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Vol. 8 - Issue 5
May 31, 2019

Tapas In The Spotlight (Again)


I called the Tapas column, in the last issue of Coverage Opinions, “Tapas In The Spotlight.”

“Tapas” has always been called “Small Dishes Of Insurance Coverage.”  It provided just a brief summary of a few cases.  These were cases where there was a point to be made – but not enough about the decision to justify an article with analysis. 

For the last issue of CO, there were many really good cases worthy of articles.  But not enough time for me to do more than just a handful of full-blown write-ups.  So I solved this by expanding the Tapas column.  Instead of having three or fours cases in Tapas, I had many.  I hit just the high points of the decisions and kept the analysis and commentary brief (or just skipped it).  I figured that anyone interested in leaning more about the case could simply read it. 

Once again there are a lot of cases worthy of inclusion in this issue of CO.  And, once again, there is not enough time for me to do more than just a few lengthy write-ups.  So, once again, Tapas will be “in the spotlight.”  I even moved it higher up in the issue, taking it out of its basement position where it has lived for the past six-plus years.    

Appeals Court: Amazon.com Not a “Seller” For Purposes of Product Liability Law

This case has nothing to do with insurance coverage.  However, it is interesting, lots of general liability coverage is tied to products liability and Amazon.com has become pretty ubiquitous in many of our lives.  So I tossed it into this Tapas column.

In Erie Insurance Company v. Amazon.com, No. 18-1198 (4th Cir. May 22, 2019), the federal appeals court addressed whether Amazon.com could be liable under the following circumstances: “Trung Cao of Montgomery County, Maryland, purchased a headlamp on Amazon’s website and then gave it to friends as a gift.  The headlamp’s batteries apparently malfunctioned, igniting the friends’ house and causing over $300,000 in damages.  Erie Insurance Company, which insured the house, paid the loss and now, as subrogee, is pursuing this action to obtain reimbursement from Amazon for negligence, breach of warranty, and strict liability in tort, arguing that Amazon has liability under Maryland law because it was the ‘seller’ of the headlamp.” 

The court held that, based on the nature of the relationship between Amazon and the “seller,” and the issue of who had title to the headlamp – not Amazon -- Amazon was not the seller for purposes of Maryland’s products liability law: “At bottom, we conclude that Amazon was not, in this particular transaction, a seller — one who transfers ownership of property for a price — and therefore does not have the liability under Maryland law that sellers of goods have.  To be sure, when Amazon sells its own goods on its website, it has the responsibility of a ‘seller,’ just as any other retailer, such as Home Depot, would have.  But when it provides a website for use by other sellers of products and facilitates those sales under its fulfillment program, it is not a seller, and it does not have the liability of a seller.”

To me, Amazon sure seems like a seller, as that term is generally understood.  When someone asks where I bought something, if Amazon, I say Amazon, and not the name of the seller on whose behalf Amazon fulfilled the transaction.  Next time I’ll say Amazon, but not for purposes of Maryland products liability law.   

People who read this article also read an article about MacPherson v. Buick Motor Co.

Court Holds That Asbestos Is A “Pollutant” Under The Pollution Exclusion

At issue in Zurich American Insurance Co. v. Insurance Company of North America, No. 14-1112 (E.D. Mo. May 21, 2019) was a dispute between two insurers over contribution for a settlement of an asbestos claim, against their mutual insured, Anheuser-Busch.  One insurer, INA, argued that it had no obligation to share in the settlement or defense costs because its pollution exclusion precluded coverage “because it involved an ‘irritant, contaminant, and/or pollutant’ which ‘discharge[d], dispers[ed], release[d], or escape[d]’ into ‘the atmosphere,’ thereby injuring the underlying decedent. According to the underlying suit, the decedent was exposed to asbestos through the air as she came into contact with her husband and his work clothes.  INA argues that this type of contamination is covered by the plain language of the pollution exclusion, which precludes coverage for bodily injury ‘arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere or any water course or body of water . . . .” 

The court, following a lengthy analysis, agreed that the pollution exclusion precluded coverage: “In the factual context of this case, asbestos unambiguously falls within the exclusion’s definition of ‘contaminants,’ ‘irritants,’ and ‘pollutants,’ and the policy is not rendered ambiguous as a matter of law merely because asbestos is not explicitly listed in the exclusion.  In [the underlying action], the plaintiff alleged that asbestos inhaled in the air caused the decedent’s bodily injury and death from pleural mesothelioma.  Plaintiff claimed that the asbestos, asbestos fibers, and asbestos dust to which decedent was exposed were ‘ultrahazardous to health’ and were ‘released into the air [thereby] creat[ing] dangerous and unreasonable risk of injury to the lungs [and] respiratory systems’ of those ‘breathing that air and coming into contact with that dust,’ including the decedent.  Plaintiffs further alleged that A-B ignored the dangers of exposure to asbestos to its employees and their families, including decedent, and failed to institute proper hygiene procedures to ensure that ‘toxic chemicals and substances such as asbestos containing dust were not carried home on the employees’ person and their work clothing.’  These claims unambiguously allege that asbestos is an irritant or contaminant under the ordinary meanings of those words.”
Court Says That The Word “Coverage” Does Not Include Defense

I’ve been saying this for years in my “50 Item ROR Checklist” seminar.  The word “coverage,” while we all know what it means, may not mean what we think it does, when it is used as a stand-alone term.  In other using, using “coverage,” without specifying coverage for defense or coverage for any damages, may lead to an unintended result.  

That was the point made by the court in Allied World Assurance Co. v. Lee Memorial Health Systems, No. 18-158 (M.D. Fla. May 1, 2019).  Allied World filed a complaint seeking a declaratory judgment that its “Policy does not afford coverage for [Lee Health] in connection with the Underlying Action.”  The underlying action involved medical malpractice and Allied World asserted two exclusions.    

As the court saw it, the DJ complaint did not speak to the insurer’s duty to defend, as it addressed “coverage.”  The court stated: “Preliminarily, the pleadings do not discuss Allied World’s duty to defend, focusing mainly on coverage in general.  This suggests indemnification is at issue rather than any duty to defend. See EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 845 F.3d 1099, 1113 (11th Cir. 2017) (‘The term ‘coverage’ typically connotes coverage of a claim, such that the insurer will indemnify the insured for any damages, up to policy limits, that the insured is found liable to pay.’).”

In the end, it does not seem to have mattered, as duty to defend, even if at issue, was not ripe for a judicial decision.  But the case makes a good point about the use of “coverage,” as a stand-alone term, if the intent is for it to mean coverage for both defense and any damages.  

Court Rules Insurer Has No Duty To Defend – Even Before Complaint Is Filed (Really)

In general, there are not an abundance of situations where an insurer can use extrinsic evidence to defeat a duty to defend.  And some states don’t allow any.  The court in Esurance Inc. v. Hamm, No. 18-1715 (D. Ore. Apr. 30, 2019) listed a few: “extrinsic evidence provides the date an insurer was notified of a claim; when the court needs to determine whether an organization or an individual was an insured under a policy; and when a previous judicial decision precludes coverage, based on the doctrine of issue preclusion.”   

Then the court in Hamm went further, holding that extrinsic evidence can even be used to defeat a duty to defend a complaint -- that has not even been filed.  Really.  I’ll keep it simple and brief…

Seth Hamm shot Emilio Pina.  Hamm pleaded guilty to Assault in the Third Degree with a firearm and was sentenced to thirty-six months in prison.  Pina sued Seth Hamm for his injuries.  Seth and Michelle Hamm sought for Esurance to defend and indemnify Seth Hamm.  Esurance undertook the defense (hiring Dennis Quaid) under a reservation of rights. Pina subsequently dismissed his lawsuit with the intent to refile. 

Importantly, the court noted: “As of yet, Pina has not refiled his suit against Seth Hamm.”  But that did not stop the court from concluding that the insurer would have no duty to defend the as-yet filed, sight-unseen, complaint.  How could that be?

The Esurance policy contains a criminal act exclusion, which the court concluded would apply to preclude coverage – even if such fact is known through extrinsic evidence and, get this, even though Pima suggested that “he might, through artful pleading, allege that he was injured by Seth Hamm without explicit reference to the fact that Seth Hamm was subsequently convicted of a criminal act.”  But such artful pleading would not matter, the court concluded, as there would be extrinsic evidence of Hamm’s guilty plea to Assault in the Third Degree.

The court wasn’t finished with its crystal ball.  It also held that, even though “Pima has not articulated any theory of liability as to Michelle Hamm,” there would be no duty to defend her.  The policy contained a “joint obligations” clause.  Thus, the court held that the criminal act exclusion applies to negligence claims against other insureds.    

The next time someone tells you that the duty to defend is broad….

No ROR Except For Punitive Damages: Independent Counsel Required

At issue in Xtreme Protection Services LLC v. Steadfast Ins. Co., No. 1-18-1501 (Ill. Ct. App. May 3, 2019)  was an insured’s claim that it was entitled to independent counsel for a suit filed against it.  The insurer said no, since its defense, it maintained, did not create a conflict, as it did not reserve its rights on any compensatory damages.  The ins and outs of the underlying claim can be spelled out here in the context of the discussion of the issues.

The independent counsel issue arose as follows: “Here, the underlying complaint alleges that Israel suffered damages when Xtreme's employee placed listening devices in Israel’s office, attached GPS devices to his vehicles, and sent threatening or harassing text messages. Steadfast’s policy with Xtreme excludes coverage for ‘intentional, criminal, fraudulent, malicious or dishonest’ acts.  Steadfast argues, however, that no conflict exists because it explicitly waived its right to deny coverage for compensatory damages based on these acts.  While Steadfast’s waiver may have resolved one type of conflict, Steadfast’s continuing reservation of its right to deny coverage for punitive damages presents another area of potential conflict.”

The court concluded that, despite the insurer’s waiver of coverage defenses for compensatory damages, a conflict still existed to support the insured’s right to independent counsel.  Its conclusion was based on which party bears the risk of loss in the suit: “The third amended complaint seeks no less than $120,000 in compensatory damages and no less than $2.1 million in punitive damages. Here, as was the case in Nandorf and Mobil Oil, the underlying complaint seeks a substantially greater amount of punitive damages than compensatory damages, but the insurance policy explicitly denies coverage for punitive damages, and Steadfast has not waived its reservation of rights regarding punitive damages. Such an award is not inconceivable given the allegations in the underlying complaint. Where punitive damages form a substantial portion of the potential liability in the underlying action and Steadfast disclaims liability for punitive damages, Xtreme is left with the greater interest and risk in the litigation. Therefore, a conflict of interest exists, entitling Xtreme to obtain independent counsel paid for by Steadfast.”

The court also observed that “[s]ince Steadfast has denied coverage for punitive damages, it has little interest in defending against Israel’s claims for punitive damages.” 

I’m not sure I get this.  After all, the court stated that “the claims for compensatory and punitive damages arise from the same wrongful conduct.”  In that case, since the insurer is obligated for any compensatory damages for this wrongful conduct, wouldn’t it still want a strong defense effort, which would also go toward defeating liability for punitive damages? 

Appeals Court Says That Money and Checks Are Not Tangible Property

Somehow the insured threw this hail Mary twice…

In Estate of Keppel v. Angela’s Angels Home Healthcare, No. A-3868-17T1 (N.J. Super. Ct. App. Div. May 9, 2019), the court addressed general liability coverage for Angela’s Angels Home Healthcare, for a claim that its employee, a home health aide, misappropriated 192 checks, from a patient, over a two-year period, leading to a loss of nearly $225,000.

The insurer disclaimed coverage on the basis of a lack of “property damage,” arguing that money is not tangible property.  Litigation ensued.  The trial court concluded that checks and money are not tangible property.  Further, loss of the money, attempted to be recovered, was not loss of use of the checks. 

For some reason the insured decided to try again.  The appeals court, looking to New Jersey law, cases nationally and dictionaries, concluded as follows:

“The loss of stolen money does not constitute ‘property damage’ because money, or the checks representing money, is not ‘tangible property.’  While checks can be touched, the checks themselves have no intrinsic monetary value and suffered no injury upon being cashed by Thomas.  Checks represent money in a bank that exists in digital form in a computer database in the name of the account holder.  Checks are a representation of money held by a bank and are simply a medium of exchange.  A medium of exchange, such as coins or dollar bills, is not tangible property.  Thus, the checks misappropriated by Thomas and then cashed without permission are not property damage as defined in the Nautilus policies.  Because we reject plaintiffs’ claim that the checks constitute tangible property, the money obtained as a result of Thomas cashing the checks does not constitute consequential damages.  The loss of use of a check does not equate with the loss of money.  Here, there is no injury to the checks, and the loss of use relates to the money misappropriated.  Therefore, there is no property damage claim under the Nautilus policies.”

Attorney’s Fees Are Covered “Damages” Says Court Following Multi-Faceted Analysis

Even though, under our so-called American Rule, a prevailing party is not entitled to recover its attorney’s fees (subject to certain exceptions), there is still a fair amount of litigation over whether attorney’s fees are covered as “damages” under a liability policy.

A California federal court held that they are.  What makes United States Liability Ins. Co. v. A&B Market Plus, Inc., No. 19-172 (S.D. Calif. May 14, 2019) worthy of note is the extent of analysis that the court undertook to reach its decision.  The court approached the question six ways from Sunday, looking at dictionary definitions of the term “damages,” the context and structure of the policy, the fact that other courts have found “damages” to include “attorney’s fees” and construing the term according to the reasonable expectations of the insured.

The court left little doubt as to the moral of the story – the term “damages” was not defined in the policy. 

If you have this issue, A&B Market, while it’s an unpublished federal court decision, provides an excellent tutorial on the issue and competing arguments.           

Louisiana Supreme Court Upholds Policy’s New York Forum Selection Clause For Claim Unrelated To N.Y.  
If you are dealing with the enforceability of a forum selection clause, in an insurance policy, then you’ll want to take a look at Creekstone/Juban I, LLC v. XL Ins. Am. Co., No. 2018-CC-0748 (La. May 8, 2019).  The Louisiana high court held that a New York forum selection clause was enforceable for a claim for flood damages in Louisiana, under a policy issued in Texas, to 20 insureds, covering over 100 properties in over 20 states. 

The best way to summarize the decision is to look at the dissent’s introduction: “It is ridiculous that a Louisiana business with Louisiana customers and employees that suffers millions of dollars in damages requiring millions of dollars of repairs by Louisiana carpenters, plumbers, and painters in Louisiana insured by an insurance policy delivered in Louisiana[*] should be required to litigate against the insurer in New York when it has been the public policy of Louisiana since 1948 that such matters should be litigated in Louisiana and that ‘any condition’ to the contrary contained in an insurance policy is prohibited.  The disdain for Louisiana business and the Louisiana Legislature is remarkable.  In reversing the trial court and the court of appeal, the majority opinion is wrong for three separate reasons: failure to recognize public policy, false dichotomy between ‘big sophisticated’ business and ‘single’ Louisiana residents, and an unsupportable reformation of the contract to enable the desired result.”    

As Francis Albert said, a New York forum selection clause can make it anywhere. 

[*] The majority opinion states: “The Policy was issued to named insured MRMG Commercial and delivered to MRMG Commercial in Lufkin, Texas.”

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