Randy J. Maniloff, White and Williams, LLP
For the past ten years I have had the privilege of publishing an end-of-year article in Mealey’s Litigation Report: Insurance that discusses the ten most significant insurance coverage decisions from the year gone by. Like anything that is done for consecutive years, some things about the article have changed during this time -- mainly its style and format. But one thing has remained constant: the criteria for selecting just ten coverage cases, out of the thousands that are decided each year -- many with enormous implications – that are the most significant.
In general, the most important consideration for selecting a case as one of the year’s ten most significant is its potential ability to influence future courts that find themselves in need of guidance when confronting a similar issue. In other words, the selected cases are ones that have legs. Many coverage cases, despite being highly significant, do not -- either because they address a mature issue, where there is no shortage of guidance, or they are unique to their particular state. Admittedly, the selection process is highly subjective and not in the least bit scientific.
The decisions selected for the 2010 edition of the Coverage Top 10, published in the December 22 issue of Mealey’s Insurance, are as follows (listed in the order that they were decided):
Pharmacists Mutual Ins. Co. v. Myer – Vermont Supreme Court held that an insurer that failed to take action to allocate damages between those that are covered and uncovered was precluded from asserting otherwise applicable coverage defenses.
Medical Protective Co. v. Bubenik – Eighth Circuit Court of Appeals held that an insured that “took the Fifth” in a civil case, because of possible criminal liability, forfeited coverage for lack of cooperation with its insurer.
Gilbane Building Co. v. Empire Steel Erectors, L.P. – Texas District Court rejected ISO’s additional insured endorsement that was designed to preclude coverage for an additional insured for its sole negligence.
Travelers Prop. & Cas. Co. v. Hillerich & Bradsby Co., Inc. – Sixth Circuit Court of Appeals provided a solution for insurers that are confronted with a demand to settle in the face of coverage defenses.
Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C. – North Carolina Supreme Court addressed coverage that could be relevant to future “greenwashing” claims (allegations that a company exaggerated the extent that its product is environmentally friendly).
World Harvest Church, Inc. v. Guideone Mut. Ins. Co. -- Georgia Supreme Court discussed the consequences for an insurer that issued an ineffective reservation of rights.
Pekin Ins. Co. v. Wilson – Supreme Court of Illinois interpreted the “expected or intended” exclusion to preclude its applicability for an assault and battery claim.
C.R.S.A. § 13-20-808 – Colorado General Assembly overrode Colorado courts to address whether faulty workmanship is an “occurrence.”
Flomerfelt v. Cardiello – New Jersey Supreme Court rejected the usually broad interpretation of “arising out of” as used in an insurance policy exclusion.
State Automobile Mut. Ins. Co. v. Flexdar, Inc. – Indiana Appeals Court rejected an insured’s argument that an insurer’s amendment of a policy provision was admissible to interpret the meaning of a prior version.
Even on a list as selective as ten cases out of thousands of possibilities, a few stand out as particularly noteworthy. In general, there are two kinds of insurance coverage issues. One involves those that have “across-the-board” applicability. These are issues that have the potential to be in play in numerous claim scenarios that arise under various types of liability policies. Other coverage issues, by contrast, are relevant only to specific claim situations.
For example, concerning the later, 2010’s Coverage Top Ten looks at whether faulty workmanship qualifies as an “occurrence” and if ISO’s 2004 amendments to its “additional insured” endorsements – designed to eliminate coverage for an additional insured’s sole negligence – achieved this purpose. While both are very significant coverage issues, their applicability is generally limited to the narrow field of construction defects.
Turning to 2010’s stand-out Top Ten coverage decisions -- those that addressed across-the-board coverage issues -- two looked at the potential for insurers to forfeit otherwise applicable coverage defenses. In World Harvest Church, Inc. v. Guideone Mut. Ins. Co., the Georgia Supreme Court taught that to preserve coverage defenses, it is not enough for an insurer simply to issue a reservation of rights – it must be an effective reservation of rights. To be effective it must fairly inform the insured that, notwithstanding the insurer’s defense of the action, the insurer does not waive coverage defenses available to it. Then, in Pharmacists Mutual Ins. Co. v. Myer, the Vermont Supreme Court went a step further and held that even an effective reservation of rights will be inoperative if the insurer failed to take action to allocate damages in the underlying action between those that are covered and uncovered.
At their core, World Harvest Church and Pharmacists Mutual involved issues that arise when an insurer is defending its insured under a reservation of rights. As the provision of a defense under a reservation of rights is at issue in a multitude of claims, regardless of their nature, the lessons from these decisions are wide-ranging.
Another coverage decision in the all-important across-the-board category is Flomerfelt v. Cardiello. Here New Jersey’s highest court bucked the trend of most courts nationally concerning the interpretation of the phrase “arising out of,” as used in a policy exclusion. The majority of courts have long construed this phrase broadly, generally interpreting it to mean “originating from,” “growing out of,” or having a “substantial nexus with.” These courts reject a legal causation test and instead employ a “but for” test to determine whether damage or liability “arises out of” a particular event. But Flomerfelt saw it differently and rejected this broad interpretation when there are multiple possible causes and theories for recovery against the insured. Given how common-place the phrase “arising out of” is in policy exclusions, any high court decision that alters what has been its steady-Eddy broad interpretation is likely to be advanced by policyholders in the future looking for a similar result.
Travelers Prop. & Cas. Co. v. Hillerich & Bradsby Co., Inc. also addressed a commonly occurring claims situation that is not tied to a particular factual scenario. Insurers often find themselves defending an insured under a reservation of rights, and then an opportunity to settle the case, within policy limits, arises. The insurer is getting tremendous pressure from its insured to settle the case to avoid any risk of a verdict in excess of policy limits. But if the insurer does what its insured is demanding, and settles the case, what happens to the insurer’s coverage defense? Did the insurer just pay to settle an uncovered claim and now has no recourse? One court has called this an untenable position for insurers. In Hillerich & Bradsby, the Sixth Circuit Court of Appeals struck a balance between the competing interests of insurers and insureds by holding that an insurer that settles a claim can then seek reimbursement of the payment from the insured if it is determined that no coverage was owed.
Lastly, this year’s Coverage Top Ten includes the 3rd edition of “Coverage for Dummies,” a light-hearted look at foolish things that people do and then seek coverage for their consequences. Further, for 2010, “Dummies” was expanded to include a hodgepodge of random observations from coverage decisions during the year that, while unimportant, were just too interesting to go unnoticed. This year’s “Dummies” includes the little league president that sought coverage for assaulting a spectator -- a player’s grandmother -- causing serious injuries. Another on the Dummies list involves coverage being sought by a husband, for eye injuries sustained by his wife, when he threw a carrot at her. And after an exotic dancer was groped by a patron, while she was walking along the top of the bar collecting tips, and her leg instinctively kicked out and struck the patron, she was the one sued and in need of coverage.
Download a copy of “Endurance Coverage 2010: The Year’s Ten Most Significant Insurance Decisions Reaches The Decade Mark; 3rd Annual Coverage for Dummies, et al.,” Mealey’s Litigation Report: Insurance, December 22 (co-authored with Joshua Mooney of White and Williams).
Randy J. Maniloff is a Partner in the Business Insurance Practice Group at White and Williams, LLP in Philadelphia. He concentrates his practice in the representation of insurers in coverage disputes over various types of claims. He writes frequently on insurance coverage topics for a variety of industry publications. Maniloff’s views on coverage issues have been quoted by numerous media including The Wall Street Journal, The New York Times, USA Today, Associated Press and Dow Jones Newswires. In January Maniloff will publish “General Liability Insurance Coverage: Key Issues In Every State,” a book addressing the law in all 50 states on twenty key liability insurance coverage issues (Oxford University Press) (Co-authored with Professor Jeffrey Stempel of the University of Nevada Las Vegas Boyd School of Law).