ABA COVERAGE

ABA COVERAGE

Welcome! We've designed this resource to provide you with abstracts of and links to current articles from Coverage, the official, journal-quality publication of the ABA Committee of Insurance Coverage, Section of Litigation. Coverage contains articles about important and cutting-edge issues and decisions concerning insurance coverage litigation, as well as information about Committee meetings and activities.

 

TABLE OF CONTENTS

ALLOCATION

ALTERNATIVE DISPUTE RESOLUTION/ARBITRATION

BUSINESS INTERRUPTION COVERAGE

CHOICE OF LAW

CLAIMS-MADE POLICIES

CLAIMS-MADE POLICIES/INTERRELATED ACTS

CONFLICT OF INTEREST

CONSTRUCTION DEFECTS

CONTINGENT BUSINESS INTERRUPTION COVERAGE

CYBER COVERAGE

DIRECTORS' AND OFFICERS' INSURANCE

DUTY TO COOPERATE

DUTY TO DEFEND

DUTY TO DEFEND/DEFENSE COSTS

E-DISCOVERY

EXCLUSIONS

FLOOD COVERAGE

FOOD CONTAMINATION COVERAGE

GLOBAL WARMING COVERAGE

INNOCENT INSUREDS

INTELLECTUAL PROPERTY COVERAGE

INVESTIGATIONS

MEDIATION  

NOTICE OF CLAIM

NUMBER OF OCCURRENCES 

OCCUPATIONAL DISEASE COVERAGE

OIL SPILLS

PREJUDGMENT INTEREST

PROPERTY DAMAGE

PROPERTY DAMAGE – APPRAISALS

RESCISSION

REGULATORY ESTOPPEL

SEC INVESTIGATIONS

SETTLEMENT CREDITS

SUCCESSOR LIABILITY

TIME-SENSITIVE DEMANDS

 

ALLOCATION 

Brent W. Huber and Susan Charles of Ice Miller LLP on "Treatment of Insurance Proceeds and the Stafford Act's Public Assistance Grant Program"

 

In their article appearing in the November/December 2011 issue of Coverage, "Treatment of Insurance Proceeds and the Stafford Act's Public Assistance Grant Program," Brent W. Huber and Susan Charles of Ice Miller LLP, observe that in instances of widespread disaster a community may find available insurance insufficient, so that the federal government may be needed to act as a kind of insurer of last resort. The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. § 5121, et seq., authorizes assistance to state and local governments and certain private nonprofit organizations in such instances. The article describes how FEMA implements the Act's Public Assistance ("PA") Grant Program in terms of what disaster recovery work is eligible for funding, what costs are eligible for reimbursement and what losses and costs the Act expressly excludes from recovery.

The article examines the interplay of policyholders' insurance recoveries and their ability to obtain PA funding. One of the more important questions in evaluating the impact of insurance on PA funding is whether the available coverage would constitute a "duplication of benefits" which the Stafford Act and implementing regulations prohibit. The article focuses on two corollary issues:

(1)   Where a policyholder settles with its insurer for less than the policy limits, can PA funding be used to make up for the difference?

(2)   Where a policy covers both PA eligible and PA ineligible costs, how should the policy limits be allocated and what losses should be covered by PA funding?

The article examines the language of the Stafford Act and Congressional intent in promulgating the Act, but finds that the Act and applicable regulations are not dispositive of these issues. Moreover, the article surveys FEMA's positions and actions on these matters and finds them to be inconsistent. Furthermore, there is little case law addressing these issues. But the article discusses one decision on point, the Ninth Circuit's ruling in Hawaii v. FEMA, 294 F.3d 1152, that adopted a "commercially reasonable" standard for evaluating a policyholder's actions with respect to available coverage. The article contends that the commercially reasonable standard for approaching coverage questions is appropriate given Congress' intent in enacting the Stafford Act. The article concludes that to the extent a PA recipient does not seek reimbursement of expenses already paid by or to be paid by insurance, the Stafford Act should allow recipients to determine how best to allocate insurance proceeds using commercially reasonable standards.

Access the full article, Treatment of Insurance Proceeds and the Stafford Act's Public Assistance Grant Program, on Lexis.com.

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Kenneth Anspach on “the Illinois Pro Rata Myth”

 

In his article appearing in the September/October 2009 issue of Coverage, solo practitioner Kenneth Anspach disputes the proposition that in Illinois the accepted method of allocation of indemnity and defense costs at the primary level of insurance for continuously triggered occurrences is pro rata. Insurers often contend that where coverage for a single occurrence is triggered among primary insurers, obligations of indemnification and defense must be allocated on a pro rata basis in Illinois. The article asserts that instead, in such instances, Illinois courts uniformly follow the holding of the Illinois Supreme Court in Zurich Ins. Co. v. Raymark Industries (“Zurich”), 118 Ill. 2d 23 (1987), that the “all sums” provision in typical commercial general liability policies precludes the use of pro rata allocation. The court there held that each primary insurer whose policy was triggered by bodily harm from asbestos exposure was “jointly and severally liable for the total indemnity and defense costs of a claim without proration.”

The article distinguishes Illinois Appellate Court decisions where pro rata allocation has been granted. Some of those cases involved allocation disputes between primary and excess insurers. The doctrine of horizontal exhaustion established and followed in those cases is inapplicable to allocations of coverage solely at the primary level. In another case, an Illinois Appellate Court found the primary insurer liable on a pro rata basis but that case involved separate and distinct occurrences over several years and unusual limiting language in the definition of advertising injury. The article notes that the court “specifically distinguished” the holding in Zurich on those grounds.

In contrast, the article cites cases that have followed Zurich in requiring primary insurers to pay “all sums” rather than allocating their liability on a pro rata basis.

Thus, the article concludes that pro rata allocations of liability for defense and indemnity costs have only been applied in Illinois in limited situations involving either the doctrine of horizontal exhaustion or where unusual policy language limits “all sums” application and where the subject of the claim consisted of multiple occurrences, rather than a continuous occurrence.   

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Vance A. Woodward of Carroll, Burdick & McDonough LLP on “Scope of Coverage Is a Matter of Contract Interpretation”

 

In an article appearing in the May/June 2009 issue of Coverage, Vance A. Woodward of Carroll, Burdick & McDonough LLP contends that the language of the typical CGL occurrence-based policy itself resolves the allocation of damages issues as to long-tail claims. He maintains that courts thus need not and should not resort to extra–contractual doctrines such as “reasonable expectations of the insured” to resolve the issue of whether the policy provides pro-rata or all-sums coverage. The author finds after surveying the leading scope-of-coverage cases that “many courts simply fail to mention the key policy language, let alone analyze it” and that those do provide a superficial analysis.

This issue arises with respect to “long-tail” claims, i.e., where exposure to harm occurs in one or more policy periods but the manifestation of the injury occurs in a later period or periods. Can the insured choose any one triggered policy to pay the entire claim where more than one policy is triggered (all-sums coverage) or does each policy cover only an allocable share of the insured’s liability (pro-rata coverage)? The article provides a painstaking analysis of the occurrence-based 1966 CGL form issued by the National Bureau of Casualty Underwriters. It considers the positions of the all-sums advocates and the pro-rata advocates in interpreting the policy. The article concludes that the policy period provision yields coverage only for injury and damage that actually occurs during the policy period and thus only pro-rata coverage is available. A chart supplements the article providing a multi-state survey of cases that have considered the issue in terms of all-sums or pro-rata coverage under the duty to indemnity and the duty to defend.

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Lorelie S. Masters and Jerold Oshinsky on "Is 'Fair' Fair?: 'All Sums' and the Allocation of Deductibles"

Much has been written on the issue of allocating an insured's liability across policy limits under general liability insurance policies.  The article "Is 'Fair' Fair?:  'All Sums' and the Allocation of Deductibles," by Lorelie S. Masters and Jerold Oshinsky, appearing in the March/April 2010 issue of Coverage, addresses the less often discussed issue of allocation of the policyholder's liability to insurance policies containing deductibles, self-insured retentions, and "fronting arrangements."  Under "all sums" or similar language in standard-form general liability policies, policyholders may select a policy or policy year(s) that provide optimum coverage as the insurers are jointly and severally liable for the loss.  The authors contend that "all sums" insurance should mean all sums not only for allocation of policy limits but also for deductibles, self-insured retentions, and "fronting" policies (collectively, "deductibles") as well.

The authors' search for pertinent court decisions led them to conclude that the case law in Washington and California appears to be the most developed on the issue of non-allocation to general liability insurance policies containing deductibles.  The article examines the courts' reasoning in those cases and finds strong support for the contention that the "all sums" rationale should apply to the allocation of deductibles.

The authors state that, despite the inclusion of "all sums" or similar language in standard-form general liability policies, some courts have adopted pro-rata approaches across policy limits under the rationale of providing "equity" and "fairness" to insurance companies.  The authors reason that, if "fairness" is used to go outside of the policy language to allocate liability on a pro-rata basis across policy limits to benefit insurers, then the concept of "fairness" should also be used to benefit policyholders in the allocation of liability to deductible periods, self-insured retentions, or "fronting" policies.  Expressed in other terms, the authors conclude, "'Fair should be fair." 

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ALTERNATIVE DISPUTE RESOLUTION/ARBITRATION

John E. James and Michael B. Rush of Potter Anderson & Corroon LLP on "Mandatory Provisions-Not in My State-McCarran-Ferguson, the FAA, and Reverse Preemption"

In their article appearing in the May/June 2011 issue of Coverage, "Mandatory Provisions-Not in My State-McCarran-Ferguson, the FAA, and Reverse Preemption," John E. James and Michael B. Rush examine how courts have dealt with the issue of the enforceability of laws that prohibit the implementation of mandatory arbitration clauses in insurance policies. The article notes that 24 states and D.C. restrict the use of mandatory arbitration in insurance policies to some extent and provides examples of such statutes that reveal a wide divergence in the scope of those restrictions. Surveying the litigation, the article finds a "fault line created by the broad mandate of the Federal Arbitration Act on one side and state statutes enacted under the aegis of the McCarran-Ferguson Act on the other." The article analyzes court decisions that have ruled that the McCarran-Ferguson Act reverse preempts the FAA when applied to state anti-arbitration laws as well as those that have ruled the FAA preempts state anti-arbitration statutory provisions when applied to insurance coverage disputes. It also considers a Fifth Circuit ruling on the anti-arbitration preemption question relating to Oklahoma insurance receivership proceedings. The article further explores disputes as to the application of state anti-arbitration provisions aside from the preemption question. It examines an Iowa Supreme Court case where the insured sought to compel arbitration while the insurer argued that the state anti-arbitration provision prohibited it. The article analyzes a Kentucky Supreme Court decision on whether a law prohibiting arbitration of insurance coverage disputes also applies to disputes concerning surety or performance bonds. Lastly, it examines decisions of the Nebraska and Montana Supreme Courts as to the applicability of state anti-arbitration provisions to "appraisal" or "adjustment" provisions in first-party policies that reach opposite holdings. The article closes with intriguing questions as to the potential effect of choice of law issues on the question of the enforceability of anti-arbitration state provisions.

Access the full article, Mandatory Provisions-Not in My State-McCarran-Ferguson, the FAA, and Reverse Preemption, on Lexis.com.

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Keala C. Ede of Robins, Kaplan, Miller & Ciresi L.L.P. on “Protecting Your Neutral: The Confidentiality of Ex Parte Communications with Party-Appointed Arbitrators”

 

This article, appearing in the November/December issue of Coverage, the periodical of the Committee on Insurance Coverage Litigation of the ABA’s Section of Litigation, explores issues of confidentiality and privilege presented by ex parte communication between parties and their appointed arbitrators. The article first considers confidentiality of ex parte communications with party-appointed arbitrators prior to and during the arbitration proceedings, examining applicable provisions of the American Arbitration Association Code of Ethics for Arbitrators in Commercial Disputes, the ARIAS·U.S. Practical Guide and the ARIAS·U.S. Code of Conduct (also called “Guidelines for Arbitrator Conduct”). The article then discusses the confidentiality of ex parte communications with party-appointed arbitrators during court proceedings, reviewing apposite federal jurisprudence and noting the purposes for which parties may and may not depose arbitrators. The article concludes by cautioning practitioners as to the limits of the attorney-client privilege and the work product doctrine in protecting against discovery of communications between a party and its appointed arbitrators after the conclusion of the arbitration proceeding.

Access the full article, Protecting Your Neutral: The Confidentiality of Ex Parte Communications with Party-Appointed Arbitrators, on Lexis.com.

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BUSINESS INTERRUPTION COVERAGE

H. Richard Chattman and Gregory D. Miller of Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. on “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?”

 In their article appearing in the July/August 2009 issue of Coverage, “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?” H. Richard Chattman and Gregory D. Miller initially note that unlike an ordinary loss causing damage to a single location, a wide-impact catastrophe (e.g., hurricane, earthquake, 9/11 attack) can cause substantial, lasting economic changes, so that pre-catastrophe business levels are often unreliable indicators of probable post-catastrophe earnings. Yet the courts are split on whether these extraordinary economic changes should be considered in measuring the compensable loss under a business interruption insurance policy or whether they should be excluded from the calculation and instead loss should be measured strictly against pre-catastrophe earnings.

This article analyzes the developing case law measuring business interruption loss in wide-impact catastrophes, and critiques the divergent rationales for the different measurements the courts have applied. Some business interruption measurement provisions provide that “due consideration shall be given to experience of the business before the loss and the probable experience thereafter had no loss occurred.” The article evaluates whether some courts have been correct in equating “had no loss occurred “with “had no catastrophe occurred.” Other business interruption measurement provisions instead use the phrase “had no interruption of production or suspension of business operations or services occurred.” The article opines that different measurement approaches for those differently phrased provisions are not justified. The authors state, “[T]he most appropriate principle ─ the one that considers the actual impact of the post-catastrophe economy on the insured’s business ─ flows logically from the basic business interruption coverage provided for earnings lost as a direct result of insured or other trigger damage.”

The article further identifies evidentiary issues that have arisen from the controversy as to how to measure a business interruption loss caused by a wide-impact catastrophe.

Access the full article, Measuring Business Interrruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?, on Lexis.com.

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Richard P. Lewis and Michael N. DiCanio on “Cleaning Up the Mess: Business Income Coverage in the Wake of Hurricane Katrina”

In their article, “Cleaning Up the Mess: Business Income Coverage in the Wake of Hurricane Katrina” appearing in the May/June 2010 issue of Coverage, Richard P. Lewis and Michael N. DiCanio examine cases addressing a host of issues concerning Business Income (or “Business Interruption”) insurance coverage in the aftermath of Hurricane Katrina.

These issues include: (1) policyholder assertions that the “wider effects of the loss” should be taken into account to increase their covered Business Income loss; (2) insurer assertions that where a policyholder’s income increased because of post-Katrina conditions there was no actual loss; (3) policyholder assertions that profits on its post-Katrina new types of projects should not bar recovery for loss of work of the type of policyholder’s projects  done before Katrina; (4) whether a period of cessation of business triggers coverage for later diminished operations or whether there is coverage only for the period of total cessation;  (5) issues as to causation such as whether various post-Katrina events resulting in Business Income loss or Extra Expenses were attributable to a covered peril; (6) whether a policyholder’s loss was attributable to damage at the insured’s premises; (7) how to calculate recoverable continuing expenses beyond loss of profit during the period of restoration; (8) whether post-Katrina aid received from governments or private organizations should offset the amount of the policyholder’s recovery for loss; (9) whether costs incurred by a policyholder in mitigating its loss were covered Extra Expenses under the policy; (10) issues as to the length and tolling of the period of restoration;  (11) whether there is Extended Business Income for a Civil Authority order to leave the premises not due to property damage but due to the fear of future property damage; (12) whether there must be a formal “order” from a civil authority to trigger coverage under the Civil Authority provision;  (13) whether a policyholder may stack applicable policies with differing limits or sublimits;  and (14) challenges to the calculations of business interruption loss, including under Daubert standards.

Access the full article, Cleaning Up the Mess: Business Income Coverage in the Wake of Hurricane Katrina, on Lexis.com.

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CHOICE OF LAW

Josephine H. Hicks and Terry L. Wallace of Parker Poe Adams & Bernstein LLP on “Insurance 101: Choice of Law in Insurance Coverage Disputes”

 

An article appearing in the May/June 2009 issue of Coverage by Josephine H. Hicks and Terry L. Wallace of Parker Poe Adams & Bernstein LLP provides an overview of the various choice of law rules that are applied in insurance coverage litigation. The authors point out that the threshold issue of which jurisdiction’s substantive law governs the dispute can be outcome determinative. “The bottom line is that a court interpreting the exact same policy language under two different sets of substantive law could reach entirely different results depending on which state’s law applies.” Insurance coverage issues in which a choice of law analysis can be outcome determinative include:

Whether insurer prejudice as a result of late notice by the policyholder is a prerequisite to denial of coverage;

A state’s position on interpreting the “sudden and accidental” pollution exclusion;

Trigger of coverage;

Bad faith;

Tender of defense costs;

The scope of the duty to cooperate;

How damages are determined; and

Whether a party qualifies as an additional insured.

The article surveys the major methods of resolving choice of law issues in insurance coverage disputes:

The traditional Lex Loci Contractus rule enunciated by the Restatement (First ) Conflict of Laws;

The modern Most Significant Contacts analysis called for by the Restatement (Second) Conflict of Laws; and

State statutes that dictate how choice of law issues are to be resolved, specifically those of North Carolina, South Carolina, Texas, and Virginia.

Each of these approaches is analyzed, variations within the approaches are noted, and instructive court decisions are examined. There is an appendix to the article identifying the approach taken by each state and the District of Columbia as well as citations to illustrative court decisions within each of the jurisdictions.

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CLAIMS-MADE POLICIES

Werner A. Powers and Charles C. Keeble, Jr. of Haynes and Boone, LLP on “Notifying Your Claims-Made Liability Carrier of a Claim: Better Late than Never”

 

In their article appearing in the September/October 2009 issue of Coverage, the authors address the issue of whether an insurer should be required to show it was prejudiced by the insured’s late notice of a claim under a claims-made policy in order to be entitled to deny coverage on the basis of that late notice.

By way of background, there are three distinct types of insurance policies. An occurrence policy provides coverage for injuries or damages that occur during the policy period even if the claim is not made until after the policy period has terminated. A claims-made policy (a “pure” claims-made policy) provides coverage for a claim first made against the policyholder during the policy period for injuries or damages that occurred either during or prior to the policy period. A claims-made-and-reported policy provides coverage only if the claim against the policyholder was made during the policy period and the insured reported the claim during the policy period (or a specified period thereafter).

Occurrence policies typically require the policyholder to provide notice of a claim “as soon as practicable.” This allows an insurer to investigate the facts of the claim and participate in the policyholder’s defense of the claim. But the authors note that given the long length of time involved in litigation, insurers are often not adversely affected by a policyholder’s late notice. Thus, most jurisdictions require insurers of occurrence policies to show they have been prejudiced by late notice before their denial of coverage on that basis will be upheld. This “notice-prejudice” rule does not properly apply to a late notice of claim that is provided after the reporting period of a claims-made-and-reported policy. Otherwise the policyholder would obtain more coverage than for which it bargained.

 “Pure” claims-made policies, like occurrence policies, typically require the policyholder to provide notice of a claim “as soon as practicable.” Should the notice-prejudice rule apply to such policies? The authors report that many courts have previously said no, failing to distinguish between “pure” claims-made policies and claims-made-and-reported policies. But this was not the case in the 2009 Texas Supreme Court decision in Financial Indus. Corp. v. XL Specialty Ins. Co., 2009 Tex. LEXIS 109. In that case, the policyholder did not provide notice of a suit filed against it to its insurer until seven months after the suit was filed. The notice was, however, given prior to the expiration of the insured’s “pure” claims-made policy. The court held that, in the absence of prejudice to the insurer, the “late” notice of claim did not bar coverage. The authors analyze that decision in their article and concur with its holding, showing why the analysis of the applicability of the notice-prejudice rule [to “pure” claims-made policies] is logically no different from the analysis under an occurrence policy. There is no requirement that the claim must be reported to the insurer during the policy period or within a specified time thereafter. The notice-prejudice rule thus properly applies to a “pure” claims-made policy  

Another 2009 Texas Supreme Court decision addressed the applicability of the notice-prejudice rule in Texas as to a “late” notice under a claims-made-and-reported-policy. In Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 2009 Tex. LEXIS 111, although the notice given by the policyholder could reasonably be seen as tardy, it was given prior to the deadline for giving notice specified in the policy.The court again applied the notice-prejudice rule, holding that coverage could not properly be denied on the basis of late notice in the absence of the insurer demonstrating that it was prejudiced by such notice.

The authors state that Financial and Prodigy teach that “the effect of a late notice of claim on a [policyholder’s] coverage properly turns on the type of claims-made policy at issue and/or whether excusing a [policyholder’s] late notice of a claim would in effect, rewrite the parties’ insurance contract by affording insurance coverage to the [policyholder]” for risks the insurer did not assume. The authors reason that the only time the notice-prejudice rule should be inapplicable to a late notice of a claim under a claims-made policy is with respect to a notice given outside the reporting period of a claims-made-and-reported policy. The authors note that whether such reasoning will be followed by the Texas Supreme Court and courts elsewhere remains to be seen.  

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CLAIMS-MADE POLICIES/INTERRELATED ACTS

Robert D. Chesler and Syrion Anthony Jack of Lowenstein Sandler, PC on “Interrelated Acts, Unrelated Case Law”

 

In their article appearing in the March/April 2009 issue of Coverage, Robert D. Chesler and Syrion Anthony Jack of Lowenstein Sandler, PC, submit that the case law as to whether a current claim against the policyholder of a claims-made policy relates back to a prior claim is so divergent as to provide little guidance. Yet this issue is often key to determining coverage because claims-made policies operate under the concept that a single claim will only trigger a single policy. Thus, subsequent claims that relate back to the original claim are deemed to have been made in the year of the original claim. The authors point out that this issue often arises either “where a policyholder wants a claim to relate back in order to gain coverage in a prior policy period as opposed to its current one” or “where the insurer disclaims coverage by asserting that a new claim relates back to an earlier policy.”

The authors find that the case law on this issue is “hopelessly irreconcilable” in part because of the fact-intensive analysis that courts tend to use in deciding this issue. For example, in both Ace Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789 (D. Md. 2008) and Allamerica Fin. Corp. v. Certain Underwriters at Lloyd’s London, 449 Mass. 621 (2007), the courts found the claims at issue were not interrelated. Yet the converse result was reached on similar facts in WFS Fin., Inc. v. Progressive Cas. Ins Co., Inc., 232 Fed. App’x 624 (9th Cir. 2007) and Capital Growth Fin. LLC v. Quanta Specialty Lines Inc. Co., No. 07-80908-CIV, 2008 U.S. Dist. LEXIS 65814 (S.D. Fla. July 30, 2008). For instance, the authors note that both ACE and WFS involved claims brought by different plaintiffs in different jurisdictions and both courts applied the “common nexus test” and yet reached different results. The author’s survey of both recent and older case law reveals similarly uneven outcomes. They conclude that both insurers and policyholders need to be aware of the unpredictable state of the law where interrelatedness is at issue.

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CONFLICT OF INTEREST

James W. Bryan of Nexsen Pruet, L.L.C. on “Right to Independent Counsel?”

 

In his article appearing in the May/June 2009 issue of Coverage, James W. Bryan of Nexsen Pruet, L.L.C. explores the question of whether ─ and under what circumstances ─ an insurer’s reservation of rights to contest coverage creates a conflict of interest for which the insured has a right to retain its own counsel ─ independent of the insurer ─ to defend a liability claim at the insurer’s expense. The answer may depend on the jurisdiction of the forum and the state’s law that governs the issue.

In some jurisdictions, there is a “per se” disqualification rule under which the insurer’s issuance of a reservation of rights letter automatically disqualifies the insurer’s defense counsel and entitles the insured to retain independent counsel at the insurer’s expense. The article explains the reasoning of the courts that apply this per se rule. In short, they reason that an insurer’s reservation of rights triggers a conflict of interest as a result of the underlying lawsuit against the insured alleging both covered and uncovered conduct by the insured. They note that the insurer would lack incentive to “vigorously” defend its insured on a portion of the claims that that appear not to be covered by the policy.

In many other jurisdictions, the courts undergo a case-by-case analysis in a reservation of rights situation to determine if the insurer is required to honor the insured’s selection of independent counsel at the insurer’s expense. Such court decisions are examined. They set forth criteria under which counsel retained by the insurer must act in such situations.

The article proceeds to discuss pertinent conflict of interest ethics rules and the cases that interpreted and applied them. As the article notes, “The problem is governed at its core by the Rules of Professional Conduct that address conflicts of interest where an attorney has multiple clients or where a third party is paying the attorney to represent a client (such as the insured).

The article further imparts practice tips from (1) the standpoint of the insured in deciding whether to assert a right to independent counsel and in choosing what to do if the insurer declines to consent to it; (2) the standpoint of the insurer in deciding whether to issue a reservation of rights letter, and how to respond to a demand for independent counsel, such as filing a declaratory judgment action; and (3) from the standpoint of insurance defense counsel, such as in terms of what communications to have and not to have with the insured and the insurer.

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Dale Hausman on “Uncertainty as to Extra-Contractual Liability for an Insurer’s Failure to Advise the Policyholder of Conflict of Interest and Option to Retain Independent Counsel for Defense under Reservation of Rights”

 

When a liability insurer provides its policyholder with a defense subject to a reservation of rights, a conflict of interest could arise between the insurer and the policyholder entitling the policyholder to retain independent counsel at the insurer’s expense. This article, appearing in the January/February 2009 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, notes that jurisdictions differ as to the insurer’s disclosure obligations under such circumstances. In a minority of jurisdictions, an insurer’s failure to advise its policyholder of the conflict of interest and of the policyholder’s potential right to independent counsel could subject the insurer to extra-contractual liability, including penalties and additional damages or to “coverage-by-estoppel.” The article focuses on two decisions issued in 2008 that reached starkly different conclusions as to this issue: Stoneridge Dev. Co. v. Essex Ins. Co., 290 Ill. 2d 660 (2008) and Elacqua v. Physician’s Reciprocal Insurers, 52 A.D.3d 886 (2008). “As a result,” the author concludes, “the law concerning what an insurer must advise the policyholder when it defends under a reservation of rights, and the prospective relief available to the policyholder if the insurer fails to provide such advice, remains particularly unclear and inconsistent among various jurisdictions….”

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John S. Vishneski, Noel C. Paul and Jessica E. Brown of Reed Smith LLP on “With Reservations: Why Conflicts of Interest Arise when Insurers Reserve Their Rights, and What Insurers Must Do in Response”

 

In an article focusing on Illinois law appearing in the Spring issue of Coverage, John S. Vishneski, Noel C. Paul and Jessica E. Brown of Reed Smith LLP submit that an insurer that improperly responds to a conflict of interest after reserving its rights should be entirely estopped from contesting coverage. Their article, “With Reservations: Why Conflicts of Interest Arise when Insurers Reserve Their Rights, and What Insurers Must Do in Response,” first illustrates why an insurer frequently faces a conflict of interest after reserving its right not to indemnify its policyholder if it is later determined that the policyholder is not entitled to coverage under the policy. The conflict arises from the fact that the attorney hired by the insurance company to defend in an action against the policyholder owes fiduciary duties to two clients: the insurer and the policyholder. There is a conflict of interest where the insurer’s appointed counsel cannot avoid advancing the interests of one of the clients to the detriment of the other. Under Illinois law, an insurer who either fails to explain the conflict of interest to the policyholder or fails to observe the policyholder’s rights may be estopped from denying coverage. The policyholder’s rights include:

The right to independent counsel;

The right to reimbursement of reasonable defense costs;

The right to reimbursement of defense costs as they are incurred; and

The right to reimbursement of all defense costs prior to a determination of noncoverage.

The article discusses each of these rights as interpreted by Illinois’ courts.

An insurer whose reservation of rights letter fails to fully and clearly advise the policyholder of the conflict of interest will be estopped from disclaiming coverage pursuant to Illinois court precedents. However, a few Illinois court decisions have held that a policyholder must prove that it was prejudiced by the insurer’s failure to disclose a conflict of interest for the insurer to be estopped. The authors submit “The better rule … find[s] de facto prejudice, and a breach of the duty to defend, where the insurer fails to disclose its conflict of interest when it first provides its defense” that “may and should lead to the insurer being estopped from contesting coverage.”

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CONSTRUCTION DEFECTS

Edwin L. Doernberger and Theresa A. Guertin of Saxe Doernberger & Vita, P.C. on "Construction Defects as an 'Occurrence': State Legislatures Weigh In"

In their article appearing in the November/December 2011 issue of Coverage, "Construction Defects as an 'Occurrence': State Legislatures Weigh In" by Edwin L. Doernberger and Theresa A. Guertin of Saxe Doernberger & Vita, P.C., the authors first note that a recurring issue for construction industry policyholders has been the availability of commercial general liability ("CGL") coverage for claims arising out of defective or faulty workmanship. Courts across the nation have taken divergent approaches to this issue. The article summarizes those varied approaches illustrating what one court described as an "intellectual mess." Four state legislatures-Colorado, Arkansas, South Carolina, and Hawaii-have recently enacted legislation addressing the issue. This was after courts in those states rendered decisions finding no coverage for constructional professionals under their CGL policies on the basis that construction defects did not constitute "occurrences" as defined in their policies. The article reviews the court decisions that apparently prompted the legislatures to jump into the fray. It further analyzes each of the new state statutes with the objective of assessing whether they help clarify or worsen the recurring issue. The statutes are compared. The article notes that the courts of all four states have not yet applied the statutes in their decisions. The article expresses strong doubts as to whether the new statutes, particularly those of Colorado and Hawaii, will resolve the long-running dispute as to whether defective construction qualifies as an "occurrence' under CGL policies.

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CONTINGENT BUSINESS INTERRUPTION COVERAGE

Lon Berk of Hunton & Williams on "CBI for the Cloud"

In his article, "CBI for the Cloud," appearing in the Nov./Dec. 2011 issue of Coverage, Lon Berk of Hunton & Williams observes that the frequency of business cloud computing is expected to increase. The article describes cloud computing and its many advantages to businesses as well as its potential disadvantages. A significant risk is business interruption in the cloud. Examples of such business interruptions are described demonstrating the importance that companies understand whether the risk of such interruptions is covered under their insurance programs. The article then identifies the most promising coverage for losses caused by business interruption in the cloud-contingent business interruption ("CBI") insurance coverage. The article describes the nature and scope of CBI coverage, including the range of "dependent locations" to an insured company. CBI coverage is only triggered when a dependent location sustains "physical loss or damage."

The article discusses some courts' findings that damage to software or data does not constitute "direct physical loss." Accordingly, insurers have maintained that CBI coverage does not extend to interruptions in cloud computing. The basis for this contention is that data or software is not tangible or physical and thus cannot cause direct physical loss. The article argues that this contention is incorrect. To establish this, the article first provides a general description of what a computer is and does and points out that corrections made to restore computer data or functionality constitute physical repairs. Court decisions that do not distinguish between physical loss and data loss are analyzed.

The article notes that perhaps in response to the force of such arguments, insurers have both added policy exclusions purporting to restrict the coverage available for data loss and have offered separate policies to cover losses due to data and software corruption. The article contends that the exclusion should not apply to the vast majority of incidents that might result in interruption of computational services provided by cloud vendors. The article concludes that insured's facing such losses should look to their legacy CBI policies as well as any new specialized policies they may have for coverage.

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F. Lane Finch on “When Disaster Strikes Someone Else: Protection Through Contingent Business Interruption Coverage”

 

Early on, this article sets forth the importance of contingent business interruption coverage today: “The interdependency of companies within the vertical supply chain, the growth of outsourcing, and reliance on just-in-time inventories all increase the risk of loss if one company in the modern web of commerce falters.” The article, which appears in Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, first explains the difference between business interruption (BI) coverage and contingent business interruption (CBI) coverage and notes that while CBI coverage is included in most sizable commercial property policies, typically it will have a small sub-limit. In order to obtain higher limits and broader terms, the policyholder must identify the specific supplier, recipient and leader properties that are crucial to its business. If there are sub-suppliers or other indirect properties that a policyholder deems crucial to its business model, the policyholder needs to negotiate specific coverage for them as well.

Acknowledging that CBI coverage language differs among contracts, the article describes typical terms and then key issues in interpreting CBI coverage, as revealed by case law:

Identifying suppliers or “contributing parties;”

Determining what constitutes “physical loss or damage;”

Determining whether or not a total cessation of business is required to trigger coverage; and

Calculating the appropriate “restoration period” to which coverage will extend.

The article analyzes each of these issues by examining pertinent and instructive court decisions.

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CYBER COVERAGE

Louis Chiafullo and Brett Kahn of McCarter & English LLP on "Coverage for Cyber Risks"

In their article appearing in the May/June 2011 issue of Coverage, "Coverage for Cyber Risks," Louis Chiafullo and Brett Kahn first observe that the costs arising from data breaches are escalating exponentially.  This can be particularly problematic for corporations as individuals (sometimes in class action suits), shareholders (in securities suits) and other entities frequently commence very expensive and highly public litigation.  In addition to those third-party claims to a corporation, there are also first-party claims such as data losses.  The article notes that corporations often tender claims for data breaches to their commercial general liability, directors and officers, or errors and omissions insurers under policies that they previously purchased without data breaches in mind.  The article examines what coverage may be available under each of what it calls "these more 'mainstream' insurance policies."  In reviewing the requirements that must be met for coverage under these policies, the article finds that they may be problematic when applied to data breaches, but coverage under those policies is still possible.  The article then considers a more recent product, a "Cyber Coverage" policy, which may be preferable, despite being relatively expensive, because of its more focused coverage for cyber risks.  The article finds that a corporate policyholder of Cyber Coverage is likely to have some of its first-party data losses covered and third-party data breach claims defended.  However, the article notes that not all cyber insurance is identical.  It concludes with practical tips for policyholders confronting data breach claims and needing to analyze their coverage to meet those claims.

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DIRECTORS' AND OFFICERS' INSURANCE

K. Alan Parry of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. and Eric G. Barber of Perkins Coie LLP on "One More Thing to Keep Directors and Officers Awake at Night: Dodd-Frank's Impact on D&O Insurance"

The November/December 2011 issue of Coverage features an article, "One More Thing to Keep Directors and Officers Awake at Night: Dodd-Frank's Impact on D&O Insurance," by K. Alan Parry of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. and Eric G. Barber of Perkins Coie LLP. The article warns that policyholders and insurers can anticipate increased directors' and officers' (D&O) coverage litigation in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The article analyzes pertinent provisions of the Dodd-Frank Act, notably the whistleblower and compensation claw-back provisions.  The protection for corporate whistleblowers who provide original information to the SEC leading to successful judicial or administrative action resulting in certain monetary sanctions is extended beyond that provided by the Sarbanes-Oxley Act in that there is a significant "bounty" payment to a successful whistleblower. This and other provisions of Dodd-Frank are expected to incentivize increased whistleblower complaints against directors and officers. The article also explains how Dodd-Frank contains an executive compensation "claw-back" provision that greatly expands the circumstances in which a company must seek to recoup incentive-based compensation paid to directors and officers prior to an accounting restatement. The article predicts, "There is little doubt that the Dodd-Frank claw-back provision will lead to increased SEC enforcement, as well as shareholder derivative actions seeking the recoupment of incentive-based compensation."

The article notes that, given the uncertainty regarding the extent of coverage under existing D&O policies in the context of the Dodd-Frank provisions, increased litigation over the policy terms' meaning and application can be anticipated. The article focuses on analyzing four pertinent and key provisions in D&O policies: (1) coverage for government agency investigative costs; (2) the definition of "Loss"; (3) the Personal Profit Exclusion; and (4) the Insured versus Insured Exclusion. The analyses include recommendations to policyholders as to examining what coverage they now have with regard to issues that the implementation of Dodd-Frank may generate and what additional protections they should seek to obtain. The article includes a cautionary note that with the Dodd-Frank rulemaking process still ongoing , insurers may be hesitant to permit changes during the renewal process that may increase their risk. It predicts that "potential gaps in D&O insurance coverage ... are sure to be highlighted, litigated, and ultimately addressed through modifications to policy language." Given the potential impact of Dodd-Frank, all involved are recommended to consult with their advisors as to how best to manage their risk.

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DUTY TO COOPERATE

Richard D. Milone and Elizabeth C. Scanlan on “Tensions Between the Duty to Cooperate and the Attorney-Client Privilege”

In the tripartite relationship between insurer, policyholder and defense counsel hired by the insurer to represent the policyholder, there is a tension between the policyholder’s duty to cooperate with the insurer in the defense of the liability claim (as required by most CGL policies) and the possibility that the information the policyholder discloses may be used against it in a subsequent coverage action. The Jan/Feb 2009 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, features an article that first explores the history and purposes of the duty to cooperate clause, finding that most courts hold the primary purpose is to aid the insurer in the defense of a liability suit and not in a coverage action.

The article next examines the applicability of the cooperation clause and finds that the courts hold it only applies when the insurer is providing a defense. Moreover, there is a split in authority as to whether the policyholder has a duty to cooperate if the insurer is providing the defense under a reservation of rights. The article then considers the extent of cooperation required of the policyholder when the clause is applicable and what the insurer can and cannot do with privileged attorney-client information it obtains. The article concludes with recommendations for policyholders seeking to comply with policy language while protecting their own interests.

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DUTY TO DEFEND

Jarrett A. Williams of Covington & Burling LLP on “The Duty to Defend Implicit Claims”

 

In an article appearing in the March/April issue of Coverage, entitled “The Duty to Defend Implicit Claims,” Jarrett A. Williams of Covington & Burling LLP first notes that the duty to defend generally requires a liability insurer to defend any lawsuit that could result in entry of a judgment against the insured that would be covered by the insurance policy. A typical duty to defend provision in an insurance policy triggers that duty even if the claim is groundless, false or fraudulent, as long as the claim would be covered if the plaintiff prevailed.

Under modern notice pleading rules, a complaint can set forth a claim for relief that creates the risk of a judgment that would be covered by the insurance policy even if that claim is merely implicit in the complaint’s allegations. In the article, the author argues that these “implicit claims” trigger an insurer’s duty to defend to the same extent as explicit claims.

Implicit claims are allegations that the plaintiff does not expressly label as claims but which nevertheless set forth a claim or claims that entitle the plaintiff to relief. An implicit claim can be established by combining allegations appearing anywhere in the complaint. It can also constitute what the author calls a “lesser –included claim,” e.g., an explicit allegation of an intentional tort can conceal an implicit claim for the unintentional version of the same tort. Mr. Williams maintains: “Just as there is no distinction between explicit claims and implicit claims when determining whether a complaint states a claim entitling the plaintiff to relief, there should be no distinction between explicit and implicit claims when determining whether a complaint triggers the duty to defend.”

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John H. Podesta and Nicholas P. Honkamp on “The Problem of Suspended Corporations in the Present Economic Downturn”

In their article appearing in the July/August 2010 issue of Coverage, the authors discuss issues that arise when corporations do not pay their state taxes in California and are subsequently suspended pursuant to California Revenue and Taxation Code Section 23301. Once suspended, a corporation cannot exercise corporate powers, rights and privileges, and, as a result, cannot defend or prosecute civil actions until the suspension is lifted. A suspended corporation may nevertheless find itself a party to a lawsuit, which creates issues that are addressed, in part, by this article. Initially, the article explains what a suspended corporation is and how suspended status differs from bankruptcy and dissolution. It discusses the effect the revival of corporate powers, upon the payment of taxes, has on the running of the statute of limitations and on a motion to dismiss. It identifies the risks involved in representing a suspended corporation, including potential criminal penalties and professional sanctions. Specifically, an attorney, other than one retained by an insurer on behalf of a suspended corporation, who knowingly advances the legal interests of a suspended corporation is potentially subject to criminal penalty under California Revenue and Taxation Code Section 19719 and jeopardizes his or her license to practice law in California.

While a suspended corporation may not defend or prosecute civil actions, the suspended corporation's insurer may, under some circumstances, intervene in a lawsuit against the suspended corporation. California Insurance Code Section 11580 allows a party obtaining a default judgment against a suspended corporation to enforce that judgment directly against the corporation's insurer. For this reason, a suspended corporation's insurer is likely to consider intervention when its insured has been named as a defendant or cross-defendant to a lawsuit. The article provides an extensive discussion of the issues that can arise when a suspended corporation's insurer intervenes in a lawsuit, including:

  • How should the court and the parties to the suit refer to the intervening insurer and its counsel in front of a jury so as not to prejudice the policyholder?
  • Does the lawyer retained by the intervening insurer represent the insurer or the suspended corporation policyholder?  
  • Is an intervening insurer that defends its interests to the detriment of its policyholder exposed to bad faith liability if the suspended corporation revives?
  • What effect does an intervening insurer have on the issues litigated and discovery conducted?
  • May an intervening insurer file a motion for summary judgment on an issue that is determinative of coverage under its policies?
  • May an intervening insurer pursue contribution from additional insured carriers?

The article concludes that there are currently more questions than answers when it comes to litigation involving suspended corporations, and emphasizes the importance of developing a strategy for effectively managing such litigation.

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DUTY TO DEFEND/DEFENSE COSTS

George B. Flanagan, Professor of Insurance, at Illinois State University, on “New Evidence on Why Casualty Insurers are Obligated to Continue to Pay Defense Costs After the Exhaustion of CGL Indemnity Limits"

 

This article, appearing in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation examines the issue of whether a casualty insurer has a duty to pay defense costs after the limits of a pre-1966 CGL policy have been exhausted. The issue exists today in long-tail product claims and many insurers contend that there is no such duty. However, the author asserts, “Many such policies, reflecting the modest limits of the era have long paid out their limits while millions of dollars of defense costs remain and should be paid.” The article first addresses the contention that in the mid-20th century there was no duty to defend after the indemnity limits had been exhausted and focuses on the New Hampshire Supreme Court decision of Lumberman’s Mutual Casualty Co. v. McCarthy. The article next analyzes the literature of the era with respect to the contention that the casualty insurance custom and practice in the middle third of the century was to continue to defend after the policy limits had been exhausted. Lastly, the article examines the insurers’contention that the fourth edition of the CGL introduced in 1955 established that an insurance policy limitation applied to the duty to defend.

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E-DISCOVERY

Barry J. Fleishman and Erica J. Dominitz on "The Perils of E-Discovery-Landmines for the Client and the Counsel"

In their article appearing in the March/April 2010 issue of Coverage, "The Perils of E-Discovery-Landmines for the Client and the Counsel," Barry J. Fleishman and Erica J. Dominitz warn, "E-discovery case law makes clear that lawyers today must possess a fair amount of technological proficiency-or ... the good judgment to hire people who do-and the management skills to oversee their work." It is not new that whenever a party reasonably anticipates litigation, it has a duty to preserve, collect, review and produce relevant evidence. But today, parties and their counsel must work together to find such evidence that may reside on networks, including servers, hard drives, PDAs, thumb drives, and other devices.  Sanctions for noncompliance with discovery rules can be severe and lawyers, themselves, can ultimately be held responsible.  In addition, the article demonstrates that some judges define spoliation to include the negligent failure to preserve evidence as well as the intentional destruction of evidence. The article focuses on the opinions of Judge Scheindlin of the Southern District of New York in the cases of Zubulake v. UBS Warburg LLC and Pension Committee of the Univ. of Montreal Pension Plan v. Banc of Am. Secs. In the former case, Judge Scheindlin states the active role counsel must play in ensuring that the client's discovery obligations are met and in the latter case, she enunciates a framework for analyzing the legal principles applicable to spoliation disputes, which the article explores in detail. Moreover, the article identifies recent ethics rules and opinions of bar associations on the need for lawyers' technological competency with respect to electronic discovery and protection of their clients' confidentiality. Lastly, the article observes that e-discovery can be very costly and protracted e-discovery disputes even more costly. Abusive e-discovery conduct is a possibility. However, some (but not all) courts have allowed prevailing parties to recover their e-discovery costs under 28 U.S.C. § 1920.

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EXCLUSIONS

Tred R. Eyerly of Damon Key Leong Kupchak Hastert on "Exclusions Got You Down? Considering Coverage for Ensuing Losses"

In his article “Exclusions Got You Down? Consider Coverage for Ensuing Lossesappearing in the January/February 2011 issue of Coverage, Tred R. Eyerly of Damon Key Leong Kupchak Hastert in Honolulu, Hawaii, first notes that although a loss may be excluded, a resulting loss may still be covered under the policy's ensuing loss provision if such loss itself is not excluded. The article surveys decisions which have found coverage under the ensuing loss provision as well as those which have denied coverage for ensuing losses.

For instance, in one case the policy excluded both losses caused by an act of faulty workmanship and losses caused by mold, but covered any ensuing loss to property not excepted or excluded by the policy.  The court held that mold resulting from faulty workmanship was not “caused by mold” and was thus covered under the policy. Conversely, another court interpreting a similar insurance policy found that damage to the interior of the house that was itself mold or wet rot was not covered even if the damage was an "ensuing loss" from the faulty construction.

In another interesting case, an ensuing loss provision provided for business interruption losses "resulting from necessary interruption of business . . . caused by loss . . . covered herein. . . ."  The court found that the ensuing loss exception to the policy’s exclusions was inapplicable if the loss was directly related to the original excluded risk. Because the business interruption was directly related to the excluded losses for faulty design, it did not come within the ensuing loss provision.

A feature of the article is a chart of pertinent cases containing a succinct summary of their factual backgrounds and the ensuing loss provisions under consideration.

The survey of cases in the article clearly supports the author’s conclusion that “[i]t is difficult to draw a clear line between those cases that find coverage for ensuing losses and those that do not. It appears that a case-by-case analysis is necessary to consider the policy language in light of the particular facts presented.”

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FLOOD COVERAGE

Wystan M. Ackerman and Seth A. Schmeeckle on “Handling the Flood of Coverage Litigation: Lessons Learned from Katrina”

 

In their article, “Handling the Flood of Coverage Litigation: Lessons Learned from Katrina,” Wystan M. Ackerman and Seth A. Schmeeckle examine a number of insurance coverage cases that arose in the wake of Hurricane Katrina and note that insurers achieved considerable success on key issues, including: (1) the robust applicability of the flood exclusion in property insurance policies; (2) the interpretation of the Louisiana Valued Policy Law that it is most likely applicable only to fire losses under fire insurance policies and not to homeowners’ policies; and (3) the defeat of class certification in most Katrina putative class actions.

The authors conclude that the Katrina litigation thus far affords several lessons for insurers in terms of best practices for litigation stemming from a catastrophe, including: (1) establishing coordination among defense groups and using  test cases that “cleanly present[ ] the critical question of policy interpretation”; (2) recognizing the unique issues of judicial ethics that can occur when a widespread catastrophe affects everyone living in the affected area; (3) giving serious thought to moving to strike class allegations in a putative class action; (4) utilizing methods to efficiently resolve large amounts of relatively smaller suits, such as establishing a protocol to administratively stay cases, conduct written discovery, and then have settlement negotiations;  and (5) taking measures to minimize possible class action tolling of suit limitation provisions in insurance policies.

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FOOD CONTAMINATION COVERAGE

David M. Halbreich, Ann V. Kramer, and Bridget C. Byrnes of Reed Smith LLP on “Put Your Money where Your Mouth Is: Insurance Coverage Issues Arising from Food Contamination Claims”

 In their article appearing in the July/August issue of Coverage, “Put Your Money where Your Mouth Is: Insurance Coverage Issues Arising from Food Contamination Claims,” David M. Halbreich, Ann V. Kramer and Bridget C. Byrnes observe that contaminated food can travel through many hands before it is consumed, potentially implicating many parties and a number of insurance policies. The article addresses the following insurance coverage issues that food contamination claims can elicit:

Are the kinds of damages that are insurable limited by applicable insurance policies?

If the claims are covered, and more than one insurer has issued policies triggered by the loss, which insurer must first respond to the claims?

If there is an indemnification and hold harmless agreement between a supplier and a distributor how does it affect their obligations to each other?

If there is such an agreement, how does it affect the various insurers’ obligation to provide insurance to the parties?

What consequences follow if a supplier is named as an additional insured on a distributor’s policy or vice-versa.

The article deals with these issues by anticipating assertions that insurers will make in order to deny or limit coverage and how insureds can successfully reply under existing law.

Part I of the article examines the “other insurance” clause and insurers’ arguments for horizontal exhaustion of available insurance.

Part II explores whether a typical “cross suits” exclusion works to prevent coverage for an action between the parties to an indemnification agreement.

Part III sets forth the types of losses that a retailer might incur─including lost profits, medical screening costs, disinfection costs, and consulting costs─and the contentions its insurer may make that those types of losses do not come under the “bodily injury” or “property damage” coverage provisions of CGL policies.

Part IV considers whether standard exclusions for liability arising from the dispersal of pollutants and exposure to mold, spores or fungi.

Pertinent case law is discussed throughout.

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GLOBAL WARMING COVERAGE

Max H. Stern and Jessica E. La Londe of Duane Morris LLP on “Keep it Cool: Potential Coverage Defenses to ‘Global Warming’ Lawsuits”

       

In their article Keep it Cool: Potential Coverage Defenses to “Global Warming” Lawsuits, appearing in the July/August 2009 issue of Coverage, Max H. Stern and Jessica E. La Londe discuss several potential coverage defenses to global warming liability claims. Specifically these are claims by corporate insureds that their insurance policies provide coverage for their alleged liability for contributing to global warming. The authors acknowledge that specific defenses will vary from case to case and “there is no predicting the creative arguments both sides of this dispute will undoubtedly assert as climate change lawsuits develop.” Nevertheless, the authors believe common defenses will involve the fortuity requirement, the loss in progress rule, and the pollution exclusion.

In terms of the fortuity requirement, some jurisdictions require that the occurrence ─ the act of releasing climate changing substances into the environment ─ be accidental for there to be coverage. Other jurisdictions uphold the denial of coverage where the insured intended or expected (or should have expected) harm to the environment to result from its actions. The article describes what arguments insurer’s and insured’s counsel can make to address these thresholds.

In terms of the loss in progress rule─embodied in the “Montrose endorsement” added to CGL policies in the late 1990s─coverage is precluded for property damage that was known by the insured to have occurred prior to the inception of the policy. The authors expect insurers to make that argument with respect to damage to the environment.

The article also examines the applicability of the pollution exclusion to coverage defenses for liability claims for global warming. It does so by first addressing the threshold issue of whether the underlying claim involves a pollutant. If the allegedly offending substance is deemed a pollutant, the article then turns to the analysis of whether the pollution exclusion of the policy applies. It examines the various forms the pollution exclusion has taken over the years including the “sudden and accidental” pollution exclusion, the “absolute” (or “total”) pollution exclusion and the pollution exclusion with a clause that it will apply unless the pollution incident is discovered by the insured within 72 hours among other requirements. In each instance, the article analyzes the pollution exclusion at issue and assesses its applicability to climate change claims.

The article further explores trigger of coverage issues. The trigger of coverage determines which policies must respond to a claim by examining when the injury or damage is deemed to have taken place. The article next examines allocation issues as once a court determines which insurance policies are triggered by a claim that spans multiple policy periods, the court must then address the issue of how to allocate the total loss among the triggered policies. Lastly, the article points out that underlying lawsuits alleging climate change may also allege punitive damages. If coverage issues arise as to the insurability of such punitive damages, the article notes that which states’ law will apply to the issue may be the determinative factor for coverage.

The article concludes that “the best strategy for insurers and their policyholders alike is to ensure the best possible liability defense to new forms of mass tort claims, like climate change lawsuits, in the first place.”

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INNOCENT INSURED

Charles Lemley and Kimberly Ashmore of Wiley Rein LLP on Irrelevant Innocence: The Interplay Between Innocent Insured Provisions and Prior Knowledge Provisions in Claims-Made Policies

In their article, “Irrelevant Innocence: The Interplay Between Innocent Insured Provisions and Prior Knowledge Provisions in Claims-Made Policies,” Charles Lemley and Kimberly Ashmore of Wiley Rein LLP address perceived conflicts between two provisions in claims-made policies. Prior knowledge provisions prohibit coverage for claims stemming from wrongful acts the policyholder was aware of before the policy went into effect. Innocent insured provisions preserve coverage for those who had no knowledge of the dishonest or wrongful acts of other policyholders on the policy. The article first examines the interpretation and application of prior knowledge provisions. It finds that frequently such provisions are written so that the knowledge of one policyholder triggers the provision as to all policyholders on the policy. However, the prior knowledge provision may contain a severability clause or the policy may have a stand-alone severability provision through which policyholders who had no knowledge of a potential claim when the policy incepted would not come under the prior knowledge provision. The article proceeds to discuss the interplay among intentional acts, prior knowledge, and innocent insured provisions. The courts have consistently found that a policyholder who engaged in intentional wrongdoing has knowledge of facts that would put a reasonable person on notice of a potential claim. The article states that the innocent insured provision operates to save coverage only where coverage is excluded because the wrongful act that is the basis of the claim could be characterized as “criminal dishonest, illegal, fraudulent, or malicious.” The innocent insured provision does not apply where there is no coverage based on the policy’s prior knowledge provision. The article concludes, “To the extent that an insured is concerned about how a policy’s prior knowledge provision potentially may be applied, an insured can negotiate for the inclusion of severability language in the prior knowledge provision itself, or for a separate stand-alone severability provision.”

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INTELLECTUAL PROPERTY COVERAGE

David A. Gauntlett of Gauntlett & Associates on “Insurance 101─Insight for Young Lawyers: No Discovery is Appropriate in Addressing Coverage for Intellectual Property Disputes”

 

In his article, “Insurance 101─Insight for Young Lawyers: No Discovery is Appropriate in Addressing Coverage for Intellectual Property Disputes” appearing in the July/August 2009 issue of Coverage, David A. Gauntlett states that while many insurance coverage disputes may warrant discovery, it is rarely appropriate in analyzing “offense” based coverage typically implicated in intellectual property/unfair competition/antitrust coverage litigation disputes. This is especially the case where the insurer has denied a defense based on a cursory review of the pleadings in the underlying action. Facts not labels govern determination of coverage issues. All facts essential to analyzing coverage may not be set forth in the pleadings. Coverage should not be evaluated after the fact. An insurer cannot use discovery to conduct the investigation it should have performed upon receipt of notice from its insured.

How individual courts approach this issue depends upon what the facts are for coverage purposes. There are three rules. The first limits analysis to the allegations of the complaint; the second, to facts known to the insurer; the third, to facts available to the insurer. Discovery about what role particular fact allegations played in theories of recovery and/or damages in the underlying action are irrelevant to this determination.

Insurers should be wary about denying a defense in a “facts available” forum. Facts first brought to the insurer’s attention after the underlying action concluded (that could have been anticipated based on allegations in the pleadings) may trigger a defense.

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Richard Porotsky of Dinsmore & Shohl LLP on Insurance 101—Insights for Young Lawyers:  Advertising Injury Coverage for Claims of Intellectual Property Infringement and Related Unfair Competition

In his article appearing in the November/December 2010 issue of Coverage, Insurance 101—Insights for Young Lawyers:  Advertising Injury Coverage for Claims of Intellectual Property Infringement and Related Unfair Competition, author Richard Porotsky, a partner at Dinsmore & Shohl LLP, notes that some claims involving intellectual property rights may be covered under the personal and advertising injury provisions of commercial general liability policies. Specifically, most courts have held that there is coverage available for IP claims involving infringement of trademark or trade dress, if certain specific criteria are met. On the other hand, courts have generally refused to find coverage for IP claims involving patent infringement and for many violations of trade secret claims. The article traces the evolution of standard policy terms concerning advertising injury from the 1981 ISO endorsement for advertising injury through the 2001 ISO form provisions for advertising injury. The article then analyzes a number of cases addressing coverage for IP claims, including two Ohio cases  which applied a four-part test centered on whether the underlying complaint: (1) enumerated a claim covered under the advertising injury provisions of the policy; (2) alleged that the policyholder’s activity constituted an “advertisement” as defined in the policy; (3) alleged a causal connection between the injury and the policyholder’s “advertisement”; and (4) involved a claim to which any exclusions in the policy applied. Westfield Ins. Co. v. Factfinder Marketing Research, Inc., 860 N.E.2d 145 (Ohio Ct. App. 2006); Westfield Companies v. OKL Can Line, 804 N.E.2d 45 (Ohio Ct. App. 2003).  The article states that under this four-part test, copyright or slogan infringement will meet the initial enumeration requirement and that the decision will turn on the other three factors of nexus, causation and application of policy exclusions.   It then discusses a recent case decided in favor of the insurer where the court found insufficient nexus and causation for the claim to be considered an advertising injury.  Premier Pet Products LLC, v, Travelers Property Cas. Co. of America, 678 F.Supp. 2d 409 (E.D. Va. 2010).   The article concludes by advising that the law in this area does not always appear “clear or consistent,” despite the noted patterns in the decisions, and therefore, careful consideration should be given to the possibility of coverage for all types of IP claims under the advertising injury provisions of applicable CGL policies.  

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INVESTIGATIONS

David S. Evinger and Gerardo Alcazar on "How Fast Can a Fire or Explosion Case Be Extinguished?: Recent Developments Involving NFPA 921: Guide for Fire and Explosion Investigations"

In their article appearing in the March/April 2010 issue of Coverage, "How Fast Can a Fire or Explosion Case Be Extinguished?: Recent Developments Involving NFPA 921: Guide for Fire and Explosion Investigations," David S. Evinger and Gerardo Alcazar warn that a fire or explosion case can be ruined if the utmost care is taken at each phase of the investigation. It is crucial that the insurance company assigning the claim, the adjuster evaluating the loss, and the attorneys taking any subsequent action "all be familiar with the various laws, codes, regulations, and guidelines that may apply from the loss investigation stage through trial."  The National Fire Prevention Association's NFPA 921 is the most accepted guidance document for fire and explosion investigation procedures. The authors review cases establishing that an investigator's knowledge and compliance with the procedures set out in NFPA 921 may be instrumental in qualifying the investigator as an expert at trial, for example, under Federal Rule of Evidence 702 and the Daubert standards.  In addition, the authors point out the International Association of Arson Investigators provides a Certified Fire Investigation® program and the National Association of Fire Investigators provides for a Certified Fire and Explosion Investigation certification. Significantly, both certification programs entail a demonstrated knowledge of NFPA 921. The authors review court decisions indicating that not only should investigators follow NFPA 921 in identifying and collecting evidence in their cause and origin analysis, but also that the opinions they offer at trial should reflect the application of its principles. Noting that "[t]he investigation procedures followed and the basis for the conclusions made by the investigator can make or break any case,"  the authors conclude that adherence to NFPA 921 "can greatly improve" the chances for the admissibility of a fire expert's testimony at trial.

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MEDIATION

Paul J. Van Osselaer of Van Osselaer & Buchanan LLP on "COVERAGE MEDIATIONS: Are they really that different?"

In his article, “COVERAGE MEDIATIONS: Are they really that different?” appearing in the January/February 2011 issue of Coverage, coverage mediator Paul J. Van Osselaer of Van Osselaer & Buchanan LLP asserts that coverage mediations are a special breed of mediation requiring special skills and then provides extensive guidance for lawyers involved in such proceedings.  The article notes that the potentially wide scope of a coverage mediation must be understood and that it often involves not just whether a loss, occurrence, or offense is covered by the insurance agreement, but the broader context of risk transfer in which indemnity agreements, extra-contractual claims, underlying litigation, additional insureds, other insurers, reinsurers, etc. may come into play. The article proceeds to explore threshold questions including:

  Should you mediate? (Contexts in which mediation might not be the right choice are addressed.)

  If so, what are your goals at mediation? (Examples of secondary mediation goals beyond reaching settlement are presented.)

  Is it the right time to mediate? (Indicators warning of premature mediation leading to unsuccessful results are imparted.)

  Do you have the right parties for the mediation? (The wisdom of including stakeholders, such as third-party claimants in liability coverage disputes, is discussed.)

In addressing the selection of the mediator, the article discusses each of these attributes that a good mediator should possess:  she or he should be respected, have an adaptable style, be knowledgeable on the topics and, principally, engaged in the process.  The article then turns to how counsel should prepare the mediator including with written joint and/or confidential pre-mediation submissions and with pre-mediation discussions. The article notes that the ethical prohibitions of ex parte communication with judges or arbitrators do not pertain to discussions with mediators.  It further discusses the two aspects of preparing the client for coverage dispute mediation: preparation on the merits and preparation as to the mediation process.  It also surveys preparatory steps lawyers should take. The article does this primarily through prompting questions for insured counsel and for insurer counsel to consider.  The article then turns to the conduct of the mediation itself providing information and guidance as to the opening comments by the mediator, opening statements, joint sessions of the parties where helpful, private caucuses, effective time management and special considerations for large coverage cases.  The article also imparts tips as to formulating the terms of the written agreement entered at the conclusion of mediation but before the formal agreement between the parties is drawn.  Lastly, consideration is given as to steps to take if the mediation proves unsuccessful.

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NOTICE OF CLAIM 

Erica J. Dominitz and Amy J. Woodworth ON "When, What and Why: Notifying Insurer of a 'Claim' or a Potential Claim under an EPLI Policy"

In their article appearing in the May/June 2011 issue of Coverage, "When, What and Why: Notifying Insurer of a 'Claim' or a Potential Claim under an EPLI Policy," Erica J. Dominitz and Amy J. Woodworth explain the importance of timely reporting a claim to an employment-related practices liability insurer. Because EPLI policies are typically written on a claims-made basis, issues that frequently arise include what constitutes a claim, when notice from the policyholder to the insurer is due and when exclusions under the policy are applicable. A correlative issue with respect to determining coverage under an EPLI policy is one of timing, i.e, when was a claim made or in some cases when did the policyholder know of facts that could give rise to a claim under the policy and thus owe a duty of notice to the insurer. This article addresses those issues.

The article first examines what is a reportable claim and notes that this determination generally is based on how "claim" is defined in the EPLI policy or whether it even is defined at all. As EPLI policies are not standardized, the article stresses the importance of analyzing the subject policy's language. For instance, the article demonstrates that whether notice requirements are triggered may depend on whether the policy states that "formal administrative proceedings" or merely "administrative proceedings" constitute a "claim." Some pertinent court decisions are analyzed.

The article proceeds to analyze a related timing issue regarding EPLI exclusions that preclude coverage for "known losses" or for claims stemming from civil, criminal, administrative, or regulatory proceeding pending before the policy incepted. One court decision that is discussed found that a prior proceeding relating to a claimant's employment that fell outside an EPLI's coverage grant may trigger a prior or pending proceeding exclusion.

The article lastly examines the possibility of an insurer rescinding the policy. Some courts have found that rescission is appropriate if the policyholder's commission of a misrepresentation in the application or a failure to report a claim or known facts that could give rise to a claim is deemed material.

Thus, the article amply establishes the importance of understanding what types of events are likely to be deemed to constitute "claims" under EPLI policies.

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NUMBER OF OCCURRENCES

John Mumford and Kathryn E. Kransdorf on “Insurance 101–Insights for Young Lawyers: Still No Certainty–Determining the Number of Occurrences in the Context of Multiple Injuries Caused by a Single Perpetrator”

 

The question of how many “occurrences,” as that term is used in commercial general liability (“CGL”) policies, transpired when one perpetrator has caused multiple injuries is quite significant in more than one respect. In an article, appearing in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, the authors explain, “This is because the term is operative in both the coverage language of the policy and in the language addressing the calculation of limits of insurance (as well as deductibles).” Yet the courts have not come up with a uniform answer in over 50 years of litigation. The article describes the two tests the courts have used in interpreting CGL policies to arrive at the number of “occurrences” that transpired in the cases before them: the “effect approach” and the “cause approach.” Although the courts now have largely settled upon the latter test, this is not dispositive of the issue, because the courts have differed in how they have applied the cause approach. This article analyzes pertinent court decision illustrating these differences in two genres of cases: those involving shootings of multiple individuals and those involving alleged child molestation claims. The article concludes with a discussion of the consequences and opportunities for practitioners in having this critical issue still unsettled in the law.

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OCCUPATIONAL DISEASE COVERAGE

Kay Brady and Jeffrey Meagher of K&L Gates on “Occupational Disease Coverage for Work-Related Illness Claims in the Tort System”

In their article appearing in the September/October 2009 issue of Coverage, Kay M. Brady and Jeffrey J. Meagher point out that with manufacturers of asbestos-containing products heavily involved in asbestos-related litigation, plaintiffs’ lawyers are filing lawsuits against new targets—their clients’ employers who have used asbestos and other harmful products in their premises. Previously, employers were thought to be protected against the massive damages associated with such lawsuits as injured current and former employees were confined to the limited remedies provided under workers’ compensation and occupational disease statutes. However, plaintiffs’ lawyers are evading these exclusivity provisions by asserting their clients were injured due to the employers’ intentional conduct and/or negligence. Some courts have held that such tort actions can be maintained. And when the employers turn to their insurers for coverage they are finding that many of their general liability policies have provisions that limit coverage for “occupational disease” claims. The article states, “The multimillion dollar question for employers and their insurers is whether the term ‘occupational disease’ includes work-related illness claims filed in the tort system or whether it is limited to claims filed under a statutory scheme like workers’ compensation.”

Insurance coverage litigation over the issue has generated two competing interpretations of “occupational disease”: (1) it is a disease developed by employees during the course of their employment; or (2) it is a term of art that is limited to claims for benefits under workers’ compensation or occupational disease statutes.  The article explores the history of how courts have defined “occupational disease” and finds that to the extent that the term had any meaning prior to passage of these statutes, it was used to differentiate between diseases caused by an employer’s negligence and diseases associated with a particular occupation, but not caused by an employer’s negligence, for which there was no common law cause of action. Now that all 50 states have created a statutory scheme to compensate workers suffering from certain work-related illnesses, the article asserts that term “occupational disease” has acquired a new meaning. While once it was used solely to differentiate between diseases for which there was a common law cause of action and diseases for which there was not, now the term “occupational disease” also refers to diseases for which there is a statutory remedy.

The article concludes that employers confronting claims in the tort system might seek to circumvent occupational disease coverage limitations that their insurers may invoke. Barring policy language to the contrary, the history of the usage of the term “occupational disease” and the statutes that now provide compensation for “occupational disease” support the contention that it is a term of art referring solely to claims for statutory benefits.         

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OIL SPILLS

Rina Carmel and Ashkan Yekrangi on An Overview of Offshore Oil Drilling Risks, Legislation and Offshore Physical Damage Insurance Policies

In their article appearing in the November/December 2010 issue of Coverage, “An Overview of Offshore Oil Drilling Risks, Legislation and Offshore Physical Damage Insurance Policies,” Rina Carmel and Ashkan Yekrangi initially explain why an increase in offshore oil spills is probable.  The article notes that an offshore oil and gas insurance and reinsurance market was established in the late 1960s to fill a gap in coverage. The article examines federal legislation that impacts coverage for offshore oil drilling, the risks that are specific to the offshore oil drilling industry, common terms and exclusions in offshore physical damage policies, and how they may apply to those risks. In terms of federal legislation, the article notes it became clear that the potential damages from the Deepwater Horizon Spill in 2010 would exceed the liability caps and Oil Spill Liability Trust Fund maximum payments provided under the Oil Pollution Act of 1990. Consequently, the House of Representatives passed a proposed “Big Oil Bailout Prevention Act of 2010” that would dramatically raise the liability caps and Fund maximum payouts. The article describes the potential impact of the proposed legislation on the offshore energy insurance industry. It then identifies a number of risks specific to the offshore oil drilling industry including the internal risks of property risks, layout and design risks, process hazards and loss control risks. It further identifies external risks to offshore drilling which include the weather, political risks and the risks posed by proximity to shipping lanes, and to other pipelines and platforms.  The article then examines offshore physical damage policies including the two Insuring Agreements of the London Standard Platform Form of 2009. Among other issues that the article discusses is coverage for pollution cleanup costs. It also delineates common exclusions found in offshore physical damage policies. The article concludes in part that “[c]overages that have previously been available may be limited or more expensive if proposed amendments to [the Oil Pollution Act] become law. … Insurers should consider underwriting cautiously and setting premiums in line with the risks.”

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PREJUDGMENT INTEREST

Nancy I. Stein-McCarthy on “Prejudgment Interest after Appraisal, a Modern Quandary on an Old Concept”

In her article appearing in the May/June 2010 issue of Coverage, “Prejudgment Interest after Appraisal, a Modern Quandary on an Old Concept,” Nancy I. Stein-McCarthy presents a case law survey of when and if prejudgment interest should be awarded in the first-party property insurance context subsequent to entry of an appraisal award.  The article reviews pertinent court decisions largely from Florida where this issue has been in flux, but also includes a multistate survey encompassing decisions in California, Connecticut, Florida, Ohio, Maryland and Mississippi.

The article first notes that prejudgment interest is widely accepted as an element of damages awardable to party who has suffered a loss from the time a cause of action accrues until the time of judgment. But this begs the question of when does the cause of action accrue. When parties to an insurance contract have an appraisal of the loss, it is because the insurance contract that both parties have agreed to has provided for it. The article reviews a line of decisions in Florida holding that in such instances, prejudgment interest should only be calculated from the time the party who suffered the loss receives an actual appraisal award (or a subsequent date as provided for in the insurance policy) as that is when the amount of the actual loss is determined.

However, the article further reviews a newer line of cases in Florida holding that where the insurer has denied coverage, it cannot rely on the policy terms deferring the payment for the loss.  In these instances, prejudgment interest may accrue on the date of loss or a date subsequent such as the period of time after proof of loss has been submitted to the insurer.  Turning to decisions in other jurisdictions as well as in Florida, the article finds that diverse guideposts and “competing interests” can be in play. For instance, “[T]he concepts that courts consistently affirm as important in any prejudgment interest determination, I.e., making the injured party whole for a right deprived, seem to lose their luster when, in essence, a penalty of interest is being awarded to a date often years prior to when the right became fixed.” The article concludes with tips for practitioners in confronting this issue where the determination often seems made more on the basis of the specific facts at issue than on adherence to principles of contract law.   

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PROPERTY DAMAGE

Sherilyn Pastor and Jerry P. Sattin of McCarter & English LLP on What Does “Physical Damage” Mean When It Doesn’t Work? “Physical Damage” as Loss of Function, Value, or Use in Liability and First Party Coverage

   

In their article appearing in the September/October 2009 issue of Coverage, Sherilyn Pastor and Jerry P. Sattin examine the meaning of the term “physical damage,” a term that is undefined in most insurance policies, yet central to insurance coverage under liability and all-risk policies. They explain that “physical damage” means more than visible material damage (e.g., a burned down building). It includes loss of property’s use, value or function, “even if only temporarily and even in the absence of any visible material change to the property.”

The article focuses on Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524 (2009), a New Jersey Superior Court, Appellate Division decision (left undisturbed by the Supreme Court) that explores the meaning of “physical damage.” There, a supermarket chain’s food spoilage losses (due to the largest power failure in North American history) constituted “physical damage” on the basis of loss of use or function. The authors explain that the “Wakefern decision does not stand in isolation,” and review other court’s decisions finding insurance coverage for physical damage involving:

·         Buildings with no visible material damage but that are rendered uninhabitable or otherwise unable to function as intended;

·         Foods or beverages that are fit for human consumption but are rendered unmerchantable; and

·         Power outages that temporarily prevent machinery from functioning.

The authors conclude “Policyholders and insurers therefore should regard the term [physical damage] broadly and flexibly as commonsense and the law of various jurisdictions require.”

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Kyle N. Roehler on “The Storm of Coverage Questions Is Approaching—Will Contractors Be Covered for Chinese Drywall Claims?”

In his article appearing in the July/August 2010 issue of Coverage, Mr. Roehler warns of the coming wave of insurance claims and ensuing coverage litigation over sulfur emissions from defective Chinese drywall. The article first reports on the extent to which Chinese drywall was installed in American homes and the potential harm it can cause. It then turns to an analysis of the coverage issues involved and how they may be resolved based on case precedents in the various jurisdictions.

An initial issue is whether the property damage caused by Chinese drywall constitutes an insurable "occurrence" under standard commercial general liability  policies.  Jurisdictions differ  on the key question  whether faulty construction lacks the necessary level of fortuity contemplated by the requirement that the occurrence be an "accident."

The article next considers whether and how Chinese drywall damage claims can fall under the "your work" and "your product" exclusions. Key factors here are the insured's position in the construction process and which part of the property at issue is damaged. Next the "sistership" exclusion is considered-this exclusion pertains to product, work or property that is withdrawn or recalled from the market or use because of suspected or known defects.

The article then turns to  the "epicenter" of the Chinese drywall coverage debate-the applicability of the "total pollution" exclusion.  The key  issues and case precedents in applying this exclusion are each examined:

  • Does a "total pollution" exclusion apply only to "traditional" environmental releases?
  • Is the hydrogen sulfide gas emitted from Chinese drywall a "pollutant"?
  • Are contained emissions "discharge," "dispersal," "release," "seepage," or "migration" in terms of contact with the environment.

Divergent court decisions are found with each issue. After surveying the diffuse judicial pronouncements on the subject, the article concludes, "Ultimately, we can anticipate that some contractors will find coverage for Chinese drywall-related claims under their CGL policies, while others will not."

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Susan J. Field and Rina Carmel of Musick, Peeler & Garrett LLP on "Evaluating First-Party Property Claims with Multiple Causes Under the Efficient Proximate Cause Doctrine"

In "Evaluating First-Party Property Claims with Multiple Causes Under the Efficient Proximate Cause Doctrine," appearing in the November/December 2011 issue of Coverage, Susan J. Field and Rina Carmel of Musick, Peeler & Garrett LLP in Los Angeles initially note that for a claim to be covered by first-party property insurance, the loss must be caused by a covered loss or peril. There may well be more than one cause of loss. Where one cause of loss is covered by the policy, but another cause is either not covered under the insuring agreement or is an excluded cause, the analysis to determine whether coverage exists can be complicated. This article surveys the various approaches states have adopted to determine coverage in such situations. These include application of the efficient proximate cause doctrine (the majority approach), application of the independent concurrent cause rule (the minority approach), and enforcement of a policy's "anti-concurrent causation" language (a more recent approach). The article then analyzes the statutes and case law addressing the meaning and application of the efficient proximate cause doctrine. For instance, in a claim involving multiple causes of loss, the factual investigation first must determine what perils occurred and how many perils occurred. The article discusses court decisions providing guidance on analyzing such issues. The article further provides some practical recommendations for both insurers and policyholders when working with consultants to investigate claims with multiple causes of losses. It concludes that "[a]n understanding of the policy language, governing law, and facts of the claim (with the assistance of consultants, if appropriate) can assist both parties in an appropriate evaluation of coverage."  

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PROPERTY DAMAGE – APPRAISALS

J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP on “Property Damage Appraisals: Process, Law, and Strategies”

 

In their article appearing in the May/June issue of Coverage, J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP observe that the appraisal process to determine the amount of loss in property damage claims increasingly is seen as a predicate to litigation. For instance, delays have resulted in allegations that the insured failed to cooperate and/or the insurer committed bad faith. Appraisal awards too low in the insured’s estimation have led to wrongful refusal to pay claims while excessive awards from the insurer’s perspective have led to fraudulent claim allegations. To return to the alternative claims dispute resolution process contemplated by the insurance contract, the authors note the emergence of a focus on court orders and memoranda of understanding that “(a) vest jurisdiction in the appraisal panel (specifically the umpire); (b) channel disputes about the progress of the appraisal (specifically including the speed of the process) back into the appraisal itself; and (c) specify the award form in order to eliminate disputes regarding what the panel decided and what it did not.” The object is to create better opportunities to resolve all the claims issues within the appraisal process. The article reviews each phase of an appraisal and imparts warnings, recommendations and opportunities along the way. The authors note that while the amount of loss awarded is binding on the parties, other issues may remain, including the application of exclusions, sub-limits and ― notably, issues of causation.

The article points out that if the parties failed to provide for the appraisal to resolve issues as to damages as for example where the loss is the result of multiple causes, some excluded by the policy, this could be grounds for litigation. The article proceeds to discuss cases ruling on the proper scope of appraisals and notes that the majority of states do not allow appraisals to determine causation. In contrast, assertions of bad faith claims handling can ― and the authors state “should” ― be addressed within an appraisal process. The article examines court decisions addressing the interaction between appraisal clauses and bad faith claims by focusing on pre-appraisal bad faith claims, allegations of bad faith during the appraisal process, and post-appraisal bad faith claims.

The article presents an outline of steps that can facilitate a dispute resolution process that maximizes accuracy and minimizes litigation. The authors state that the objectives are “parity and clarity.” The steps include orders of referrals that transfer jurisdiction from a court to an arbitration panel and empower the umpire in an appraisal panel to make decisions needed for the orderly and timely progress of the appraisal and appraisal documents designed to ensure a fair process. Appendices to the article present samples of such appraisal documents ― a memorandum of appraisal and an appraisal award.

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RESCISSION

Mary McCutcheon and Amanda Hairston of Farella Braun + Martel LLP on "Revisiting the Three Rs: Risks, Rewards, and Rescission"

In their article appearing in the May/June 2011 issue of Coverage, "Revisiting the Three Rs: Risks, Rewards, and Rescission," Mary McCutcheon and Amanda Hairston observe that insurers' claims that they are entitled to rescind certain of the policies they have issued are increasing. The article sets forth the elements insurers must prove to succeed on a claim for rescission and identifies differences among the jurisdictions as to whether an insurer must also prove some form of intent by the policyholder to deceive the insurer.

The article discusses policyholders' various potential responses to an insurer's rescission claim. First, policyholders may assert that they were not under a duty to disclose the matter upon which rescission is sought. The article notes the decisive factors under this issue are what the insurer asked in the application for insurance and the exact wording of its questions.

Second, policyholders may rely on a severability of the application provision to prevent the policy from being rescinded as to all the policyholders. The article finds that the extent of severability of the application provision will often be dispositive of this issue. A full severability provision will protect innocent policyholders, but a partial severability may lead to rescission of insurance for both policyholders who had knowledge of the false or misleading statements and those to whom that knowledge can be imputed. For instance a CFO's statements can be imputed to her or his corporation.

Third, policyholders may assert that the insurer must keep advancing defense costs while the contested claim for rescission is pending.

The article examines pertinent and informative court decisions and finds, "For each of the responses, both carriers and policyholders can find their own comfort in the case law."

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REGULATORY ESTOPPEL

Tobias J. Cushing of Saxe Doernberger & Vita, P.C. on “Regulatory Estoppel 15 Years After Morton: A Fifty State Survey & Discussion of Arguments Regarding Regulatory Estoppel”

 

An article appearing in the March/April issue of Coverage, “Regulatory Estoppel 15 Years After Morton: A Fifty State Survey & Discussion of Arguments Regarding Regulatory Estoppel” is by Tobias J. Cushing of Saxe Doernberger & Vita, P.C. He points out that courts are increasingly estopping insurance companies from interpreting policies and adjusting claims in ways that differ from what they told insurance regulators. Currently, the state courts are divided as to the extent such “regulatory estoppel” will be applied or limited.

The seminal insurance coverage case on regulatory estoppel is Morton Int’l, Inc. v. Gen. Accident Ins. Co. of Am., 629 A.2d 831 (N.J. 1993). In that case, the court held that the insurance industry’s representations to regulators that a pollution exclusion would not apply to unintentional and gradual pollution estopped insurers from taking a contrary position as to the plaintiff’s claims for insurance coverage. The article analyzes that court decision as well as others that adopted regulatory estoppel. It also analyzes selected cases rejecting regulatory estoppel. It further provides a 50-state survey of court decisions on the issue. The author notes that thus far regulatory estoppel has only been applied to the pollution exclusion in CGL policies. Questions as to the future include:

·         Will the doctrine be applied to other policy provisions?

·         Will the doctrine be applied to other types of insurance?

·         Whether there are arguments that can be made to limit or defeat its application?

The article explores each of these questions.

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SEC INVESTIGATIONS

Gregory S. Wright and Richard A. Kriby of K&L Gates on Insurance Coverage for SEC Investigations

In their article appearing in the November/December 2010 issue of Coverage, Insurance Coverage for SEC Investigations, Gregory S. Wright and Richard A. Kirby report that in several recent court decisions coverage has been found under D&O and/or E&O liability policies for the significant costs policyholders have spent defending investigations by the SEC or other regulatory agencies.  A caveat is that court decisions vary in this area based on the specific policy language and facts at issue. Depending on the circumstances, policyholders of Professional Liability Policies may have a strong case for coverage even prior to the entry of a Formal Order of Investigation.  If an insurer issues policy language that is potentially ambiguous in the context of well-known SEC practices and policies, then under canons of constructing insurance policies, policyholders may have strong arguments that such ambiguities should be resolved in favor of coverage. The authors examine pertinent court decisions, some of which have held as follows:

   SEC investigations are “proceedings” for purposes of triggering coverage;

   Given that SEC investigations may evolve over time, coverage does not necessarily turn on the specific language in the Formal Order;

   For purposes of triggering coverage, subpoenas and Formal Orders allege “wrongful acts”;

   Coverage may be available for investigations prior to the entry of a Formal Order; and

   Insurers should not withhold reimbursement of defense costs prior to a judicial ruling on potential coverage decisions.

The authors conclude that policyholders facing SEC investigations should carefully evaluate whether they have coverage under existing Professional Liability Policies. Moreover, those who are renewing their policies or newly purchasing Professional Liability Policies should seek appropriate coverage for SEC investigations.

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SETTLEMENT CREDITS

Charles H. Mullin, Karl N. Snow, and Noah B. Wallace on “Proper Settlement Credits in All Sums Jurisdictions”

In their article appearing in the May/June 2010 issue of Coverage, “Proper Settlement Credits in All Sums Jurisdictions,” Charles H. Mullin, Karl N. Snow and Noah B. Wallace explore the question of whether a settlement credit in all sums jurisdictions should be equal to the policy limits of the settled policies (“policy limits”) or equal to the amount of the settlement (“pro tanto”). They extensively analyze three hypothetical cases where an environmental claim is allocated to differing insurance policies using both policy limits and pro tanto formulas for settlement credits.

The authors’ guideposts in their analyses are two well established public policy objectives: (1) the goal of encouraging settlement, thus avoiding litigation costs and the uncertainty of the outcomes for the settling parties and (2) the goal of leaving third parties to the settlement unaffected by the terms of the settlement. Their study finds that the acceptance of a given settlement credit approach in all cases would be inequitable. Instead, the proper choice depends on the facts underlying the settlement. More specifically, the proper choice is grounded on the reasons the settlement amount varies from the policy limits. When a contention specific to the policies in question is the prime reason for the settlement, such as a coverage defense applicable to those policies or the risk of insolvency, the pro tanto approach may be more equitable. The authors explain, “This approach leaves nonsettling insurers unaffected by the settlement and the policyholder whole.”  In contrast, when a common coverage defense or the time value of money drives the settlement, “the policy limits approach is preferable as it removes the possibility of over collection [by the settling policyholder] and leaves each party, at a minimum, as well off as it was prior to the settlement.”

The authors acknowledge that their case studies do not take into account some complicating factors:  litigation costs are not borne equally, risk aversion among parties may differ, and there is generally an asymmetry of information among the policyholder, the settling insurer and the nonsettling insurers. Nonetheless, the authors state that the basic patterns they have found will pertain to the vast majority of potential fact patterns.

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SUCCESSOR LIABILITY

Gerald V. Weigel, Jr. of Dinsmore & Shohl, LLP on “A Random Walk Through the Corporate Succession Thicket─Recent Cases Involving Transfers of Coverage”

 

The lead article in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, addresses the question of whether insurance policies purchased by a company whose assets have been sold or transferred to a successor company provide coverage to that successor company. Given the regularity with which corporations purchase and sell one another, in whole or in part, this issue is frequently litigated. Moreover, the issue has been complicated by mass tort claims that have generated disputes concerning liability insurance policies issued years, even decades, ago.

The author emphasizes that the cases in this area are too numerous to review here and so he has chosen ones he find especially provocative. He focuses upon cases which have particularly troubled the courts: “those where an insured corporation sells or transfers assets to another corporation, which thereafter is sued as a result of a loss at least arguably attributable to events that had occurred─that is, in the parlance of most occurrence policies, bodily injury or property damage that occurred─before the sale.”

Consequently, the article analyzes the decisions of:

Northern Insurance v. Allied Mutual Insurance (9th Cir. 1992);

Henkel v. Hartford Accident & Indemnity (Cal. 2003);

Pilkington North America, Inc. v. Travelers Casualty & Surety Co. (Ohio 2006);

The Gliden Co.  v. Lumbermens Mutual Casualty Co. (Ohio 2006);

Elliott Co.v. Liberty Mutual Insurance (N.D. Ohio 2006); and

Travelers v. United States Filter (Ind. 2008).

The article concludes by evaluating the current state of the law and enumerating points of interest for business lawyers working on future transactions.

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G. David Godwin, Partner, Carroll, Burdick & McDonough LLP on "Lost a Duty to Defend? The Duty to Defend under a Missing Liability Policy"

In his article, “Lost a Duty to Defend? The Duty to Defend under a Missing Liability Policy,” appearing in the January/February 2011 issue of Coverage, G. David Godwin of Carroll, Burdick & McDonough LLP, explores the rights and obligations of policyholders and insurers in connection with claims for a defense under missing liability policies.

Policyholders seeking a defense under a missing or lost liability insurance policy must establish the existence and terms of the policy as well as making a prima facia case of a potential for coverage. The article discusses what the insured must prove and how the parties may determine when a duty to defend is owed under a missing policy. The determination of whether a duty to defend exists begins with an analysis of whether a policy exists and what its terms are, based on the facts that can be established, secondary evidence that can be adduced and the applicable law specific to the alleged contract. The article discusses respective burdens of proof and the interplay of the factors that may be considered in determining whether an insurer should defend under an alleged missing policy. The article states there are at least six key terms that must be established by the insured in most lost policy cases:

  The identity of the insured and insurer;

  The policy number;

  The policy period;

  The limits afforded under the policy;

  That the type of claim at issue was one of the hazards covered by the policy; and

  The amount and payment of premium.

The article further notes that other terms may also have to be established depending on the claim and circumstances at issue and presents an illustrative example. The article describes what is involved and the challenges presented as well as provides helpful tips as to establishing the critical elements of a missing policy. The Best Evidence Rule and Secondary Evidence Rule are addressed. The article discusses what constitutes secondary evidence and discusses applicable rules of evidence, observing that the insured may have to provide clear and convincing evidence of the missing policy and its terms. Moreover, finding relevant documents may not be enough as the insured should adduce enough proof to authenticate and admit the secondary evidence in a court of law. Conversely, the insurer has the burden of proof as to exclusions in the policy which it may meet by resort to its internal underwriting practices, its records and personnel as well as industry practices. The article concludes that while there is no duty to defend under a missing policy unless its existence and key terms are established, when that occurs the insured may be owed the same duties as would pertain to known policies.

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TIME SENSITIVE DEMANDS

James M. Hofert and Jennifer K. Gust on "Time-Sensitive Demands"

 

In their article appearing in the March/April 2010 issue of Coverage, "Time-Sensitive Demands," James M. Hofert and Jennifer K. Gust initially describe the debate as to the legitimacy of time-sensitive demands. Such a demand is a settlement offer made by an underlying plaintiff that the defendant's insurer must accept by the deadline set forth in the demand. If the insurer does not accept the settlement offer in time, the insured defendant may be exposed to an excess judgment. This may prompt the insured to issue a bad faith claim against its insurer, which may be assigned to the underlying plaintiff as part of a settlement. Insurers have asserted that time-sensitive demands are "legal gamesmanship" involving unreasonable conditions designed to evade coverage limits and illegitimately reach the insurers' deep pockets for extra-contractual damages.

Plaintiffs' attorneys assert that time-sensitive demands instead are a legitimate means to compel unwilling insurers to timely pay policy limits where the actual damages are clearly greater than the coverage limits. The authors find that while either side of the debate may be correct in a given case depending on the specific facts involved, the overriding principle is that the insurer must act in good faith in deciding how to handle the settlement offer, not unwarrantedly exposing its insured to excess liability. The authors identify numerous factors the insurer must take into account beyond objectively assessing the defensibility of the case in terms of liability, e.g., the relative persuasiveness of the parties and their witnesses. They also identify jurisdictional differences as to the standards governing an insurer's duty to settle in response to a time-sensitive demand. Importantly, the authors note, "... it is the insurer's conduct-not the underlying plaintiff's-that is at issue for in a bad faith claim for failure to settle."

The article examines a number of bad faith cases involving delayed responses to time-sensitive demands, identifying the dispositive facts or totality of circumstances that led each court to find for or against the insurer.  The article concludes with several prudent recommendations for insurers handling time-sensitive demands. An overarching recommendation is that "[t]he insurer's best defense to potential bad faith liability arising from a time-sensitive demand is honest and timely communication with both the underlying plaintiff who is making the demand and its insured."

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Comments

Anonymous
Anonymous
  • 10-11-2012

It seems to be good insurance abstract but it would have been better if table of content could have bee directly linked to the entity just to have fast scroll .