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

2005: The Year of the Rooster
Top New Claim Threat:            Hurricane Katrina        
Athletic Achievement:              Roger Federer             
Furthest Fall from Grace:         Scott Gilbert
Coolest New Gadget:               HD Television
Hottest Coverage Issue: Absolute Pollution Exclusion
The 5 Most Important Insurance Opinions of 2005
Avery v. State Farm Mutual Auto Ins. Co., 835 N.E.2d 801 (Ill. 2005)
Reversing a $1.1 billion award against State Farm, the Illinois Supreme Court has ruled that two lower courts erred in certifying a national class action of policyholder consumers who alleged injury as the result of the insurer’s practice of using repair parts that were not the original equipment of the car manufacturer. The Supreme Court declared that the Circuit Court had abused its discretion in certifying the class and finding “commonality” among the plaintiffs’ claims in view of the fact that the claims actually involved different policy wordings used by State Farm in several states. Further, the Supreme Court held that State Farm’s use of after-market parts was not in violation of its policy obligations, nor did it constitute a violation of the Illinois Consumer Fraud Act.
Comment: The after-market parts class action crusade against auto insurers reached its high water mark in Illinois with a billion dollar award against State Farm. In this crucial opinion, newly elected members of the Illinois Supreme Court turned the tide and helped to substantially limit class actions as a plaintiffs’ remedy in similar litigation, a trend that was accelerated around the same by the newly-enacted federal Class Action Fairness Act (CAFA).
Elacqua v. Physicians’ Reciprocal Insurers, 800 N.Y.S.2d 469 (3d Dept. 2005)
The Appellate Division of the New York Supreme Court ruled in this case that an insurer had not only ignored a conflict of interest in failing to assign independent counsel to individual physicians and a professional association that were both claiming under its policy but that the insurer had an affirmative obligation to notify its policyholder of that right since “to hold otherwise would seriously erode the protection afforded.”
Comment: Elacqua poses difficult and troubling questions for insurers. As the opinion of a single Department of the Appellate Division, is it controlling law in the rest of the state. And if it is, what types of affirmative duties do insurers have where the carrier is uncertain as to whether a conflict exists or believes that the insured is already protected through the advice of its own counsel. As a footnote to the 2005 opinion, the same court ruled in Elacqua v. Physician’s Reciprocal Insurers, 860 N.Y.S.2d 229 (3d Dept. 2008) that a liability insurer’s failure to notify its policyholder of its right to independent counsel due to a conflict of interest was a deceptive practice for which the insured was entitled to recover its attorney’s fees pursuant to General Business Law Section 349. 
Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 451 (2005)
In a brief but momentous opinion, the Court of Appeals ruled that a landlord’s insurer was only obligated to pay a single “occurrence” limit for a lead poisoning claim, despite the fact the tenant’s child had suffered bodily injury during all three years of Allstate’s coverage. While opining that whether limits could be stacked would ordinarily be a “difficult question,” the court held that in this case the issue was controlled by a “non-cumulation” clause that stated that “regardless of the number of insured persons, injured persons, claims, claimants, policies involved, our total liability under the Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for Coverage X shown on the declarations page. All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss.”
Comment: Together with the Third Circuit’s opinion in Liberty Mutual Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3d Cir. 2005), this ruling of the New York Court of Appeals revived interest in non-cumulation clauses as a means of avoiding successive limits from being stacked in long-tail cases.
Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 829 (2005)
The New Jersey Supreme Court ruled that an absolute pollution exclusion did not preclude coverage for personal injury claims against a painting subcontractor arising out of claims for nausea, vomiting and headaches suffered by a tenant who was exposed to fumes in the course of the insured’s work. In keeping with similar rulings from state supreme courts in California, Illinois, Massachusetts, Ohio, New York and Washington, the New Jersey Supreme Court declared that the history of such exclusions makes clear that their intent is to only preclude coverage for traditional environmentally-related damages, such as CERCLA claims. In keeping with the analysis of the original pollution exclusion that it adopted in Morton, the court looked to industry statements made to state regulators in the mid-1980’s when absolute pollution exclusions were first proposed for approval and concluded that there was no compelling evidence that the exclusion was intended to have the broad effect proposed by Selective in this case adding that, “The insurance industry may not seek approval of a cause restricting coverage for the asserted reason of avoiding catastrophic environmental pollution claims and then use that same clause to exclude coverage for claims that a reasonable policyholder would believe were covered by the insurance policy.” 
Comment: Twelve years after the New Jersey Supreme Court shocked the insurance industry by gutting the “qualified” pollution exclusion under the guise of “regulatory estoppel,” the Supreme Court returned to the scene of the crime in Nav-Its. Apart from Pennsylvania (?), no court in the country has followed the notion that statements made by third parties to state regulators can bind coverage for policyholders who were never aware of or relied on such claimed representations concerning the scope of coverage.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 115 P.3d 460 (2005)
The California Supreme Court here ruled that in cases where a court determines that an insurer had no duty to defend and the insurer had been defending under a reservation of rights that included a claimed right to recoup defense costs in the event that it was found not to owe coverage, the California Supreme Court has ruled that the insurer is entitled to reimbursement for the costs of defense. The Supreme Court rejected the Court of Appeal’s holding that the defense obligation was only terminated prospectively and found instead that insofar as the court had ruled that there was no potential for coverage, the insurer never had a duty to defend and is therefore entitled to recover its fees under a Buss analysis. So long as the insurer had given notice at the time that it agreed to defend that it was reserving rights on this basis. The Supreme Court held that this was so even if the determination that there was no potential for coverage was based on case law that evolved afterwards, as was the case here where the insurer agreed to defend the case prior to the California Supreme Court’s Hameid ruling clarified the limitations of “advertising injury” coverage as regards such claims.
Comment: Scottsdale was the third in a trilogy of cases that began with Buss in 1997 (insurer allowed to sue later to recoup that portion of defense costs solely allocable to non-covered claims) and persisted through 2001’s Blue Ridge v. Jacobsen (insurer allowed to recoup settlement payment is case later held not to be covered).  
© 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.