For the past 13 years, at around this time, I have sat down and inked a list of the ten insurance coverage decisions of the year just-completed that I believed were the most significant. There was nothing complex or scientific about the process nor authoritative about the results. Neither was the process a collaborative effort. I simply devised a selection criteria and set out to choose the ten cases that I, personally, believed most satisfied it. In general, the cases I selected were those most likely to be examined by courts nationally and influence their decisions. The 2013 list and commentary appeared in the December 18th issue of Coverage Opinions.
Of course, a list of this sort is highly subjective. When putting together my annual list of the year’s most significant coverage decisions I always wondered what other coverage lawyers would have on theirs. Surely there would be some overlap. But the lists would hardly be a mirror image. So this year – now with the benefit of a platform to do so; which I didn’t have pre-Coverage Opinions -- I set out to solicit others’ opinions on the year’s most significant coverage decisions.
I reached out to some of the country’s leading coverage lawyers – both policyholder and insurer side – and asked them to tell me what they believe was the most significant coverage decision of 2013. I was thrilled that so many agreed to participate – especially when they were constrained to a limited number of words to explain their response. This was a difficult constraint -- but necessary given the number of views that I sought.
Set out below – in their own words -- are the most significant coverage decisions of 2013 according to some of the country’s leading coverage lawyers.
Roberta Anderson -- K&L Gates, LLPIndalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA (Pa. Super. Ct. Dec. 2, 2013) [enhanced version available to lexis.com subscribers]The appellate court in Indalex reversed course in the wake of a number of Pennsylvania decisions that took a narrow (if not nil) view concerning the scope of CGL coverage for construction, faulty workmanship and product defect claims. Distinguishing highest court precedent in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co. (Pa. 2006) [enhanced version available to lexis.com subscribers], and Kvaerner’s intermediate appellate progeny in Millers Capital Ins. Co. v. Gambone Bros. Dev. Co. (Pa. Super. Ct. 2007) [enhanced version available to lexis.com subscribers], and Erie Ins. Exch. v. Abbott Furnace Co. (Pa. Super. Ct. 2009) [enhanced version available to lexis.com subscribers], which contain some exceedingly broad verbiage suggesting that such claims simply cannot comprise an “occurrence” due to the lack of any fortuitous “accident,” the appellate court in Indalex reversed the trial court and upheld coverage for tort claims alleging that the insured’s window and door products “were defectively designed or manufactured and resulted in water leakage that caused physical damage, such as mold and cracked walls, in addition to personal injury.”
As the Indalex court succinctly (and correctly) summed it up: “Simply stated…we cannot conclude that the claims are outside the scope of the coverage…Because the underlying complaints alleged defective products resulting in property loss, to property other than [the insured’s] products, and personal injury, we conclude there was an ‘occurrence’[.]” The Indalex court also refused to defeat coverage based on Pennsylvania’s “gist of the action” doctrine, which operates to preclude plaintiffs from recasting ordinary breach of contract claims into tort claims, reasoning that “application of the doctrine in this context would be inconsistent with the duty to defend, which is broader than the duty to indemnify and applicable when a claim is potentially covered.”
Indalex clearly changes the Pennsylvania landscape on the “occurrence” issue, paving the way to coverage for claims alleging unintentional damage or injury resulting from an insured’s faulty work or defective products. A clear victory and holiday treat for Pennsylvania insureds, Indalex appears to be part of a broader, emerging national trend favoring insureds in this area, following this year’s earlier decisions from the highest courts in Connecticut, Georgia, West Virginia and North Dakota.
John Ellison, Tim Law, Jay Levin and Doug Widin -- Reed Smith, LLPStandard Mutual Insurance Company v. Lay (Ill. May 23, 2013) [enhanced version available to lexis.com subscribers];K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co. (N.Y. Sept. 3, 2013) (Reargument Granted) [enhanced version available to lexis.com subscribers]. In Lay, the Illinois Supreme Court found that the “manifest purpose” of the Telephone Consumer Protection Act “is remedial and not penal” and that “the TCPA-prescribed damages of $500 per violation are not punitive damages.” The TCPA allows “an action to recover for actual monetary loss . . . or to receive $500 in damages for each such violation, whichever is greater.” The Court’s reasoning can be applied to many other statutes that contain similar damages provisions, such as the Fair Credit Reporting Act, and to policy provisions excluding “fines” or “penalties.” Class actions under such statutes are common, so the Court’s decision should have substantial reach. In K2, the New York Court of Appeals held that when a liability insurance company breaches its duty to defend, the insurance company may not later rely on policy exclusions to escape its duty to indemnify. Rather, the insurance company “may litigate only the validity of its disclaimer.” Often, an insurance company will demand a trial to parse damages, established by settlement or judgment, between those that are covered and uncovered. The New York Court of Appeals has provided an elegantly simple solution to a common problem. If some damages were potentially covered, such that the insurance company should have defended the case, all damages will be treated as covered.
Laura Foggan -- Wiley Rein LLPK2 Investment Group, LLC v. American Guarantee & Liability Ins. Co. (N.Y. Sept. 3, 2013) (Reargument Granted) [enhanced version available to lexis.com subscribers] K2 Investment Group, and the grant of rehearing, are critical because refusing to allow an insurer to raise defenses to its indemnity obligation departs from established New York insurance law and creates a new remedy for the breach of the duty to defend. Estopping the insurer from raising any coverage defenses is contrary to the overwhelming weight of authority in New York and nationwide. Rather, damages for breach of the duty to defend should be limited to the cost of the defense, or other damages that the insured proves arise directly from the breach.
In an instance of a wrongful refusal to defend, adequate remedies exist to protect the policyholder. Indeed, New York law provides that the insurer cannot challenge facts determined, or a judgment or settlement reached, in an underlying suit it wrongfully refused to defend, absent proof of fraud or collusion. However, an insurer should have the opportunity to test the underlying judgment for fraud or collusion, and to litigate its coverage defenses as to indemnity. This case is very important because imposing "automatic" indemnity on the insurer is overbroad and unfairly punitive. In addition, it may have constitutional due process implications.
Mike Marick -- Meckler Bulger Tilson Marick & Pearson, LLPAmerican Law Institute’s “Principles of Liability Insurance”A proposed amicus brief in support of the policyholder’s position before the New York Court of Appeals in K2 Investments Group, LLC v. American Guarantee (reargument granted) [enhanced version available to lexis.com subscribers], reveals the potential significance, to both insurers and policyholders, of the American Law Institute’s still unfinished “Principles of the Law of Liability Insurance.” Although the ALI’s “Principles” project is still years away from completion, a draft proposal, that would estop insurers who have wrongly refused to defend from contesting their indemnity duties, has been cited to the New York Court of Appeals by an amicus seeking to sustain the Court’s original ruling in K2.
Unlike ALI’s Restatements, which describe what the law is, “Principles” are aspirational--they purport to describe what the law should be. But from whose perspective? The authors of the draft are the “reporters”—Tom Baker and Kyle Logue, law professors. In their introductory remarks to Tentative Draft No. 1 of the “Principles”, the reporters explained: “In a number of instances ... we propose adjustments to existing rules that we believe are superior. That, of course, is the point of a Principles project.” (Emphasis added.)
One specific “adjustment” suggested by the reporters would be to impose a forfeiture of coverage defenses (i.e., automatic indemnity) upon an insurer which breaches its duty to defend, under an “estoppel” theory. See ALI Tentative Draft No. 1, § 21. The remedy of estoppel, as opposed to more traditional contract law remedies, has been and remains the law in very few states. Draft Section 21 has not been voted upon by the ALI membership, even tentatively. Yet, the proposed amicus brief invokes draft Section 21 as “mak(ing) clear” that estoppel purportedly is “the trend of the law.”
There has been and will be considerable discussion and debate over Section 21, many other sections of the “Principles,” as well as the impact, if any, the final work will or should have on insurance law. By citing even a preliminary draft as authority, however, it is now clear that policyholders’ counsel intend to invoke this work to advance their litigation interests.
Lorie Masters -- Jenner & Block LLPAstraZeneca Insurance Co., Ltd. v. XL Insurance (Bermuda) Ltd., 1  EWHC 349 (Comm.) appeal argued (Nov. 2013)An early 2013 decision by the English Commercial Court demonstrated how the typically overlooked governing law and dispute-resolution provisions can affect a policyholder’s ability to recover insurance proceeds under a Bermuda Form policy. AstraZeneca construed a Bermuda Form policy that had been amended from the typical Bermuda Form wording by: (i) adopting English, rather than New York, law; and (ii) waiving the typical arbitration requirement. As a result of that waiver, AstraZeneca is one of the few reported decisions to analyze key Bermuda Form policy terms. For that reason alone, the decision deserves recognition as one of the most significant coverage decisions in the past year.
AstraZeneca found that, when an insurance policy includes no duty to defend, the policyholder must establish actual legal liability to an underlying claimant before coverage applies; arguable or alleged legal liability does not suffice. While a settlement or judgment may establish a loss, according to Justice Julian Flaux’s decision, it does not necessarily establish legal liability where coverage applies “by reason of liability imposed by law.” Instead, the court concluded that insurers may “relitigate” in a coverage dispute the basis of the policyholder’s liability in the underlying claims. This distinction arose because of key differences between English and New York law; as such, neither the New York law holdings in Luria and Uniroyal, nor the New York public policy favoring settlements, applied. As AstraZeneca did not prove the basis for its liability in the underlying Seroquel cases, no coverage applied—even for defense costs.
This decision shows how the governing law and arbitration provisions in a Bermuda Form (or other) policy can determine the outcome of a coverage dispute. To avoid this result, policyholders should address these provisions in policy renewals and reject English law as the governing law. Policyholders also can ensure that an alleged liability or loss in a settlement or judgment will suffice as a basis for indemnity under its liability insurance policies.
Barry Ostrager and Andy Frankel -- Simpson Thacher & Bartlett LLPPlant Insulation Co. v. Fireman’s Fund Ins. Co. (Cal. Super. Ct. April 8, 2013) Plant Insulation Co. v. Fireman’s Fund is a particularly important decision for a number of reasons. It is the first ruling to our knowledge to adopt the Wallace & Gale approach to completed operations in California. The ruling is substantially more thorough than either the District Court or Fourth Circuit’s ruling in Wallace & Gale, and addresses not just plain language but also arguments about drafting history, extrinsic evidence and the purposes of the products/completed operations hazards. It also addresses exceptions to the completed operations hazard that insureds from time to time rely on. In addition, while W&G was focused on the completed operations hazard, Judge Munter’s ruling applies a similar analysis to the products hazard. Specifically, if an asbestos claimant was injured by virtue of the manufacture, sale or handling of an asbestos-containing product, the claim is a products claim if the product in question was relinquished by the time of the insurer’s policy period--even the exposure arose from an insured’s ongoing operations. This is an important aspect of the court’s ruling as there are few decisions discussing this issue in the context of the products hazard language, particularly with respect to asbestos bodily injury claims, and adds an important new argument in non-products disputes. In addition, the court adopted our argument on burden of proof, finding that the insured has the burden of showing that a claim falls outside of the products and completed operations hazard where, as here, the aggregate limits had been exhausted. The court also rejected arguments that some of the other insurers made on medical issues and what constitutes “bodily injury” in the asbestos context. The case has gained a lot of attention, particularly in the non-products arena and we think it will be influential nationwide.
Bill Passannante -- Anderson Kill, PC FDIC D&O Liability Insurance “Recommendations”In a somewhat unique statement from the FDIC in “Financial Institution Letter in FIL-47-2013” (October 10, 2013) (available http://www.fdic.gov/news/news/financial/2013/fil13047.pdf) the FDIC states “In recent years, the FDIC has noted an increase in exclusionary terms or provisions contained in depository institutions’ D&O insurance policies that may adversely affect the recruitment and retention of well-qualified individuals. When such exclusions apply, directors and officers may not have insurance coverage and may be personally liable for damages arising out of civil suits relating to their decisions and actions. In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language.”Further the FIL notes that: “The FDIC urges each board member and executive officer to fully understand the answers to the following questions regarding D&O insurance coverage, especially when considering renewals and amendments of existing policies: What protections do I want from my institution’s D&O policy? What exclusions exist in my institution’s D&O policy? Are any of the exclusions new, and if so, how do they change my coverage? What is my potential personal financial exposure arising from each policy exclusion? D&O liability insurance is an important risk mitigation tool for financial institutions, and it is vital for directors and senior executives to fully understand the protections and limitations provided by such policies.”The FDIC may be motivated by its not uncommon position as a receiver of a failed bank. Still the public commentary on D&O liability insurance issues is notable. The obvious question is whether the FDIC will continue down this road of addressing D&O insurance policies. The Construction Defect TetralogyCarl Salisbury -- Kilpatrick Townsend & Stockton LLPThe quote of the year is from a case that was decided by the West Virginia Supreme Court of Appeals. Crediting Felix Frankfurter, it said, “Wisdom too often never comes, and so one ought not to reject it merely because it comes late.” The decision is one of four that, together, constitute the most significant development in coverage law in 2013.
The trend began April 5, 2013. The North Dakota Supreme Court in K&L Homes, Inc. v. American Family Mut. Ins. Co. [enhanced version available to lexis.com subscribers], overruled an earlier precedent and held that a subcontractor’s faulty workmanship can constitute a covered “occurrence” under a CGL policy. On June 11th, the Connecticut Supreme Court joined the same chorus, singing from the same hymnal, in Capstone Building Corp. v. American Motorists Ins. Co [enhanced version available to lexis.com subscribers].
Next, the West Virginia Supreme Court of Appeals decided Cherrington v. Erie Ins. Prop. and Cas. Co. [enhanced version available to lexis.com subscribers]. What made Cherrington noteworthy is that it was expressly swayed by the tide of opinion from its sister courts that faulty workmanship can be accidental. Finally, there was Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co. [enhanced version available to lexis.com subscribers], where the Georgia Supreme Court also overruled precedent to align itself with the majority.
It is hard to remember the last time four state high courts reached the same conclusion on the same contentious question in four months -- doubly so when three of them overruled prior decisions to get there. The willingness of so many state Supreme Courts to revisit what was, for them, a settled issue, and to reverse themselves on the strength of the majority decisions of their sister courts, suggests that the remaining outliers – those courts that cling to the minority view that faulty workmanship can never be accidental – may yet see their own way clear to correcting prior erroneous precedent on this issue.
Ron Schiller, Dan Layden and Bo Ebby -- Hangley Aronchick Segal Pudlin & Schiller, PCExecutive Risk Indemnity Inc. v. Cigna Corp., (Pa. Super. Ct. July 18, 2013) [enhanced version available to lexis.com subscribers];United HealthCare v. Columbia Casualty Co. (D.C. Minn. Apr. 25, 2013) [enhanced version available to lexis.com subscribers] In 2013 there were two significant decisions addressing the all-important issue of allocation of covered and uncovered claims.
Executive Risk Indemnity involved a claim by Cigna Corp., for a $170 million settlement with health care providers, for allegedly conspiring to underpay them billions of dollars for benefits owed over a decade. Cigna sought coverage from numerous insurers including Executive Risk, the only one not to settle.
In a 2009 decision the Pennsylvania Superior Court held that, while a “Contract and Benefits Due” exclusion of the Executive Risk policy applied, the settlement with the providers encompassed both breach of contract and RICO claims, the later which were possibly within the scope of the policy’s coverage. The case was remanded to the trial court for further proceedings on the issue of allocation. A trial was held in November 2010 and the court held for Executive Risk and against Cigna on all claims. Cigna appealed again, arguing that the trial Court incorrectly placed the burden of establishing coverage via allocation on Cigna, the insured.
On July 18, 2013, in the first appellate decision addressing the specific point, the Pennsylvania Superior Court held that the insured (i.e., Cigna) bears the burden of allocating a settlement between covered and non-covered claims when, as here, it controls all aspects of the case, including settlement. In United HealthCare, United was sued by the American Medical Association for a variety of claims alleging that United provided inadequate reimbursements for covered out-of-network medical services. In addition to the AMA Litigation, United faced two other actions for its alleged misconduct concerning inadequate reimbursements. In 2009, United announced its settlement of the litigations for $400 million collectively and submitted the settlement for coverage by its insurers, including Executive Risk.
The Minnesota District Court held that aspects of United’s settlement were per se not covered and that United – not its insurers – having controlled and executed the settlement, without the consent of its insurers, bore the burden of proving the allocation of the settlement between covered and non-covered claims. Importantly, United bore this burden regardless of the reason the claim was not covered including whether the claim was barred by an exclusion. Like the Pennsylvania Superior Court later held in the Cigna litigation, the District Court found that, where the insured controlled the settlement, it and not its insurers legally and logically bore the burden to prove the amount of its covered loss.
Both cases represent a trend of courts holding that, with regard to the all-important issue of allocation in the context of settlement, the insured can and often should bear the burden of establishing its loss even when the non-covered part of the settlement is barred by an exclusion. That is, once the insurer proves the existence and applicability of an exclusion, the insured still must establish how much, if any, of its settlement is covered. This levels the playing field for insurers since the insured often controls settlement negotiations and the written terms of the settlement agreement.
[For more information on United HealthCare see the May 8, 2013 issue of Coverage Opinions.]
Tom Segalla and Patrick Omilian -- Goldberg Segalla LLPTravelers Indemnity Co. v. Excalibur Reinsurance Corp. (April 8, 2013) [enhanced version available to lexis.com subscribers]This past year yielded few significant reinsurance decisions. In USF&G v. American Re-Insurance [enhanced version available to lexis.com subscribers], New York’s highest court clarified the follow the settlement doctrine as to an insurer’s settlement allocations. USF&G received much attention. A subsequent decision from the District of Connecticut, Travelers Indemnity Co. v. Excalibur Reinsurance Corp. (“Excalibur”), sought to reconcile USF&G with another leading New York reinsurance case, namely Travelers Cas. & Sur. v. Certain Underwriters at Lloyd’s of London [enhanced version available to lexis.com subscribers] (“Travelers”). Excalibur is a must-read for every reinsurance practitioner both for its substance and its rare literary enjoyment.
In a thoroughly reasoned, well-articulated, and curiously entertaining decision, Judge Haight, in Excalibur, explained, when USF&G and Travelers are read together, the rules of law governing follow-the-settlements and settlement allocation are made manifest. Those rules are: (1) A follow the settlements clause in a reinsurance contract requires that deference be given to a cedent’s decision on the allocation of settlement payments among reinsurers; however: (2) A cedent’s allocation decisions are not immune from scrutiny, which includes: (3) Consideration of whether the allocation is a reasonable one, that is, one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at if the reinsurance did not exist; and: (4) In any event, an allocation by a cedent that violates or disregards provisions in the reinsurance contract is invalid and cannot be sustained by a court.
Excalibur provides thorough guidance regarding the propriety of insurer’s settlement allocations and is a useful case for cedents and reinsurers alike.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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