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

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

2006: The Year of the Dog
Top New Claim Threat:            *** Cheney 
Athletic Achievement:             Barbaro
Furthest Fall from Grace:        Duke Lacrosse
Coolest New Gadget:              WiFi
Hottest Coverage Issue            524(g) Plans
 
The 6 Most Important Rulings of 2006
Fuller-Austin Insulation Co. v. Fireman’s Fund Ins. Co., 135 Cal. App.4th 958, 38 Cal. Rptr.3d 716 (2d Dist. 2006), review denied (Cal. April 19, 2006)
Between the 1940’s and the 1980’s, Houston-based Fuller-Austin was involved in the installation and removal of building materials containing asbestos. Over time, thousands of asbestos suits were brought against Fuller-Austin that were defended by its primary insurers. In 1997, Fuller-Austin advised its insurers that it was considering entering into a 524(g) pre-packaged bankruptcy. After a nine-week trial, a Los Angeles jury ruled in May 2003 that Fuller Austin’s insurers were obligated to contribute over $200 million to a trust fund that the insured had entered into with the underlying asbestos claimants.  The jury held that the allowed asbestos claims was $108,175,000; the value of pending but unresolved claims was $108 million, and the value of future claims was $750 million. These findings were largely set aside by the Second Appellate District on January 19, 2006. In keeping with the California Supreme Court’s ruling in Hamilton v. Maryland Casualty, the Court of Appeal held that the bankruptcy confirmation proceedings had none of the attributes of an actual trial as it was not a contested evidentiary hearing, did not provide for the presentation of evidence concerning the debtor/insured’s liability and involved a process of negotiation, not fact finding. The Court of Appeal also rejected Fuller-Austin’s contention that this was a settlement binding on the insurers. Although it agreed that the plan was a settlement, it noted that Fuller-Austin had not obtained the insurers’ consent. The court refused to find that the mere issuance of a reservation of rights letter by an excess insurer waived their right to require consent to a settlement before implicating their indemnity duties. The Court of Appeal found that allowing Fuller-Austin to enter into a global settlement in the bankruptcy court without the insurers’ participation while permitting the insurers to challenge the plan for fairness, reasonableness and lack of fraud or collusion did no violence to the language in the policies requiring their consent. While agreeing that insurers should not be permitted to “hover in the background at critical settlement negotiations” resisting all responsibility on the basis of lack of consent, the Court of Appeal held that the bankruptcy court’s confirmation of the Section 524(g) plan could not be read to preclude the right of the carriers to subsequently litigate the issue of whether the plan was unfair, unreasonable or the product of fraud or collusion.
Comment: Following on the heels of the Third Circuit’s opinion in Congoleum, this decision helped to put a stake through the heart of a legal strategy that posed a critical and unforeseen exposure to excess carriers and that was breeding a terrible culture of corruption among counsel representing some policyholders and asbestos plaintiffs (or both).
 
Glidden Co. v. Lumbermen’s Mut. Cas. Co., 861 N.E.2d 109 (Ohio 2006)
Pilkington North American, Inc. v. Travelers Cas. Ins. Co., 861 N.E.2d 121 (Ohio 2006)
The Ohio Supreme Court issued a pair of opinions on December 20, 2006 that seemed at the time to reflect a deep division within the court with respect to whether and when corporate successors are entitled to claim coverage under a predecessor’s policies for long-tail liabilities arising out of the manufacture, sale or distribution of the predecessor’s products. In Pilkington, a plurality of the court seemed to hold that, although the terms of a policy might allow a successor to obtain rights to indemnification, coverage was not transferred by “operation of law.” The court also held, however, that any such rights were not barred by the policies’ anti-assignment clause, as the “chose in action” was fixed as of the date of the underlying injuries triggering coverage.   A concurring opinion by Chief Justice Moyer and Justice O’Connor argued that an insurer’s defense obligation was not assignable, particularly where, as here, multiple parties might be seeking a defense such that the assignment had materially changed or increased the risk faced by the insurer. A different view was taken by Justices Pfeiffer and Resnick, who concurred in part and dissented in part, arguing that defense costs were likewise assignable. Finally, Justice Lanzinger filed his own concurring and dissenting opinion declaring that Pilkington’s demand for a defense and indemnification was not a chose in action and therefore should not have been assignable at all. On the same date, the court ruled that Glidden was not entitled to coverage by “operation of law” for lead paint claims involving policies issued between the 1960s and 1974 to a predecessor entity that manufactured the leaded paint giving rise to Glidden’s present tort liabilities. Four of the justices found that the underlying corporate transactions that ultimately resulted in the creation of Glidden in 1986 had explicitly excluded insurance policies from the liquidation and distribution of assets of certain entitles. Nor did the corporate transactions in any way suggest an intent to convey rights under the policies. However, Judge Lanzinger concurred in the judgment. Justices Resnick and Pfeiffer dissented, arguing that even though the corporate history in this case was more “tangled” than was the case in Pilkington, the successor entity should still be entitled to obtain the benefits of the predecessor’s policies.
Comment: Despite the confusion engendered by these various plurality opinions, Glidden and Pilkington helped to “decalifornicate” the California Supreme Court’s Henkel analysis and gave mainstream credibility to insurer arguments that successor entities were not entitled to coverage under their predecessors’ policies “by operation of law.”
 
Kvaerner Metals v. Commercial Union Ins., Inc., 908 A.2d 888 (Pa. 2006)
In this case, the Pennsylvania Supreme Court ruled that claims for breach of contract and breach of warranty with respect to the design and construction of a coke oven battery failed to seek recovery for an accident” or “occurrence.” Although these terms were undefined in the subject polices, their ordinary meaning contained an element of fortuity that cannot be present where a claim is for faulty workmanship. The Supreme Court found that any contrary interpretation of the policies would allow insurers to convert CGL policies into performance bonds that guarantee the insured’s work, rather than the accidental results thereof.   Having found that the underlying claim fell outside the scope of the policy’s insuring agreement, the court elected not to proceed to the issue of the applicability of various business risk exclusions to the underlying claims.
 
Lee Builders, Inc. v. Farm Bureau Mutual Ins. Co., 137 P.3d 486 (Kan. 2006)
The Kansas Supreme Court ruled that moisture problems due to the insured’s defective materials or workmanship in a construction project constitute an “occurrence” for purposes of liability insurance coverage so long as the insured did not expect or intend the damage to occur. The Supreme Court observed that it would make little sense for a CGL policy to include an exclusion for property damage to the insured’s own work and that of its subcontractors if such property damage was never meant to be an “occurrence” in the first place. If the insurer had wanted to distinguish between claims for breach of contract and tort, it should have included language to this effect.
Comment: Although Kansas is not a bellwether jurisdiction, the willingness of a relatively conservative state supreme court to follow the Wisconsin Supreme Court’s American Girl analysis contribute to a general groundswell that swept before it many of the traditional distinctions that had limited coverage for contractual disputes, especially in the construction defect context.
 
Wilkinson v. Citation Ins. Co., 447 Mass. 663, 856 N.E.2d 829 (2006)
 In the decade after 1997, the Supreme Judicial Court steadily expanded exceptions to the “American Rule” in insurance disputes, ruling in a series of cases that insureds were entitled to recover DJ fees in cases involving homeowner’s policies, then all cases involving the duty to defend and finally even cases where the insurer was defending under a reservation of rights but sought to cut off any continuing defense duty. In Wilkinson, however, the SJC ruled that a Superior Court judge had erred in holding a property insurer that had disputed a first party claim in good faith nonetheless owed the legal fees incurred by its policyholder in pursuing the claim. While maintaining its earlier-stated view that fees are recoverable for disputes involving a liability insurer’s duty to defend or where the insurer has acted in bad faith, the Supreme Judicial Court found that, short of abandoning the American Rule altogether, there was no principled basis in this case for distinguishing disputes involving insurance policies from other types of contractual disputes. 
Comment: Few issues influence the willingness of parties to sue or be sued as the rules governing the right of the prevailing party to recover its attorneys fees. This is particularly so in recent years, where the hourly rates charged by large policyholder-oriented law firms have dramatically outstripped the rates that insurers are used to paying panel counsel. With this case, the SJC was given an opportunity to rule that policyholders could recover attorneys in all coverage disputes, whatever the policy form or issue. The refusal of the court to do so, signaled an important leveling off in the court’s swing to the left that was echoed a year later by the Connecticut Supreme Court’s opinion in ACMAT Corp, v. Greater New York Mutual Ins. Co., 282 Conn. 576 (2007). 
 
Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006)
In this case, the Minnesota Supreme Court substantially trimmed back the rights of insurers to allocate defense costs and indemnity in construction defect cases. The Court of Appeals ruled in a construction defect case that defense costs and indemnity should both be allocated based on “time on the risk,” rejecting the trial court’s “equal shares” approach for defense costs. The court also ruled that the period of allocation should run through the date that the problems were remediated and should not be cut off, as the trial court ruled, when the insured general contractor received complaints from property owners concerning construction defects.   On further review, however, the Minnesota Supreme Court ruled that continuing injury claims resulting from construction defects should be allocated on a “time on the risk” basis from the start of the policy in which the closing date occurred through the end of the policy year in which the insured received notice of claim. The court declared that the insured need not bear responsibility for any period of time for which insurance was unavailable for claims of this sort, so that the period of allocation period ends as of the year in which the insured received notice of claim or with the end of the last period of insurance coverage, whichever is earlier. The Supreme Court held that “strict application” of its Northern States Power “actual injury” rule appropriate because any other result (1) would leave the policyholder uninsured with respect to damages allocated to the period between notice of the claim and the end of remediation and (2) would put a burden on insureds to prove not only that damage was the result of a single discrete occurrence, but during which particular policy period the occurrence took place, thus further increasing the costs of coverage litigation. The Supreme Court rejected various insurers’ argument that the allocation period should be co-extensive with the period of injury, thus extending up until the property damage from water intrusion in the homes had been fully remediated, despite the fact that Wooddale has apparently been unable to buy coverage for water intrusion exclusions after 2002. Also, in light of the “known loss” doctrine, the court ruled that coverage cannot be triggered under policies issued after the insured has received a claim, even if remediation is not yet complete. The court also ruled that if a policy is triggered, an entire policy year applies, even if the closing date or date of notice occurred midway through the policy.   Finally, the Supreme Court held that the Appeals Court had erred in allocating defense costs in the same percentages as applied to indemnity, holding instead that in light of precedents such as Jostens, each insurer should pay an equal share of defense costs and that an “equal shares” approach would minimize or avoid inter-carrier squabbling over how to apportion defense costs.   In a cryptic footnote, the court questioned whether such losses should be apportioned to multiple policies at all, but didn’t pursue the question further since all parties to this case had stipulated that water intrusion claims were subject to a “time on the risk” analysis.
Comment: Despite cases such as Domtar and NSP, the Minnesota Supreme Court seems to have an ambivalent attitude to trigger and allocation issues. In 3M, the Supreme Court refused to apply a continuous trigger in a case where the cause of loss was a specific, identifiable event. Here, the court adopted a continuous trigger but substantially limited the allocation period. Upon information and belief, this is the first state supreme court decision that has adopted ‘unavailability” as an exception to allocation outside the environmental/toxic tort context.
 
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