This article originally appeared in the March 19, 2014 issue of Coverage Opinions.  Sometimes I make stuff up in CO.  This is a real case.  Really. 

Just when you thought you’ve seen it all, along comes Brooks v. Zulu Social Aid and Pleasure Club, 110 So. 3d 703 (La. Ct. App. 2013).  At issue was the applicability of the “Coconut Exclusion” in a commercial general liability policy.  [And I thought my “Insurance Key Issues” coverage book was pretty comprehensive.  Apparently not so much.]                  

Faith Brooks sustained injuries (at least a broken nose) when a coconut thrown by a rider in the Zulu parade hit her in the face.  She and her family filed suit against the Zulu Social Aid and Pleasure Club, alleging that her injuries were caused by: The deliberate and wanton act or gross negligence of the Zulu Krewe and organization, its officers, directors and members, in several non-exclusive ways, including: throwing a coconut from the float directly at Faith Brooks, striking her in the face; failing to enforce the mandatory rules and regulations adopted by the Zulu Krewe and organization, the Mardi Gras Association and the City of New Orleans barring any member or float rider from throwing a coconut or other inherently dangerous hard object from the float at the spectators; and throwing a coconut when Zulu, its members and float riders, knew or certainly should have known, that injury to one or more spectators was substantially certain, if not inevitable.  Lloyd’s was named as a defendant in plaintiffs’ first amended petition. 

Lloyd’s issued a policy (presumably commercial general liability) to Zulu.  Lloyd’s undertook Zulu’s defense under a reservation of rights.  The Lloyd’s policy contained, by way of a General Change Endorsement, the oooold “Coconut Exclusion,” which provided: “[i]t is hereby agreed and understood that there will be no coverage for any coconut thrown in any fashion from anywhere on the float.  Coconuts may be handed from the first layer of the float only.”       

Seems simple enough.  This isn’t exactly some manuscript antitrust endorsement in a D&O policy we’re talking about here.  Lloyd’s, not milking the case, filed an answer and motion for summary judgment on the same day.  The trial court granted Lloyd’s motion.

Zulu went to the Court of Appeal of Louisiana and argued that summary judgment was inappropriate because the petition stated that the claims presented were “non-exclusive.”  This, Zulu argued, created the possibility of liability pending further, adequate discovery.  In other words, Zulu maintained that it was “impossible to say that the Lloyd’s policy excluded coverage pending adequate discovery.” 

The appeals court concluded that Zulu’s argument had merit.  The court was quick to point out that, in reaching its decision, it was not meaning to suggest or imply that Lloyd’s appointed counsel rendered anything less than adequate representation to Zulu.  “Instead, it merely appears from the record that no discovery was conducted on Zulu’s behalf during the time that it was represented by Lloyd’s appointed counsel.”  Under these circumstances, the court held that the trial court “abused its discretion in ruling on the motion for summary judgment before allowing Zulu a meaningful opportunity to conduct discovery.  Because there is the possibility that additional discovery could reveal a material issue of fact, the granting of summary judgment at this stage of the case was premature.”

While the court held that summary judgment for Lloyd’s was premature, it seems inevitable that that’s where the case is going.  I’ve looked at the Coconut Exclusion six ways from Sunday and I just can’t see any way a policyholder can crack this nut.

 

 

The 26th Annual West Coast Casualty Construction Defect Seminar is being held from May 9-10, 2019 at the Disneyland Hotel in Anaheim.  Yes, 26th annual!  There are some CD claims that have not been resolved in 26 years.      

With 1,500 attendees, this is the must-attend construction defect seminar for all those involved with construction defect litigation and claims -- insurers, coverage lawyers, plaintiffs counsel, defense counsel and those on the science and technology side of CD.  This is the Davos of construction defect seminars.

I am delighted to announce that attendees of this year’s West Coast Casualty Construction Defect Seminar will receive a complimentary copy of the 4th edition of General Liability Insurance Coverage – Key Issues In Every State!!  How exciting is that!   

I’ll be there and I know I’ll see some CO subscribers.  It’s a small world, after all.

More information about the 26th Annual West Coast Casualty Construction Defect Seminar is here:

http://www.cvent.com

 

 

In the course of my teaching duties at Temple Law School this semester, I have gone through many important provisions of a commercial general liability policy with the students.  Doing so has caused me to notice some terms that I have never even remotely thought about in all these years.  And I’m sure that’s the case for many long-time insurance professionals.

For example, I’ve never even come close to having a claim that involved any of the following provisions in a CGL policy:

• The vending machine exception to the definition of “your product”
• An “insured contract” on the basis of a sidetrack agreement
• The exception to the aircraft exclusion for liability assumed under an “insured contract” for the ownership, maintenance or use of the aircraft.
• Coverage for a bail bond, as a supplementary payment, for a “traffic law violation”
• The “war exclusion” for purposes of a claim for “personal and advertising injury”

If anyone has ever been involved in a claim where one of these CGL policy provisions was in play, I’d love to hear about it.  The first two people who can tell me the details of such a claim will each get a copy of the 4th edition of Insurance Key Issues.  I know.  I know.  You could just make a story up.  But would anyone really do that?  We’re talking about a copy of an insurance book.  I’m not giving away a Tesla here folks.  I trust you.  Well, mostly.  I reserve the right to cross-examine any entrant if something doesn’t smell right.  
        
Get A Coverage Opinions Pen – Just Ask

I started out with hundreds.  I now have just ten Coverage Opinions pens sitting in a drawer.  If anyone wants one just ask.  The first ten people to reply will get the pen that will change their lives.  It’s as life changing as a squip (Broadway trivia). 

This insurance coverage bracket originally appeared in the March 14, 2016 issue of Coverage Opinions. 

If you are reading this it means you are wondering if Saint Mary's has a prayer in the opening round of the NCAA Men's Basketball Tournament. Look, your bracket is going to be busted by Thursday night, when that number 8 seed you took to make it to Final Four go down in flames. It serves you right for listening to some expert on ESPN.com. When it comes to the NCAA Tournament bracket, I'd put my money on Mildred from HR over an ESPN expert any day of the week.

Rather than be frustrated that you’ve wasted ten bucks on the NCAA office pool once again, fill in the Insurance Coverage Bracket and choose the most interesting coverage issue. You can’t lose – since there is nothing to win.  But if there were, you would still lose to Mildred from HR.

I was going through a rarely used drawer in my office recently and came upon this picture that I had forgotten about.  It was taken on April 16, 2006.  My daughter was ten days old at the time.  And there I was -- reading her the 5th annual Top 10 Coverage Cases of the Year article.  

Don’t worry – I read her real books too – like that that children’s classic: Oh, The Places In An Insurance Policy You’ll Go.

 

Clearly things did not go well between QBE and American Claims Management, Inc., its third-party claims service administrator, on one particular automobile liability claim.  QBE alleged that it sustained significant damages on account of the alleged failure of ACM to follow the parties’ claims management agreement. 

The California Court of Appeal decision in QBE Ins., Inc. v. American Claims Management, No. D073345 (Cal. Ct. App. Feb. 4, 2019) involves the aftermath of an arbitration award for QBE over the handling of the claim.  The court described the claims handling scenario as follows:

“In February 2011, Cortes was involved in a traffic collision with the Cardonas. Cortes’s insurance policy had a $30,000 liability limit per accident.  That month, the Cardonas mailed a policy limits demand to ACM, giving it 15 days to respond.  When ACM sought to accept the offer after the deadline had elapsed, the Cardonas rejected it.  In November 2012, the Cardonas sued Cortes.  With QBE’s approval, ACM hired attorneys to defend Cortes.  In June 2015, following a trial, the Cardonas obtained a judgment against Cortes in the amount of $20,974,903.

ACM did not timely communicate to QBE its receipt of the demand letter.  The Panel wrote in its final award: ‘In what would become a disturbing pattern, ACM also neglected to inform QBE that [] Cardona had called ACM . . . to follow up on his demand letter, that the demand letter expired . . ., and that [an ACM employee who was subsequently fired] failed to contact Cardona until [after the demand letter’s deadline]. In other words, ACM apparently chose to withhold from QBE evidence of its own negligent performance under the Agreement that . . . had potentially exposed ACM to hundreds of thousands, if not millions of dollars for bad faith.’

In June 2016, ACM and QBE further stipulated that $15 million was a reasonable amount to settle the Cardona lawsuit against QBE, and it was a good faith settlement. They agreed that no party can challenge the amount of the settlement, and no party ‘will assert that the other party acted as a volunteer by entering into the settlement.’  QBE subsequently paid the Cardonas that amount.

QBE sued ACM to recover the $15 million settlement plus more than $1 million in legal fees that QBE incurred in the related action.”

The arbitration panel ruled that QBE proved that ACM was deficient in the performance of its responsibilities to QBE under the claims management agreement.  The Panel ruled: “The starting point for the Panel’s analysis of contract damages is with ACM’s failure to timely review the letter demand, timely respond thereto and ultimately pay policy limits on behalf of Cortes.  Had it done so, QBE would have only incurred an expenditure of $30,000[ ], [Cortes’s] full policy limits. . . . QBE ultimately paid $15 [million] to resolve the Cortes and Cardonas claims.  All but $30,000[ ] of this payment was required because of ACM's breach.”

The court’s decision does not address the ins and out of ACM’s alleged failure to follow the parties’ claims management agreement with respect to the demand to settle.  That’s what the arbitration was about. 

Instead the court addressed ACM’s argument that the arbitration award should not be confirmed and, instead, vacated or corrected.  But the court did not do so.  As it explained, its hands were tied: “Considering the strong public policies favoring arbitration as a speedy and relatively inexpensive means of dispute resolution, the scope of judicial review of private, binding arbitration awards is extremely narrow. (citations omitted).  We can neither review the merits of the controversy, the arbitrator’s reasoning, or the sufficiency of the evidence supporting the award, nor correct or vacate an award because of an arbitrator’s legal or factual error, even if it appears on the award’s face.” 

The appeals court concluded that ACM’s claims, as to why the arbitration award should not stand, were assertions of legal error.  This, the court explained, was outside the scope of its permissible review of an arbitration award: “[t]he arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement.”
 

Given the extent to which some insurers use TPAs for handling claims, situations no doubt arise where the insurer disagrees with a TPA’s actions.  But this one is a doozy of a coulda, shoulda situation.

 

Deere & Company v. Allstate Insurance Company, No. A145170 (Cal. Ct. App. Feb. 25, 2019) involves an interesting excess-related coverage issue.  Excess cases often do not get discussed in Coverage Opinions, as they can be policy-language driven.  As a result, they may be too unique to offer a lesson or guidance for future cases.  And offering such guidance is one of the key factors for choosing a case for inclusion in CO.  But Deere & Company merits discussion here because it’s a unique issue and the court’s decision turned on policy language that is not unusual. 

At issue in Deere was coverage for claims filed against Deere, for bodily injury, caused by exposure to Deere’s asbestos containing products – brakes, clutch assemblies and gaskets used in Deere’s machines.  Needless to say, it’s complicated.  It involved coverage under 100+ policies issued to Deere from 1958 to 1986.  The trial was in three phases between 2006 and 2013.  Someone could have completed law school – twice – in less time.

The recent California appellate court decision addressed how to treat the self-insured retention in Deere’s policies.  Of note, Deere’s insurance program, for its products claims, did not include primary policies.  Instead, Deere had a series of first layer umbrella policies that provided coverage in excess of a self-insured retention.  It ranged from $50,000 to $1,500,000 over time.  Deere also had several layers of excess policies that sat above the first layer umbrella policy.

The issue before the court was this: Coverage under the first layer umbrella policies was subject to Deere’s satisfaction of the self-insured retention.  But what about the excess policies above that?  Was coverage under those policies also subject to satisfaction of the self-insured retention?

The trial court answered yes.  The appeals court reversed.

The court set out a variety of policy language and observed that the issue was tied to the extent that the “following form” provision incorporates the terms of the underlying policies.  Critical to the court’s analysis was that the scope of coverage, under a following form policy, is generally subject to the same conditions and limitations as the underlying policy – but with the exception for the limits of liability. 

The court had little trouble reaching its conclusion that the SIR was not applicable to the excess layers above the first layer umbrella: “The plain language of the first-layer umbrella policies and the higher-layer excess policies makes clear that Deere has no obligation to pay additional retained limits once the aggregate limits of the underlying policies have been satisfied. Section two of the higher-layers policies is entitled ‘Limit of Liability—Underlying Limits’ and provides that the only precondition to liability attaching to the higher-layers policies is that the ‘Underlying Umbrella Insurers have paid or have been held liable to pay the full amount of their respective ultimate net loss liability’ of $10 million (varies per policy) per occurrence, but $10 million (varies per policy) in the aggregate.  It further states that the higher-layer insurer ‘shall then be liable to pay only the excess thereof … .’ This section says nothing about higher-layer excess coverage being conditioned on Deere paying any additional SIR or retained limit before liability attaches. Moreover, there is no language in this provision that justifies treating Deere as an underlying umbrella insurer or treating the retained limits in the underlying policies as ‘insurance’ for this purpose.”

 

Can you imagine if Wile E. Coyote brought products lability claims against all those Acme-named companies from which he bought devices to try to take down the Road Runner. The devices always backfired, leading to all manner of serious injuries.  Acme’s general liability insurer would surely need some serious manuscript endorsements to address this challenging exposure.  

I couldn’t help but think of an anvil, falling on top of the Coyote, when I saw the exclusion at issue in United Specialty Ins. Co. v. Everest Construction, No. 18-45 (D. Utah Feb. 28, 2019). 

Kimberly Delobel, a building inspector, filed suit against Everest Construction, after she was seriously injured upon being struck by an eighty-five pound package of roofing shingles that had been thrown, by an Everest employee, off the roof of a building at a construction project.

Everest sought coverage from its general liability insurer, United Specialty.  The insurer denied that it owed a defense, citing that oooold “Fall From Heights” exclusion:

“Bodily injury” sustained by any person at the location of the incident, whether working or not, arising out of, resulting from, caused by, contributed to by, or in any way related to, in whole or in part, from a fall from heights. For purposes of this exclusion, a ‘fall from heights’ shall be defined as a fall from any elevation where there is a height differential between surfaces. This also includes the fall of an object causing, contributing to, or in any way relating to, in whole or in part, a person sustaining “Bodily injury.”

Everest argued that the “Fall From Heights” exclusion did not apply because the bag of shingles did not “fall” off the roof, but, rather, it was thrown.  As Everest saw it, the “Fall from Heights” exclusion was silent as to thrown objects.

The court agreed: “United Specialty argues that ‘fall’ includes an object thrown from above.  But the court agrees with the Defendants that United Specialty’s interpretation is strained.  The court concludes, after having reviewed the various dictionary definitions cited by the parties, that the usually accepted understanding of ‘fall’ means that an object drops to the ground without involvement by a human actor.”
   
Unique issue.  Interesting decision.     

I reached out to Everest Construction for comment.  A company spokesperson had two words to say: “Meep Meep.”

 

Withdrawing an insured’s defense can be perilous business for an insurer.  In my experience it is a decision that insurers take seriously.  And it is an action that they do not take frequently.  Lots of courts say that an insurer has a duty to defend its insured until there are no potentially covered claims remaining.  But there is not a lot of guidance beyond this easy to say statement of law – especially when it comes to what information the insurer can consider in determining that there are no potentially covered claims remaining. 

The paradigm withdrawal situation (and the easiest one, if there’s such a thing) is when the only potentially covered count has been dismissed from the case, such as by the plaintiff or court.  But that happens infrequently.  The more challenging scenario is when an insurer believes that it can withdraw a defense based on information revealed during discovery.  Can that information be considered by an insurer to withdraw its defense, in the face of a complaint (or a complaint and other information, in an “extrinsic evidence” state) that still triggers a defense? 

Putting aside these legal issues, there is another factor that insurers consider when it comes to withdrawing a defense.  Doing so, especially close to trial, can have bad optics.  In any subsequent coverage litigation, it will be easy for the insured to paint the insurer as having abandoned its insured.  Somerset Pacific LLC v. Tudor Insurance Company, No. 17-7099 (E.D. La. Feb. 5, 2019) demonstrates a timing factor that insurers should not overlook when considering the withdrawal of a defense. 
  
Tudor Insurance Co. defended Somerset Pacific in a personal injury action.  A two-year old child was severely burned by hot water in an apartment complex owned by Somerset.  Somerset was insured under a $1,000,000 primary liability policy issued by Tudor and a $10,000,000 excess policy issued by National Union.  

Four months before trial, Tudor settled the case, for its policy limit, but did not secure a release of Somerset’s excess exposure. At that point, Tudor’s plan was for its counsel to withdraw after the excess carrier, National Union, assumed the defense.

However, National Union did not accept the defense right away.  A dispute arose over it.  After National Union did accept Somerset’s defense, counsel retained by Tudor withdrew from the case.  Somerset was now forced to switch to new defense counsel just months before trial. 

[While this was going on, Somerset retained its own counsel, as it saw the risk of uninsured exposure.]  

Tudor maintained that, “pursuant to Louisiana law it has a right to settle for its policy limits without securing a release of Plaintiff’s uninsured exposure provided the settlement does not prejudice Plaintiff.  Tudor argues that Plaintiff cannot show that the settlement prejudiced it because Tudor continued to defend Plaintiff after its settlement until its excess carrier assumed its defense, and Plaintiff was not ultimately subject to any uninsured liability.”

Even if all that’s true – the legal principle and lack of uninsured exposure -- the court still held that Tudor could be liable for bad faith – a decision not made by the court as it concluded that it involved fact issues.  

True – the insured was never without defense counsel.  But the problem for Tudor had to do with the timing of its decision to withdraw.  The court explained: “[T]he insurer must make every effort to avoid prejudicing the insured by the timing of its withdrawal from the litigation. . . . Arguably there may be a point in ongoing litigation at which the insurance company’s withdrawal from the defense of the insured would be so prejudicial to the insured’s interests that it would constitute a breach of the company’s duty to act as a fiduciary toward the insured and to discharge its policy obligations in good faith.  Although Plaintiff was never left without a defense, a jury could find that the timing of Tudor’s withdrawal, and the dispute that accompanied it, prejudiced Plaintiff and required it to incur additional attorneys’ fees in protecting its interests.”

 

The Ninth Circuit’s decision in Attorneys Insurance Mutual Risk Retention Group, Inc. v. Liberty Surplus Insurance Corp., No. 17-55597 (Feb. 15, 2019) is very short – about a page.  But it still has a lot to say.  And it is a decision that insurers, that write “claims made” policies, should pay close attention to. 

At issue was coverage for attorney J. Wayne Allen, under professional liability policies issued by Liberty Surplus Insurance Corp., for claims arising out of a probate case and related action.  [Attorneys Insurance Mutual Risk Retention Group had been defending Allen and was seeking contribution for defense costs.]

Liberty had issued a 2009-2010 policy and a 2010-2011 policy.  A probate case had been filed against Allen during the 2009-2010 policy period.  A related civil action was filed against Allen during the 2010-2011 policy period.
    
Liberty maintained that it owed no coverage by asserting a commonly-used “relation back” argument.  Specifically, Liberty argued that Allen failed to report the probate case to it during the 2009-2010 policy period.  Thus, when Allen sough coverage for the related civil action, under the 2010-2011 policy, Liberty argued that none was owed, because it related back to the earlier probate case.  Thus, the civil action was also considered to have not been reported during the 2009-2010 policy period.

Liberty’s argument was based on the following provision contained in the 2010-2011 policy:

“Claims alleging, based upon, arising out of or attributable to the same or related acts, errors or omissions shall be treated as a single Claim regardless of whether made against one or more than one Insured.  All such Claims, whenever made, shall be considered first made during the Policy Period or any Extended Reporting Period in which the earliest Claim arising out of such acts, errors or omissions was first made, and all such Claims shall be subject to the same Limits of Liability.”

Critical to the court’s analysis was the 2010-2011 policy’s definition of “Policy Period:” “the period from the Inception Date of this Policy to the Policy Expiration Date as set forth in the Declarations or its earlier termination date, if any.”  (emphasis added).  The “Declarations” identified the policy period as July 31, 2010 until July 31, 2011.

Here’s where it got problematic for Liberty.  Under the definition of Policy Period – which refers to this policy -- the later related civil action, filed against Allen during the 2010-2011 policy period, was considered first made during the 2010-2011 policy period.  In other words, the language of the 2010-2011 policy did not support relation back to the 2009-2010 policy. 

The 2010-2011 policy’s reference to “policy period” is clearly intended to be a reference to an earlier policy’s policy period.  However, the language did not support it.  The court stated: “As the district court correctly noted, ‘[a]dopting Liberty’s interpretation would require the court to give different meanings to the same term used in the same policy, which would run afoul of the rules of contract interpretation.’”

Claims made insurers – check your policies.  It is an easy fix.

 

I’ve always found this to be an interesting duty to defend issue.  A class action complaint is filed against the insured.  The complaint describes some injury or damage sustained by the named plaintiff(s).  These named plaintiff(s) allegations do not trigger a duty to defend.  However, it’s a putative class action.  If it is certified, there could be hundreds or thousands of plaintiffs.  And some of their claims may trigger a duty to defend.  But the class has not been certified.  And it may never be certified.  And if the duty to defend is tied to the allegations in the complaint -- Look, the allegations in the complaint do not trigger a duty to defend.  You can see what’s going on here.

While the issue does not arise everyday, it has not gone without some judicial consideration.  And courts have held that the potential claims, of a putative class, can trigger a duty to defend.  Given the defense costs that can arise in a class action, this can be no small issue.  

This was the situation before the court in Liberty Mutual Insurance Co. v. Dometic Corp., No. 17-882 (N.D. Ind. Mar. 6, 2019).  Dometic Corp. was named as a defendant in three putative class actions alleging that it sold “gas absorption refrigerators, mainly for RVs, containing a defective cooling unit that can leak flammable gases and cause fires.”  Liberty undertook Dometic’s defense, under a reservation of rights, and filed an action seeking a declaratory judgment that it had no duty to defend or indemnify Dometic for the underlying complaints.

At issue were Liberty Mutual’s one-year general liability policies issued to Dometic between 2001 and 2004.

The two competing arguments were just what you would expect to see: 

“Liberty Mutual first argues that it has no duty to defend Dometic against the underlying complaints because no named plaintiffs allege a potentially covered property damage claim during a policy period. It’s undisputed that the property damage claims of the named plaintiffs in the underlying complaints all occurred years after the Liberty Mutual policies expired.  Liberty Mutual therefore contends it has no duty to defend because ‘[i]f the pleadings reveal that a claim is clearly excluded under the policy, then no defense is required.’”

“Dometic argues that although the named plaintiff’s claims fall outside of the coverage periods, the court can and should consider the putative classes’ claims, which would fall within the unexhausted policy coverage periods.”

The court noted that, while there were no cases addressing Indiana law on the issue, courts outside of Indiana have done so.  The court was able to cite to, and discussed, several decisions holding that the potential claims, of a putative class, can trigger an insurer’s duty to defend.  And importantly, the court noted that Liberty could point to no cases that disagreed. 

Without getting into some of the weeds, at the heart of the court’s decision was that, while the property damage claims of the named plaintiffs all occurred years after the Liberty Mutual policies expired, the complaints alleged that hundreds or thousands of fires had caused millions of dollars in property damage.  The court rejected Liberty’s argument that the putative class claims were too remote or speculative to trigger a duty to defend.  

Following its conclusion that no exclusions applied, the court held that Liberty had a duty to defend its insured.