue of a written contract or agreement.  The point of such a blanket endorsement is to furnish a means of providing such coverage that is more efficient than requiring either a separate contract between each subcontractor and each additional insured (which the majority finds to be necessary here) or that the policy list the identity of each additional insured (a list that would have to be amended whenever the named insured undertakes an obligation to add a new upstream entity, consistent with standard commercial practice).  In that regard, counsel for defendant conceded that underwriting considerations for a policy like the one before us are based, not on the number or identity of additional insureds that may be covered but, instead, on the nature of the insured’s work.  Thus, when Samson — a subcontractor on a major construction project, with a practical understanding of risk allocation in the construction industry — procured the policy here, it would reasonably expect that it had the right to add Gilbane JV, an  upstream entity, as an additional insured without the approval of, or even so much as a notification to, defendant, so long as such coverage was required by a written contract.  Seen through this lens, the interpretation proffered by Gilbane JV is consistent with the reasonable expectations of the average insured upon reading the policy and employing common speech.”  
The additional insured endorsement at issue here is quite common.  In addition, it is not usual for a construction contract to obligate a party to name an entity as an additional insured, but where such entity (the purported additional insured) is not a party to the contract.  This happens often in contacts between general contractors and subcontractors where the sub is obligated to name the general contractor AND the owner as additional insureds – but the owner is not a party to the GC-sub contract.

So as unlikely as it is for an additional insured decision to be included as one of the year’s ten most significant, Gilbane Building Co./TDX Construction Corp. v. St. Paul Fire and Marine Ins. Co. had the makings.




Vol. 8 - Issue 1
January 3, 2019


Northfield Insurance Company v. Ht. Hawley Insurance Company, 184 A.3d 517 (N.J. Super. Ct. App. Div. 2018)

New Jersey Court’s Most Substantive Guidance In 56 Years On One Of The State’s Most Important Issues

Sometimes one of the ten most significant coverage decisions of the year has not a single one of the stated qualifications for making the list.  In other words, the bedrock principle for a case being selected – having the potential ability to influence other courts nationally – is lacking.  It is one of those cases that is very important within its own borders, but with no ability to extend its influence further.  

Nonetheless, cases like this can make the annual top ten list because they are from a state with substantial claims and coverage litigation, the issue is one of paramount importance for that state and case law is lacking.  While the case will not be influential nationally, it could still impact a number of claims.   

Northfield Insurance Company v. Ht. Hawley Insurance Company is one of these state-limited decisions with the right qualifications to warrant inclusion on this year’s annual top ten list.

Those who handle coverage cases in New Jersey have long-known that, if an insurer retains counsel, and defends its insured under a reservation of rights, the insured must consent to such an arrangement.  This rule dates back to the New Jersey Supreme Court’s landmark 1962 decision in Merchants Insurance Co. v. Eggleston.   

New Jersey courts have imposed a simple sanction on insurers that fail to obtain their insured’s consent to being defended under a reservation of rights – loss of the insurer’s ability to assert an otherwise applicable defense to coverage.

Despite its significance, the consent issue in Eggleston has not generated many decisions in the past 50-plus years.  This dearth has left open to discussion whether an insurer that defends its insured, under a reservation of rights, but without obtaining its insured’s consent, has automatically lost its coverage defenses -- or must the insured have been prejudiced by the lack of consent.  

The New Jersey Appellate Division’s 2009 unpublished decision in Nazario v. Lobster House concluded that loss of coverage defenses was automatic, with prejudice suffered by the insured not being a consideration.  The court was clear: “We find nothing in Eggleston or its progeny which suggests that the insured must prove actual prejudice to create coverage, or that the carrier may prove lack of prejudice to avoid coverage by estoppel, when a fully informed written consent is lacking.  The control of the litigation without proper consent equates to creating the coverage without qualification under Eggleston.”
Notwithstanding Lobster House (and the Appellate Division’s 1967 decision in Sneed v. Concord Insurance Co.), the New Jersey Appellate Division held, in a published opinion, that an insurer that defends its insured, under a reservation of rights, but without obtaining consent, is not automatically in boiling water.

Admittedly, while Northfield v. Ht. Hawley involves a unique scenario that played into the decision, the opinion still concludes that an insurer’s failure to follow Eggleston’s consent requirement does not automatically lead to an insurer’s loss of coverage defenses.

The Empress Hotel, located near the ocean in Asbury Park, sustained roof damage during Superstorm Sandy.  This caused water damage to the hotel’s interior.  Prior to the storm, CDA Roofing Consultants had performed roof installation work on the hotel.  Empress and its insurer, Mt. Hawley Insurance Co., filed suit against CDA and its subcontractor, alleging that CDA’s negligence enabled the damage to the roof to take place. 

CDA’s liability insurer was Northfield.  The insurer advised CDA that, for a host of reasons, it was disclaiming coverage for the Empress suit.  However, Northfield stated that it was “willing” to provide CDA with a “courtesy defense,” subject to a reservation of rights.  Northfield later commenced a suit against CDA, seeking a declaration that it had no duty to defend or indemnify CDA in the Empress suit.                

Putting aside some procedural issues, Mt. Hawley and Empress argued, in the Northfield coverage action, that Northfield should be estopped from denying coverage for the claim against CDA, in the Empress action, because Northfield violated Merchants v. Eggleston by failing to properly seek CDA’s consent to its control of the defense.  The trial court agreed with Mt. Hawley and granted its motion for summary judgment.     

The issue made its way to the New Jersey Appellate Division, which reversed the grant of summary judgment in favor of Mt. Hawley. 

First the court addressed whether Northfield had complied with Eggleston by stating that it was “willing to provide” a courtesy defense.  The court concluded that, at least for summary judgment purposes, it was possible that “CDA’s failure to decline that ostensible favor justifies a finding that CDA acquiesced in Northfield’s control of the defense of the underlying action. . . . [T]he statement that a ‘courtesy defense’ would be provided might plausibly be interpreted as an offer of a defense, and not as the insurer’s insistence on controlling the defense. And, if interpreted as an offer, CDA’s following silence could be interpreted as acquiescence in Northfield’s control of the defense; such a circumstance would not offend Egglestonor its progeny.” 

This aspect of the opinion, involving a “willingness” to provide a “courtesy defense,” is unique.  But it offers this take-away, as the court put it: rejection of “the argument that Eggleston permits avoidance of estoppel only if the insurer uses certain magic words in communicating with its insured.”

The more important aspect of the opinion is the court’s conclusion that, even if Northfield did not satisfy the Eggleston consent requirement, loss of its coverage defenses was not automatic.  The court stated: “We reject Mt. Hawley’s argument and the motion judge’s determination that estoppel must always follow an insurer’s failure to fairly seek consent.  Indeed, Eggleston hardly supports such a view because waiver instead of estoppel was found implicated there.  Eggleston in no way suggests that estoppel immediately attaches when an insurer, while reserving its rights or declining coverage, assumes  control of the defense without first obtaining the insured’s consent. On the other hand, we recognize that Sneed [v. Concord Ins. Co., N.J. App. Div. (1967)] would appear to have drawn such a conclusion; in fact, in Sneed, the panel held that ‘Eggleston adumbrates’ the conclusion that estoppel will automatically follow and ‘[p]rejudice to the insured will be assumed.’  We do not agree with that blanket statement.” 
The court based its decision -- and recognizing that it was applying a summary judgment standard -- on two factors. 

First, as a matter of law, estoppel precludes a party “from asserting rights which might perhaps have otherwise existed . . . as against another person, who has in good faith relied upon such conduct, and has been led thereby to change his position for the worse.”

Then, as matter of fact, looking at the reliance test, the court explained: “First, it has not been shown that CDA relied on what Northfield wrote and changed its position to its detriment.  The factual record suggests that CDA was defunct when Northfield declined coverage and assumed CDA’s defense.  Consequently, one might ask what CDA would have otherwise done if it had rejected Northfield’s ‘courtesy defense.’  It certainly did not appear to be prepared to defend itself; no doubt CDA would have defaulted if Northfield had not provided a defense, just as CDA defaulted in this declaratory judgment action.  So, it is fair to conclude — at least for summary judgment purposes — that CDA did not adjust its conduct one way or another when advised by Northfield that it would provide a ‘courtesy defense.’  In short, the evidence is inconclusive if not lacking at this time as to whether CDA detrimentally relied.”

The court also concluded that there was no evidence to suggest that Northfield acted with an intention or expectation that its actions would be acted upon by the other party:  “The ‘other party’ — CDA — wasn’t ‘acting’ at all; it was moribund if not completely defunct at the time.  Whatever Northfield did or would do in defense of the underlying action was not likely to cause injury to CDA regardless of the outcome.” 

Admittedly, that CDA was defunct made it easier for the court to conclude that CDA did not rely on Northfield’s actions and change its position to its detriment.  Policyholders in future cases will no doubt raise that to distinguish their own Eggleston violation scenarios.  Nonetheless, the decision is a significant one.      

Complying with Eggleston is, of course, the best way for an insurer to proceed when retaining counsel and defending an insured under a reservation of rights.  However, for insurers that fail to do so, an Asbury Park hotel teaches that it does not necessarily have to be no surrender.




Vol. 8 - Issue 1
January 3, 2019


McCain v. Promise House, Inc., 2018 Tex. App. LEXIS 3092 (Ct. App. Tex. May 2, 2018)

Insurer Has Right To Settle.  But Insured Refuses To Sign The Settlement Agreement: Now What?

It is widely acknowledged that an insurer does not need its insured’s consent to settle a claim under a general liability policy.  Professional liability policies can be a different story.  But for CGL policies the insurer calls the shots.  The insured may not be happy about the settlement, and object to it, but its hands are tied.  [I’m sure that people can tell me exceptions, but I’m speaking of the general principle in a straightforward claim scenario.]

But this can be easier said than done.  What happens when the insurer wants to settle a claim and the insured objects.  The insurer responds that it can, and will, settle over the insured’s objection.  But then what happens when the insured, given its displeasure over the situation, refuses to sign the settlement agreement?  Hasn’t the insured just used the back door to obtain a right for which the front door was bolted shut?  And, if the insurer settles the claim, without a settlement agreement, it could be leaving its insured open to future liability -- and perhaps now without adequate remaining limits.      

As this is a situation that arises now and then, and is without a lot of case law guidance, I included the Texas appeals court’s decision in McCain v. Promise House, Inc. as one of the year’s ten most significant liability coverage decisions.
In December 2014, Glen McCain sued Promise House, a residential social services care facility, alleging various claims after his eleven-year-old son was physically and sexually abused by an “older male individual” while a resident of the facility.

Promise House had a commercial general liability insurance policy with Arch Insurance that contained a “sexual or physical abuse liability endorsement.”  Arch retained counsel to defend Promise House.  The following month, counsel for Promise House sent a letter to McCain’s  counsel, confirming a $400,000 settlement and stating that the settlement will be memorialized in a final settlement agreement.  Counsel for Promise House signed the letter as did McCain’s  counsel.  This is called a Rule 11 Agreement.

Promise House objected to the settlement and stated that it refused to sign the settlement agreement.  McCain’s counsel filed the Rule 11 agreement with the court and asserted breach of contract claims against Promise House and Arch.  The trial court found for Promise House. 

The Texas appeals court reversed.  Putting aside how it got there, the appeals court discussed whether the Rule 11 Agreement was enforceable and held that it was.   

Turning to the consent issue, the court stated the widely acknowledged rule that “[w]hen the language of an insurance contract unambiguously vests the insurer with an absolute right to settle third-party claims in its own discretion and without the insured’s consent, we will not engraft any consent requirement onto the contract.”  Further, lest there be any doubt about this, the court went on: “[T]he policy did not provide Promise House the right to object to any settlement.  By purchasing a policy that did not provide Promise House the right to veto settlement of third-party claims, Promise House gave up the right to complain that any settlement Arch entered somehow damaged Promise House.”

But that’s all general principle speak.  What about the practical issue -- Promise House refused to sign a formal settlement agreement.  This was not necessary, the court concluded, as the Rule 11 Agreement was enough to constitute a final settlement.  But what about the fact that Promise House did not sign the Rule 11 Agreement.  Also not necessary, the court concluded: “An insurer which, under the terms of its policy, assumes control of a claim, investigates the claim and hires an attorney to defend the insured, becomes the agent of the insured and the attorney becomes the sub-agent of the insured.”  So, the fact that counsel for Promise House drafted, signed and sent a letter to McCain’s counsel, agreeing to the settlement, was sufficient to bring the case to an end.

The court did not analyze these agency principles in reaching this conclusion.  It simply stated them as fact.  I’m sure some academic types could write a hundred pages addressing these issues in detail.  But the take-away from McCain is this -- the court found a practical solution to a practical problem.




Vol. 8 - Issue 1
January 3, 2019


American Law Institute Adopts The Restatement Of The Law, Liability Insurance

Four Potential Landmines For Insurers

While it is not a judicial one, the decision, in May, of the American Law Institute, to adopt its Restatement of the Law, Liability Insurance, certainly qualifies as one of the ten most significant of the year.

The years-long debate, at times contentious, over the substance of the RLLI, was well-publicized.  That is now in the rear view mirror.  But while one debate over the RLLI has ended, a new one is getting underway -- the role it may play in courts’ decision making.  As Alexander Graham Bell said, when one door closes another door opens.  Fraulein Maria, in the Sound of Music, made a similar observation.                       

While nobody knows what the role of the RLLI may be, I’ve given it some thought and have a take on it.  In addition, as discussed below, I believe that the possible impact of the RLLI can only be rightly considered on a provision-by-provision and state-by-state basis.  Comprising 50 sections and 500 pages, it is not an all or nothing proposition.  Based on that, I see four aspects of the RLLI that could have a significant impact on insurers.  I address these four potential landmines below.
Possible Role of the Restatement of the Law, Liability Insurance

Any consideration, of the possible role of the RLLI, must start with this fundamental truth – it is not precedential in any court, in any jurisdiction.  Second, the Restatement is comprised of 50 sections, addressing a multitude of liability coverage issues.  Third, the state of the law on coverage issues can differ dramatically between jurisdictions – both to the extent it has been developed and its treatment of substantive principles.  Based on this confluence of factors, the possible impact of the RLLI is likely tied to the state of the law on each provision and in each jurisdiction.  In other words, if there is law on a certain issue, in a particular state, it is less likely – and, in some cases, much less likely -- that a court would have any reason to consider the RLLI for guidance.  This reduces the possible impact of the RLLI.          

Conversely, when a court comes upon a coverage issue of first impression in its state or one in which any homegrown law is not clear-cut, courts frequently turn to out of state decisions and/or secondary sources for guidance. Of course these decisions and sources are not binding, but they are instructive to a court in need of an answer.  In the course of doing so, the RLLI may now be included in the list of sources that a court turns to for help in an unchartered territory situation.  Knowing that Restatements are developed by learned individuals at the ALI, following a long and painstaking process, it would not be unreasonable that a court would look to what the RLLI has to say about the issue.

Here are some examples of how this has already played out in courts.  The RLLI was cited by courts even before it was given final approval. 

Lack of Case Law

In Selective Insurance Company of America v. Smiley Body Shop, Inc., 260 F. Supp. 3d 1023 (S.D. Ind. 2017), an Indiana federal court addressed an insurer’s right to reimbursement of defense costs. The court first noted that there was no Indiana authority that had spoken to this issue. So, not surprisingly, the court looked to other decisions for guidance (3rd Circuit, 10th Circuit and Illinois Supreme Court) and noted that these courts found that an insurer did not have a right to recoup defense costs.  Then the court turned to the RLLI (even as a draft) for further guidance, which it noted does not permit reimbursement of defense costs.  In the end, the court was not required to answer the reimbursement question. However, if it were, the court, using the RLLI for support, was seemingly poised to conclude that the insurer did not have such a right.

In Gilbane v. Liberty Insurance Underwriters, No. 16 CH 15163 (Cir. Ct. Cook Cty. Nov. 2, 2018), the court was again called upon to decide if an insurer was entitled to reimbursement – this time of an indemnity payment.  The court was tasked to reach its decision under Rhode Island law, which was acknowledged to provide little guidance on the issue.  [So little that the court did not say what this guidance was.]  The court acknowledged, rightly so, that “[s]tates are split on whether insurers have the right to seek reimbursement from the insured for defense costs and indemnity or settlement payments.”  In disallowing reimbursement, the court included in its analysis the fact that the RLLI disallows reimbursement.

Case Law Exists

In Catlin Specialty Ins. Co. v. J.J. White, Inc., No. 14-1255 (E.D. Pa. Feb. 27, 2018), the court addressed a coverage issue that was the subject of precedent in the relevant jurisdiction (New York).  The court concluded that the insurer breached its duty to defend.  However, despite an argument from the policyholder, the court was not willing to hold that the insurer waived the right to argue that it may not owe coverage for indemnity.  In other words, the court did not adopt the so-called “waiver rule” – which was supported by an early draft of the RLLI.  And, as the court saw it, why would it?  After all, as the court noted, the waiver rule was rejected by the New York Court of Appeals in K2 v. American Guarantee (N.Y. 2014). 

While the court in J.J. White declined to adopt the RLLI, over high court precedent, the court in Catlin Specialty Ins. Co. v. CBL & Assocs. Props., 2018 Del. Super. LEXIS 342 (Del. Super. Ct. Aug. 9, 2018) needed much less in the way of existing case law to be persuaded to decline the follow the RLLI.  The court permitted an insurer to seek reimbursement of defense costs.  In rejecting the policyholder’s RLLI-based argument, that the court should preclude such reimbursement, the court was persuaded by an eleven year old federal district court decision, from the relevant jurisdiction, that permitted reimbursement.

Four Potential Insurer Landmines in the Restatement of the Law, Liability Insurance

As noted above, the possible impact of the RLLI can only be rightly considered on a provision-by-provision and state-by-state basis.  Moreover, I believe that the RLLI is likely to have the most influence when a court comes upon a coverage issue of first impression in its state or one in which its law is not clear-cut.  Based on this, I see four aspects of the RLLI that could have significant impacts for insurers.  These all involve scenarios where there is not an abundance of case law.  Hence, a court considering applying the RLLI would have less competition for doing so.  

Updating Reservation of Rights

Not surprisingly, the RLLI (§ 15) affords insurers the right to undertake a defense under a reservation of rights.  This Restatement section then goes on to state that, “if an insurer already defending a legal action learns of information, which it did not have constructive notice of under subsection (1) [for the original ROR], that provides a ground for contesting coverage for that action, the insurer must give notice of that ground to the insured within a reasonable time to reserve the right to contest coverage for the action on that ground.”

So the RLLI states that an insurer, in receipt of information that gives rise to a new coverage defense, must send a supplemental reservation of rights letter.  A comment to § 15 then states: “An insurer should know within a reasonable time any allegation contained in any pleading and in any other filing or transcript that a reasonable insurer managing the defense of a case would have reviewed.”   

Translation – the RLLI, based on a comment, purports to impose upon the insurers the task of reviewing all pleadings and deposition transcripts – which could be many and voluminous -- to identify new coverage defenses, and issue an updated reservation of rights.  Just as with the fairly inform requirement, discussed next, and the adequacy of reservation of rights letters could become a more frequently disputed issue.               

Reservation of Rights: The Fairly Inform Standard

Much has been discussed in the past few years about the obligation of insurers to issue reservation of rights letters that do more than simply set out some facts and quote policy language and then declare, viola, that the insurer’s rights have been reserved.  Some courts have penalized insurers for issuing ROR letters that did not fairly inform the insured, i.e., adequately explain, with specific facts tied to the potentially relevant policy provisions, why coverage might not be owed. 

The RLLI’s § 15 adopts this fairly inform standard: “Notice to the insured of a ground for contesting coverage must include a written explanation of the ground, including the specific insurance policy terms and facts upon which the potential ground for contesting coverage is based, in language that is understandable by a reasonable person in the position of the insured.”

With only a few states having specifically discussed the “fairly inform” standard for ROR letters, the RLLI gives the rule a wider base of support.

Insurer Receiving Information From Defense Counsel 

Section 10 of the RLLI gives insurers wide latitude in controlling a defense that it is providing.  However, § 10 then goes on to state that the insurer’s “right to receive from defense counsel all information relevant to the defense or settlement of the action, [is] subject to the exception for confidential information stated in § 11(2).”  Turning to § 11(2), it provides that “[a]n insurer does not have the right to receive any information of the insured that is protected by attorney—client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured.”

Reading these two provisions together, defense counsel cannot provide information to its client’s insurer that “could be used to benefit the insurer at the expense of the insured.”  Of course, defense counsel almost always maintains that it has no involvement in coverage issues.  That’s between his or her client and its insurer.  But, under these provisions, defense counsel must be quite familiar with the coverage issues.  Otherwise, how would defense counsel know if information provided to the insurer “could be used to benefit the insurer at the expense of the insured?”  Prudent defense would presumably err on the side of caution and provide very little information to the insurer -- perhaps only discovery responses and deposition transcripts.  This could lead to insurers being called upon to make settlement or trial decisions, without the benefit of a full analysis from defense counsel, who was fearful of providing information that could be used to benefit the insurer at the expense of the insured.

Excess Liability For Non-Bad Faith Breach Of The Duty To Defend

Section 48 of the RLLI sets forth damages available for a breach of a liability policy – even if the breach was not in bad faith.  The list includes reasonable defense costs, any indemnity owed, damages for failure to settle and “[a]ny other loss, including incidental or consequential loss, caused by the breach, provided that the loss was foreseeable by the insurer at the time of contracting as a probable result of a breach, which sums are not subject to any limit of the policy.”

Thus, under § 48, an insurer that breaches the duty to defend, and not in bad faith, could potentially be liable for a judgment in excess of its limits.  Coincidentally, as 2018 was coming to a close, the Supreme Court of Nevada cited to § 48 in reaching just such a decision.  See Century Surety Company v. Andrew, 2018 Nev. LEXIS 112 (Nev. Dec. 13, 2018) further down the list of the year’s ten most significant liability coverage decisions. 



Vol. 8 - Issue 1
January 3, 2019


Berry Plastics Corp. v. Illinois National Ins. Co., 903 F.3d 630 (7th Cir. 2018)

Court Opens The CGL Door To Coverage For Lost Future Profit

It is not usual to see a case that addresses whether a commercial general liability policy provides coverage for economic losses, such as lost profits, when an insured’s product causes “property damage.”  Here, consider an insured’s component product that causes a customer’s product to fail, leading the customer to sustain economic losses tied to its actual lost products. 

In Berry Plastics Corp. v. Illinois National Ins. Co., the Seventh Circuit addressed coverage for economic losses tied to an insured’s defective product.  But, here, the court examined whether “property damage” includes lost profits associated with the insured’s customers products that were not damaged – or not even in existence.  In other words, on account of the insured’s defective product, its customer sustained lost future profits. 

Early on the decision, the appeals court has this to say about the potential, in general, for lost profits: “To make an obvious point first, lost profits are a form of business loss and as such are not the type of injury that the ordinary commercial general liability policy insures against. What an insurer like Illinois National undertakes to insure against in such a policy is property damage or bodily injury that results from the manufacturer’s product after it leaves the manufacturer’s hands, which represents a distinctly different form of risk from the disappointed commercial expectations of the manufacturer's customer.”

But, despite such pronouncement, the Seventh Circuit held that coverage for lost future profits have the potential to be covered – and in scenarios that are far from far-fetched.  The insured in Berry Plastics lost -- but for a reason tied to the specifics of the case.  The decision, more generally, is a win for policyholders.  And coming from the Seventh Circuit, addressing an issue without an abundance of case law (on the future profits issue), the decision warranted inclusion here as one of the year’s ten most significant

The facts giving rise to the coverage issue are complex.  In very simple terms, Berry makes plastic packaging products.  It produced a foil laminate product for Packgen.  Packgen was developing, for one of its customers, CRI Catalyst Company, a container that could be used to store and ship a chemical catalyst that CRI produced for use in the refining of crude oil.  The foil layer of the container’s exterior surface failed.  CRI cancelled all pending orders of containers.  At the time of the failure, Packgen was selling over 1,200 containers per month to CRI.  Packgen anticipated that that would continue for the foreseeable future.  Packgen was also making overtures to 37 petroleum refiners.  They had expressed interest in the containers for use in disposing of spent catalyst.  Word of the product’s failure reached the oil refineries.  They made no purchases from Packgen.

Packgen sued Berry.  The jury awarded Packgen $7.2 million, which represented approximately $640,000 for unpaid invoices for containers that had already been shipped to CRI and future lost profits of $6,560,000.  

Berry sought coverage from its primary commercial general liability insurer, which paid its $1,000,000 limit.  However, Berry’s excess insurer, Illinois National, refused.  Berry filed suit.

The district court, with no Indiana case law on point, and, therefore, required to predict how the Indiana Supreme Court would resolve the issue, surveyed case law from other jurisdictions and held that “damages for lost profits are not covered as ‘damages because of ... Property Damage’ unless they are a measure of the actual physical injury to tangible property or for the loss of use of that property.  The profits that Packgen lost on future sales of its [containers] did not constitute such a measure of physical injury or loss of property. Accordingly, the court was convinced that the Indiana Supreme Court would conclude that Illinois National had no duty to indemnify Berry for those lost profits.”

The Seventh Circuit affirmed, but for a reason tied to the specific facts before it.  However, on the overarching issue, the court concluded that coverage could be owed, to an insured, for its liability for its customer’s lost future profits. 

The court’s conclusion was tied to the policy’s insuring agreement: The insurer was obligated to “pay on behalf of [Berry] those sums in excess of the Retained Limit [i.e., the $1 million covered by the (primary) policy] that [Berry] becomes legally obligated to pay as damages by reason of liability imposed by law because of ... Property Damage ... to which this Insurance applies.” 

In particular, the decision was tied to the phrase “because of ‘property damage.’”  Focusing on that phrase, the court’s conclusion was as follows:

“An ordinary understanding of the phrase ‘because of’ would include a broad array of consequential damages, not simply those that constitute a measure of the injury to the property itself. . . . And to the extent that a causal connection can be shown between property damage and lost profits, nothing in the term ‘because of property damage’ suggests that such lost profits necessarily should be excluded. If the delamination of Berry’s defective product and the disintegration of a Packgen [container] had resulted in a fire that shut down CRI’s catalyst-manufacturing facility for a substantial period of time, for example, why should the profits and market share lost to CRI as a result of this incident not be considered a measure of the injury to CRI’s property, in the sense that it addresses the entirety of a loss CRI would not have suffered but for the concrete property damage that occurred?

Given that there is no language in Illinois National’s policy that on its face excludes any category of losses that are incurred ‘because of’ property damage, we are willing to assume, consistent with Berry’s argument, that the Indiana Supreme Court might well leave the door open to coverage of future losses, including lost profits and loss of goodwill, so long as the insured can establish a causal relationship between the property damage and those losses.”

But the Seventh Circuit was not willing to conclude, as Berry argued, that all of Packgen’s lost profits, on future sales of containers, are automatically because of the damage Berry’s defective foil caused to the completed containers sold to CRI.  The court drew a distinction: “Assuming that Indiana law would permit the recovery of lost future profits, Wausau [Wausau Underwriters Ins. Co. v. United Plastics Group, Inc., 512 F.3d 953 (7th Cir. 2008)] makes clear that whether the Illinois National policy covers an award of such business losses depends on whether those losses were specifically due to property damage or instead to the failure of Berry’s foil laminate product to function as expected and warranted.”

The court went on to provide examples of this distinction between potentially covered versus uncovered lost future profits.  In general, did Berry’s component, sold to Packgen, cause property damage, such as a fire to CRI’s facility – for which lost future profits could then be covered?  Or was the problem with the component discovered by CRI in testing, before property damage could take place?  In that case, the lost future profits would not be covered, as they would be because of the failure of the product to perform as warranted.     

Berry lost, because it failed to make any effort to draw this distinction – which is likely to be complex and subject to disputes in future cases.  But despite Berry’s fate, the decision is one that policyholders can be expected to turn to when their products or actions cause another to sustain lost future profits.




Vol. 8 - Issue 1
January 3, 2019


Atain Specialty Ins. Co. v. Reno Cab Co., 2018 U.S. Dist. LEXIS 157758 (D. Nev. Sept. 14, 2018)

Court Provides An Answer To Attacking The Assault & Battery Exclusion

I have no statistical proof of this, but, anecdotally, I can say with confidence that insurers win a lot more cases than they lose involving the Assault and Battery exclusion under general liability policies.  Insurers tend to use broad A&B exclusions that cover both the act of the assault and battery, as well as claims against the insured for negligent hiring, negligent training, negligent supervision, etc.  In other words, the exclusions preclude coverage for assault and battery and failing to prevent the assault and battery.

But the insurer in Atain Specialty Ins. Co. v. Reno Cab Co. lost in its effort to apply an assault and battery exclusion.  And the reason was not because of something particular about its A&B exclusion – which can certainly be unique. Rather, it was for a reason that likely applies to virtually all A&B—CGL exclusion cases.  For this reason, and given the frequency in which A&B exclusions arise, I selected Reno Cab as one of the year’s ten most significant liability coverage decisions.

The case involves the potential availability of coverage, under a general liability policy, for a dispute over a cab fare that resulted in a death.  Claims for wrongful death, battery and negligent training and supervision were asserted against Reno Cab Company.  The cab company’s insurer, Atain Specialty, asserted that no coverage was owed, for defense or indemnity, on the basis of an assault and battery exclusion, which provided as follows:


1. Assault and Battery committed by any Insured, any employee of any Insured or any other person;
2. The failure to suppress or prevent Assault and Battery by any person in 1. above;
3. Any Assault or Battery resulting from or allegedly related to the negligent hiring, supervision, or training of any employee of the Insured; or
4. Assault or Battery, whether or not caused by or arising out of negligent, reckless or wanton conduct of the Insured, the Insured's employees, patrons or other persons lawfully or otherwise on, at or near the premises owned or occupied by the Insureds, or by any other person.

Reno Cab argued that the A&B exclusion was ambiguous, as to whether it applied to self-defense, since the Expected or Intended Exclusion contained a self-defense exception: “‘Bodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured.  This exclusion does not apply to ‘bodily injury’ resulting from the use of reasonable force to protect persons or property.”

The court rejected the insurer’s argument, among others, that exclusions operate independently of each other and should be read separately.  The court sided with Reno Cab: “The Court agrees with Reno Cab that the Assault and Battery Exclusion conflicts with the Expected or Intended Injury Exclusion and creates ambiguity.  An assault or battery is an intentional act, which brings it within the scope of both the Assault and Battery Exclusion and the Expected or Intended Injury Exclusion, yet only the Expected or Intended Injury Exclusion includes a carve-out for self-defense.  Accepting Atain’s contention that self-defense necessarily constitutes an assault and battery, this inconsistency leads to two competing interpretations of the Policy: on the one hand, the Policy covers self-defense characterized as an intentional act, and on the other hand, the Policy excludes coverage for self-defense characterized as an assault and battery.  An insurance policy is considered ambiguous if it creates multiple reasonable expectations of coverage as drafted.  In light of this ambiguity, the Court must construe the Assault and Battery Exclusion in favor of coverage.”
This is a serious decision for insurers that handle claims that, by their nature, invoke the A&B exclusion.  The reason being that the self-defense exception, contained in the Expected or Intended exclusion, is likely contained in their policies too.  It is a standard exclusion in the ISO commercial general liability policy.  Thus, the rationale for Reno Cab -- that the combination of an Expected or Intended Exclusion with a self-defense exception, and an A&B exclusion with no self-defense exception, is ambiguous -- is open to wide-spread applicability.  Insurers that handle claims, that invoke the A&B exclusion, would be well-served to consider a possible response in their policies.



Vol. 8 - Issue 1
January 3, 2019


Philadelphia Indemnity Insurance Company v. Hollycal Production, Inc., 2018 U.S. Dist. LEXIS 211289 (C.D. Cal. Dec. 7, 2018)

First Decision On Coverage For Injury Or Damage Caused By A Drone (What To Make Of Policies With Drone Exclusions?)

Philadelphia Indemnity Insurance Company v. Hollycal Production is, as far as I know – and I’m pretty sure I’m right about this – the first decision to address whether coverage is owed, under a liability policy, for injury or damage caused by a wayward drone.  For years now I’ve be hearing about how drones are going to change my life.  No more carrying the recyclables to the curb every other Tuesday.  Nope, I’ll have our family drone do that as part of its chores.  But my life has not changed since drones came along.  The pizza delivery guy is still, well, the pizza delivery guy.

Nonetheless, I suspect that drones will find enough day to day uses to cause some injuries or damage.  As Blood, Sweat and Tears said, what goes up must come down.  So the first decision to address whether coverage is owed, under a liability policy, for such injury or damage, merits inclusion as one of the year’s ten most significant coverage cases.  When it comes to new exposures, the first decisions addressing the issue are often-times given outsized importance. 

At issue in Hollycal Production was the availability of coverage for a photographer, whose drone, being used to photograph a wedding, came into contact with Darshan Kamboj, a guest, causing her to lose sight in an eye.  The drone did not fall from the sky.  Rather, it was hovering at eye level when the unfortunate collision took place.    
Hollycal was insured under a general liability policy issued by Philadelphia Indemnity Insurance Company.  Following Ms. Kamboj’s unsuccessful efforts to settle the matter with Philadelphia Indemnity, she filed suit against Hollycal Production and related individuals.  Philadelphia Indemnity undertook Hollycal’s defense, under a reservation of rights, and filed an action seeking a determination that it had no obligation to defend or indemnity. 

As Philadelphia Indemnity saw it, no coverage was owed on account of two exclusions in the policy: (1) “Bodily injury” or “property damage” “arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto’ or watercraft owned or operated by or rented or loaned to any insured;” and (2) the Policy does not apply to bodily injury “[a]rising out of the ownership, operation, maintenance, use, loading, or unloading of any flying craft or vehicle, including, but not limited to, any aircraft, hot air balloon, glider, parachute, helicopter, missile or spacecraft.”  [The first exclusion is contained in ISO’s standard commercial general liability policy.  The second one is not.]       

Philadelphia Indemnity filed a motion for summary judgment.  It was unopposed.  However, the argument by plaintiff’s counsel, pre-suit, was that the aircraft exclusions did not apply because a “drone equipped with a camera is not capable of transporting persons or cargo,” but, rather, is “unmanned and operated remotely.”  Ms. Kamboj’s counsel argued that the drone was “a piece of equipment” and not “an aircraft or vehicle.”

But the court held that the aircraft exclusions applied to preclude coverage.  While the analysis was not extensive, the court did not believe that that it was necessary for the drone to transport anything.  The court’s succinct analysis went like this:  “The Policy specifically excludes any bodily injury arising out of the use of an aircraft operated by an insured.  While the policy does not define the term ‘aircraft,’ the term ‘aircraft’ is unambiguous and its ordinary meaning, as defined by Merriam-Webster’s Collegiate Dictionary, is ‘a vehicle (such as an airplane or balloon) for traveling through the air.’ . . . Here, Ms. Kamboj was injured when a drone, hovering at eye level and operated by Defendant Satyam Sukhwal, came into contact with her eye. A drone, as a ‘vehicle . . . for traveling through the air’ is an aircraft under the term’s ordinary and plain definition. The ordinary definition of an aircraft does not require the carrying of passengers or cargo. Additionally, that a drone is unmanned and operated remotely does not make it any less of an aircraft.”

So there you have it – bodily injury, caused by a drone, comes within the aircraft exclusion of a liability exclusion.

But what about this?  Some liability policies now include a drone exclusion (fancy name – “Unmanned Aircraft” exclusion).  If an insurer is using a drone exclusion on its liability policies, does that mean that a policy, without a drone exclusion, is intended to provide coverage for injury or damage caused by a drone?  Otherwise, so the policyholder argument goes, why add the exclusion?  Insurers argue that the exclusion was added for the avoidance of doubt.  Courts throughout the years have addressed whether, the addition of an exclusion in a policy, means that the now-excluded scenario was initially intended to be covered.  The decisions on this issue go both ways.




Vol. 8 - Issue 1
January 3, 2019


Century Surety Company v. Andrew, 2018 Nev. LEXIS 112 (Nev. Dec. 13, 2018)

Non-Bad Faith Breach Of The Duty To Defend Could Lead To Insurer Liability in Excess Of Limits

Most Significant ALI Restatement Case To Date

Insurers generally accept that they face potential exposure, above their limits of liability, if they fail to settle a claim within such limits, where the opportunity existed, and they did so it bad faith.  In other words, a determination is made that, based on the potential for liability and damages, the insurer should have settled the claim within policy limits and eliminated the insured’s potential for personal liability.  And, importantly, its failure to do so was unjustified, based on a certain state-specific standard, for analyzing its decision, being satisfied.

But what is generally not accepted by an insurer is that it faces exposure, above its limits of liability, for a decision not to settle, or any other action taken – even if ultimately determined to have been incorrect -- if such decision was not made in bad faith.  In other words, courts frequently hold that an insurer, simply being wrong, has not acted in bad faith.   

But not so in Century Insurance Company v. Andrew.  The Supreme Court of Nevada held that the insurer breached its duty to defend – but did not do so in bad faith.  Nonetheless, the court concluded that the insurer could, perhaps, be liable for a judgment that is $17,000,000 in excess of its policy limit.  Given that the question whether an insurer has breached its duty to defend is one of the most common at issue in coverage litigation (it has no tie to any particular type of claim), the potential exposure the decision creates, that the issue has not been addressed by many courts and that the court adopted what it called the minority view, it was not difficult to put Andrew on the list of the year’s ten most significant liability coverage decisions.  And for good measure -- the decision is the most significant one to date involving the new Insurance Restatement.       

The case grew out of a motor vehicle accident.  Michael Vasquez used his truck for personal use and for his mobile auto detailing business, Blue Streak Auto Detailing, LLC.  Vasquez struck Ryan Pretner, causing significant brain injuries.  Blue Streak was insured under a commercial liability policy issued by Century Surety Company.  The policy had a limit of $1 million.

Century Surety conducted an investigation and concluded that, at the time of the accident, Vasquez was not driving in the course and scope of his employment with Blue Streak.  On that basis, Century rejected a demand to settle the claim within the policy limit.  Pretner filed suit, alleging that Vasquez was in fact driving in the course and scope of his employment.  Century refused to defend Blue Streak.  Vasquez and Blue Streak defaulted.  Century, made aware of the default, maintained that the claim was not covered.

Vasquez and Blue Streak entered into an agreement with Pretner not to execute on any judgment against them.  Blue Streak assigned its rights against Century to Pretner.  The court entered a default judgment against Vasquez and Blue Streak for $18,050,183.  The court’s findings of fact stated that “Vasquez negligently injured Pretner, that Vasquez was working in the course and scope of his employment with Blue Streak at the time, and that consequently Blue Streak was also liable.”

Pretner, as an assignee of Blue Streak, filed suit against Century in state court, for breach of contract, breach of the implied covenant of good faith and fair dealing and unfair claims practices.  The bad faith suit was removed to federal court. 

The federal court concluded that Century breached its duty to defend Blue Steak, but such breach was not in bad faith.  The court then went back and forth on whether Century’s liability was capped at its $1,000,000 limit plus the defense costs incurred by Blue Streak (of which there were none).  The court concluded that bad faith was not a requirement to hold Century liable in excess of the policy limit.  However, the court stayed its decision, as that question was certified to Supreme Court of Nevada.
The Nevada high court concluded that, even in the absence of bad faith, an insurer may be liable for a judgment that exceeds the policy limits –“if the judgment is consequential to the insurer’s breach.”  In coming to this conclusion, the court observed that it was adopting the minority view, with the majority rule being that an insurer’s liability, for a non-faith breach of the duty to defend, is capped at its policy limit plus the insured’s defense costs. 

The court’s rationale, for adopting the minority rule, was that “[u]nlike the minority view, the majority view places an artificial limit to the insurer’s liability within the policy limits for a breach of its duty to defend.  That limit is based on the insurer’s duty to indemnify but a duty to defend limited to and coextensive with the duty to indemnify would be essentially meaningless; insureds pay a premium for what is partly litigation insurance designed to protect . . . the insured from the expense of defending suits brought against him.” 

In adopting the minority rule, the court cited to section 48 of the ALI’s Restatement of the Law of Liability Insurance – Damages for Breach of a Liability Policy -- which provides, in part: “The damages that an insured may recover for breach of a liability insurance policy include … (4) Any other loss, including incidental or consequential loss, caused by the breach, provided that the loss was foreseeable by the insurer at the time of contracting as a probable result of the breach, which sums are not subject to any limit of the policy.” 

While the court’s decision was hardly driven by the Restatement, it played some part.  Even if minor, given the potential impact of Andrew, it is fair to say that the decision represents the most significant one to date involving the Restatement.       

Despite reaching this decision, the Andrew court was quick to point out that the insurer’s excess liability was not automatic: “However, we are not saying that an entire judgment is automatically a consequence of an insurer’s breach of its duty to defend; rather, the insured is tasked with showing that the breach caused the excess judgment and is obligated to take all reasonable means to protect himself and mitigate his damages.”

The court’s opinion suggests that an insurer will be more likely to be saddled with an excess judgment when its insured is faced with defending a lawsuit, on its own, but cannot afford a lawyer.  Here, any default judgment, and consequent settlement over the limits, would be more likely to have been caused by the breach of the duty to defend.  As the court further explained, compare this to an insured that can afford to mount a defense -- and it is as good as one that the insurer would have provided.  In such case, the entire judgment would not be consequential to the insurer’s breach of the duty to defend.  Thus, the insurer’s liability should be capped at the policy limit.    

The take-aways from Andrew are two-fold.  Even if it’s the minority rule, the amount of case law nationally, addressing this issue, is not abundant.  Thus, Andrew could have a bigger impact than if it were just one more case out of many on the issue.  The decision’s impact will certainly be felt in the frequent situation of auto policies with low limits.  A person purchasing a $15,000 auto policy would seemingly not be able to afford to mount a defense in its own.  Thus, it would have the argument that the insurer’s breach of the duty to defend was the cause of the excess judgment.  But Andrew could also be relevant in the context of liability claims under homeowner’s policies and general liability policies – even with high limits.  Whether the insured could have defended itself is not necessarily tied to the insured’s ability to afford an insurance policy, even one more than bare bones.   

The Andrew court’s test, for establishing an insurer’s excess liability, is quite fact specific and it is easy to imagine litigation over proof of satisfaction of the insured’s “task:” “showing that the breach caused the excess judgment and [that it satisfied its] obligat[ion] to take all reasonable means to protect himself and mitigate his damages.”



Vol. 8 - Issue 1
January 3, 2019


Moore v. GEICO General Insurance Co., 2018 U.S. App. LEXIS 35196 (11th Cir. Dec. 14, 2018)

One Insurer Settles A Claim.  Can That Fact Be Used By A Different Insured, Against A Different (Non-Settling) Insurer, As Evidence Of Bad Faith?

In one way, bad faith is a straightforward issue.  The relevant state’s legal standard, that an insured must meet, to be awarded damages for bad faith (first party and failure to settle), have been well-defined by courts.  In other words, the rules can be easily articulated.  On the other hand, bad faith can be the furthest thing imaginable from a straightforward coverage issue.  That’s because the question, whether that easily articulable bad faith standard has been met, can be extremely fact-intensive.  A policyholder, asserting a claim for bad faith, will likely point to a host of factors, concerning the manner in which the insurer handled a claim, or made a coverage determination, in arguing that it has been.  Of course, facts, and their significance, are often times disputed.  Courts will likely consider the various factors, give relative degrees of weight to them, and decide if they give rise to bad faith.  In doing so, the bad faith considerations will likely be related to the claim at hand.  But sometimes policyholders attempt to assert that the insurer’s handling, of other claims, should also be relevant to the bad faith determination at hand.

Moore v. GEICO involved a court’s analysis of bad faith based on a factor that I have never seen considered before.  A policyholder argued that its insurer acted in bad faith by not settling a claim made against it.  Of note, in support of its position, the policyholder pointed to the manner in which another insurer handled and settled a claim, for another insured, arising from the same circumstances. 

I’m not certain if Moore is the first case addressing this alleged bad faith factor, but there certainly aren’t many.  Granted, not every case involves multiple insurers and insureds.  But enough do.  Add to that the frequency in which policyholders allege bad faith, the novelty of the argument, the paucity of case law addressing the issue and that Moore is from a Circuit Court of Appeals.  And, what’s more, while the insurer won, the court’s decision still offers opportunities for policyholders to use it to their advantage.  This combination led to Moore making the cut as one of 2018’s top ten coverage decisions.

The bad faith allegations in Moore grew out of a horrific car accident.  Joshua Moore and Richard Waters got into a road rage situation on a Florida highway.  Waters was drunk and on opioids.  Hand gestures were exchanged.  Waters swerved into Moore’s vehicle.  Moore lost control, crossed the median, and hit Amy Krupp’s car head-on.  Her ten year son was in the vehicle.  Krupp died.  Her son sustained brain injuries.  Waters was sent to prison.           

Waters was insured by Peak Insurance.  However, his policy offered only $10,000 in property damage coverage.  Moore was insured under his parents’ GEICO policy, which provided bodily injury coverage of $10,000 per person/$20,000 per occurrence and $10,000 in property damage coverage.

Attorney Lance Holden was hired to represent the Krupps.  Holden made what the court described as “essentially identical settlement offers to both Waters’ and Moore’s insurers: If, among other things, the insurer, within twenty-one days, paid claimants the full amount of available coverage, submitted a document for claimants to sign releasing only the insureds and provided affidavits from the insureds or their insurance agents swearing that there was no other available insurance, claimants would fully release the insureds from any further liability stemming from the accident.”

Waters’ insurer, Peak, complied with these conditions and the Krupps settled their claims against Waters.

It was more complicated with GEICO.  GEICO tried to settle, but the Krupps found GEICO’s efforts inadequate, “primarily because (1) GEICO provided a form document that released, not only its insureds, but also ‘all officers, directors, agents or employees of the foregoing [named insureds], their heirs, executors, administrators, agents, or assigns’, and (2) GEICO provided vague and incomprehensible affidavits from its insureds, the Moores, regarding the possible availability of additional insurance.”

The Krupps rejected GEICO’s efforts to settle their bodily injury claims and sued Moore.  A  jury returned a verdict of approximately $45 million in the Krupps’ favor and held Moore 10% responsible.  The court entered judgment against Moore for over $4 million.

Moore initiated suit in federal court against GEICO.  He asserted that, under Florida law, GEICO acted in bad faith in failing to settle with the Krupps for his coverage limits when it had the opportunity to do so.

GEICO filed a motion in limine, requesting that, under Fed. R. Evid. 403, the district court prohibit Moore from “(1) ‘presenting evidence, testimony, or argument that the underlying claim ‘could' have been settled, that [claimants were] willing to settle, or that GEICO had an opportunity to settle the underlying claim because [claimants] settled with PEAK’; and (2) ‘presenting evidence, testimony, or argument relating to PEAK’s handling of a claim against Waters.’”

The district court denied GEICO’s motion.  So, during trial, “Moore frequently put on evidence and made argument that Peak was able to settle claimants’ property damage claim against its client for the property limits of that policy.”  The jury found that GEICO had acted in bad faith.

Afterwards the court ruled that it erred in permitting the jury to hear evidence of claimants’ settlement with Peak and the manner in which Peak handled the claim.  The court granted a new trial. This time GEICO prevailed.  Moore appealed on the issue of the admissibility of Peak’s handling of the claim.

The Eleventh Circuit affirmed the decision that the Peak settlement was inadmissible.  The court explained that Rule 403 provides that “[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” 

The court explained its decision:  “Evidence of claimants’ settlement with Peak certainly had some probative value. The manner in which Peak handled the claims against its insured was probative, at a minimum, to counter GEICO’s evidence that it could not understand claimants’ settlement conditions, which were the same for both insurers. Evidence of Peak’s claims handling also bolstered Moore’s expert’s testimony as to the insurance industry’s custom and practice in handling claims of catastrophic injuries. Moreover, the fact that claimants settled with Peak was relevant to counter GEICO’s argument that claimants never intended to settle their claims for the minimal insurance coverage available.

On the other hand, the probative value of this evidence was diminished because the claim Peak settled was not identical nor even substantially similar to the claim GEICO was handling.  Peak’s insured had only property damage coverage and, between that coverage and the property damage coverage that GEICO provided its insured Moore, there was no likelihood that claimants’ property damage claims would exceed that available coverage. By contrast, GEICO provided its insured, Moore, not only property damage coverage, but also bodily injury coverage. The amount of that bodily injury coverage, however, was minimal.  Faced with catastrophic bodily injury claims, there was a clear possibility of a bodily injury judgment against Moore that would far exceed his coverage. The claims Peak settled, then, were significantly different from the claims GEICO was handling.”

An insurer defending a bad faith case, that is faced with evidence of how another insurer handled a claim, for a different insured, is likely to argue that it’s an apples to oranges comparison.  And there are indeed likely to be differences that can be pointed out.  But despite the differences here, and the Eleventh Circuit’s affirmance, the appeals court seemed to suggest that it “might” have gone the other way if it had been reviewing the matter de novo and not based on an abuse of discretion standard.  Bad faith determinations are often tied to consideration of a host of factors.  Moore provides a unique one that a court may be willing to include in the mix.