Featured Blog of the Month - National Insurance Law Forum: a Multi-Part Series Outlining the Decade’s Insurance Developments

The Five Most Important Insurance Coverage Rulings of 2000:
Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 217 F.3d 33 (1st Cir. 2000).
The First Circuit ruled that a reinsurer could be sued for unfair claims handling and bad faith based upon a pattern of evasive claims handling in which it had raised a series of constantly shifting defenses and objections in an effort to delay or avoid paying Commercial Union’s ceded environmental settlement. The First Circuit ruled that Seven Province’s bad faith tactics “were wholly alien to the usual course of dealings between an insurer and a reinsurer.”
Comment: In a decade in which an unprecedented increase in reinsurance disputes largely tore away the “gentleman’s agreement” veneer of relations between reinsurers and ceding companies, the First Circuit set the tone early on with this bad faith opinion.
In re Rules of Professional Conduct, 299 Mont. 321, 2 P.3d 806, 814 (2000)
Efforts by insurers to impose strict litigation guidelines on defense counsel met their Waterloo when the Montana Supreme Court declared that lawyers could not ethically disclose bills to third party auditors for fear that disclosure would waive the privileged content of such documents, since auditors are not part of the “magic circle.” The court also ruled that The rules of professional conduct are not superseded by the terms governing the duty to defend in an insurance policy, nor do they only apply in cases where a conflict of interest between insured and insurer is apparent from the outset. In particular, the court ruled that guidelines requiring the insurer’s prior approval threatened defense counsel’s ethical ability to exercise independent professional judgment on behalf of the insured client.
Comment: Following this opinion, insurers and defense counsel pulled back from a nascent civil war that threatened to tear apart the tripartite relationship. Insurers have since largely revised their guidelines and reached out to defense counsel to find ways to manage litigation in a more nuanced way. Even so, by the end of the decade, many individual practioners and law firms had given up insurance defense work for more lucrative pursuits.
Matagorda County v. Texas Association of Counties Risk Management Pool, 52 S.W.3d 128 (Tex. 2000)
Efforts by the industry to extend Buss beyond California met a 10 gallon pothole when the Texas Supreme Court ruled on December 21 that liability insurers do not have a contractual or implied right to obtain reimbursements for sums that they pay to settle claims on behalf of their insureds that are later found not to be covered. Two dissenting judges argued that the Texas Supreme Court should have followed the California Supreme Court’s lead in Buss in finding an implied obligation to reimburse where the insurer’s payment would otherwise confer a windfall on the policyholder.
Comment: Years later, the Texas Supreme Court would again rule in Frank’s Casing that insurers have no similar right of recoupment. To a large extent, the refusal of Texas courts to imply rights that California courts have recognized is a product of the fact that Texas courts are, in general, much more conservative in imposing such obligations on insurers in the first instance, particularly with respect to claims of bad faith.
Travelers Ins. Co. of Illinois v. Eljer Manufacturing, Inc., 757 N.E.2d 481 (Ill. 2000)
Whereas the Seventh Circuit had ruled in Eljer Manufacturing Co. v. Liberty Mutual Ins. Co., 972 F.2d 805 (7th Cir. 1992) that the presence of a defective component caused “property damage” even if it had not yet caused damage to the product as a whole, the Illinois Supreme Court took a different view in cases involving the same claims under excess policies, declaring that that the installation of a defective product does not result in physical injury to tangible property until it actually fails and causes third party property damage.
Comment: Eljer had consequences well beyond its facts, particularly in the context of asbestos building claims. It was also not the last time in which the Illinois’ two leading course took divergent views on insurance issues. Ironically, the next time that the courts took such conflicting views of the law, it was the Seventh Circuit that held for insurers in refusing to find “personal injury” coverage for junk fax claims, whereas the Illinois Supreme Court took the opposing view, finding CGL coverage for TCPA claims in Swiderski Electronics in 2006.
Wisconsin Label Corp. v. Northbrook P&C Ins. Co., 607 N.W.2d 276 (Wis. 2000)
In a case that pre-figured many disputes that emerged later in the decade concerning problems involving defective computer software and electronic components, the Wisconsin Supreme Court held that lost profits suffered by a retailer due to the application of incorrect bar codes were not “physical injury to tangible property” or other claim for loss of use that might constitute “property damage.” The Wisconsin Supreme Court ruled in that economic loss suffered by the plaintiff due to the mislabeling of UPC codes on the insured’s product did not result in any physical injury that would constitute “property damage” under the policies. The also court concluded that diminution in value caused by incorporation of a defective product does not constitute “property damage” under post-1973 policies unless it is the result of “physical injury” or “loss of use” and is not a separate basis for claiming coverage.
Comment: In retrospect, Wisconsin Label would prove to be the high water mark of insurance jurisprudence in Wisconsin. In the years to come, the Wisconsin Supreme Court, which had up until then generally been viewed as a reasonable arbiter of insurance disputes, fell under the sway of justices who were willing to find coverage for claims under increasingly improbable circumstances.
© Copyright 2010 by the National Insurance Law Forum. All rights reserved. Reprinted with permission. This blog originally appeared on the National Insurance Law Forum website. The National Insurance Law Forum is one of the Insurance Law Center’s Top 50 Insurance Blogs for 2009. The Top 50 Insurance Blogs may be found here.