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

2001.    For those of us of a certain age it was, like 1984, a year in which remembered symmetries clashed with current realities.  For many, it was the year in which the new century finally began.  By the fall, it was clear to all that we had entered a new era.
  
2001: The Year of the Snake
Top New Claim Threat: Y2K
Furthest Fall from Grace: Enron
Athletic Achievement: Barry Bonds
Coolest New Gadget: Noise cancelling headphones
Hottest Coverage Issue: Attorney-Client Privilege
  
The Five Most Important Insurance Coverage Rulings of 2001
 
Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313 (2001)
 
In the most important allocation/recoupment case to be decided since Buss, the California Supreme Court ruled that where an insurer has defended a lawsuit under a reservation of rights and settles the claim over the objections of its insured, it is entitled to full reimbursement for all reasonable settlement payments in the event that it is later determined that the claims were not covered under its policy. The insurer had only settled after first warning the policyholder that it would seek recoupment and after giving the insured the right to take over its own defense if it so chose. The court distinguished the Texas Supreme Court’s 2000 opinion in Matagorda, noting that insurers are not free in California to immediately pursue a DJ to resolve coverage issues where, as here, the coverage issue conflicts with the underlying tort suit. The court also emphasized the fact that the insured had been offered the right to take over its own defense. 
 
Comment: At the time, Jacobsen seemed like an entirely equitable and reasonable outcome to the dilemma that insurers face when insureds demand that they pay to settle cases that insurers do not believe are covered. Ironically, the case has since had the unforeseen outcome of placing insurers in the default position of having to fund settlements for insureds, even in cases where coverage likely does not exist.
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Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001)
 
The Ohio Supreme Court ruled 4-3 that correspondence between an insurance company and its outside coverage counsel evaluating a policyholder’s claim for coverage is discoverable in a bad faith case, concluding that “claims file materials that show an insurer’s lack of good faith in denying coverage are unworthy of protection” much like the claim fraud exception to the attorney/client privilege. Three dissenting justices criticized the “unworthy of protection rationale” as being even broader than the claimed fraud exception, which only waives the attorney/client privilege in the event of proof whereas the majority’s analysis permits all such documents to be discovered in any case where bad faith is merely alleged.”
 
Comment: Vanliner sent a shiver through the insurance industry. Apart from the Arizona Supreme Court’s Lee opinion, no other court had ruled that a mere allegation of bad faith was enough to vitiate the privilege. In the event, these concerns proved somewhat exaggerated. Since 2001, however, no other state court has taken this view. Even in Ohio, the state legislature approved a measure in 2007 ameliorates Vanliner by now requiring in camera review by a court before privileged communications needed be disclosed.
Certain Underwriters at Lloyd’s v. Superior Court, 24 Cal.4th 945, 16 P.3d 94 (2001)
 
The California Supreme Court on February 1, 2001 that general liability policies that insure sums that the insured is “legally obligated as damages” only extend coverage to sums that the insured is ordered to pay by a court judgment and, consistently with its ruling in Foster-Gardner, specifically do not encompass “expenses required by an administrative agency pursuant to an environmental statute.” The Supreme Court refused to find that the insuring agreement extended to damages that existed apart from any order by a court. Further, the court refused to read “damages” outside of the insuring agreement or to find that it was redundant with the language requiring the insurer to pay sums for which the policyholder was “legally obligated.”
 
Comment: Powerine was followed by similar Supreme Court rulings in 2005 that extended its holding to excess policies.  Together, these decisions have largely blunted the effect of the court’s earlier holding in Foster-Gardner that environmental claims are a “suit” and have since significantly reduced the number of environmental claims being litigated in California.
Access Certain Underwriters at Lloyd’s v. Superior Court on lexisONE®
 
 
Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593 (Ariz. 2001)
 
In this case, the Arizona Supreme Court broke new ground, holding that a cause of action for malpractice existed, even if the insurer was not a client per se. Even if the insurer is not the lawyer’s client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications. Further, the court declared that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured “but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith.”
 
Comment: Much of the “dual client” case law, a pivotal premise underlying the tripartite relationship, has been decided in the unlikely context of efforts by insurers to sue defense counsel for malpractice. In this case, the Arizona Supreme Court found a way to avoid finding an express client relationship but still acknowledging the right of insurers to sue for malpractice.

 
Sunbeam Corp. v. Liberty Mutual Ins. Co., 781 A.2d 1189 (Pa. 2001) 
 
After nearly two decades of pro-insurer rulings from state and federal courts, the future of the pollution exclusion was cast into doubt by the Pennsylvania Supreme Court when it ruled in this case that the exclusion was ambiguous or that coverage was mandated on a Morton-style theory of regulatory estoppel. While stopping short of formally adopting regulatory estoppel, the Supreme Court remanded the question back to the trial court for further finding and further suggested that such evidence might be relevant to establish a “custom and usage” within the insurance industry that mandates an interpretation of “sudden and accidental” that is contrary to the understanding of the general public. Justices Saylor and Castille argued that the lower court’s ruling should have been affirmed as the plain and ordinary meaning of “sudden and accidental” precludes coverage in a case where contamination occurred gradually over an extended period of time.
 
Comment: Despite initial concerns that Sunbeam might transform Pennsylvania into “West Jersey,” Pennsylvania’s courts have been slow to embrace the “regulatory estoppel” ‘theory. On the other hand, Sunbeam has made it far more difficult for insurers to obtain summary judgment in old pollution cases in the Keystone state and have opened the door for policyholder to pick and choose 1970-86 years under J.H. France.
 
 
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