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

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

2007: The Year of the Pig
New Nasty Claim Threat:                     Contingent Commissions        
Athletic Achievement:                         Tiger Woods
Furthest Fall from Grace:                    Dickie Scruggs
Coolest New Gadget:                           Streaming Video
Hottest Coverage Issue:                       “Occurrence”
 
The 7 Most Important Coverage Rulings of 2007
Cinergy Corp. v. St. Paul Surplus Lines Ins. Co., 865 N.E.2d 571 (Ind. 2007) 
In this case, the Indiana Supreme Court held that a liability insurer has no obligation to pay for the cost of implementing new technology to prevent future environmental harm. In holding that AEGIS did not owe coverage for a lawsuit in which the federal government sought to compel Duke Energy and other utilities to comply with the federal Clean Air Act and implement new clean air technologies to prevent widespread harm to public health and the environment, the Supreme Court agreed with other jurisdictions that a distinction should be drawn between remedial and prophylactic remedies and that coverage was not required here where the federal lawsuit was directed at preventing future harm to the public not obtaining control, mitigation or compensation for past or existing environmentally hazardous emissions. The court ruled that the policy’s requirement that injury be “caused by an accident” precluded coverage for cases such as this where the complaint sought to prevent an occurrence from happening. 
Comment: Notwithstanding broad language in its 2001 opinion in Hartford v. Dana that damages covered under a general liability policy might include costs “to prevent further releases of hazardous substances,” the Indiana Supreme Court ruled in Cinergy that coverage only extends to existing harm and does not insure against costs that a policyholder must undertake to prevent future injuries. The opinion has since been widely cited by insurers as proof against claims that they should be liable for the cost of limiting greenhouse gas emissions that are claimed to contribute to global warming.
 
Donegal Mut. Ins. v. Baumhammers, 938 A.2d 286 (Pa. 2007)
After the Pennsylvania Superior Court ruled 5-3 that a shooting spree in which the insured’s son fatally shot five people and wounding another involved six separate “occurrences, a nearly equally divided Supreme Court tilted the opposite way, ruling that the claims involved a single ‘occurrence.” ), the Supreme Court held that the appropriate focus of a “cause” analysis was on the act of the insured that gave rise to his or her liability rather than the “immediate injury-producing act.” The court held that, “Determining the number of occurrences by looking to the underlying negligence of the insured recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured.  Since the policy was intended to insure [policyholders] for their liabilities, the occurrence should be an event over which [policyholders] had some control.” Justice Baldwin’s opinion was joined by Justices Castille, Saylor and Eakin. Justices Cappy and Baer filed separate concurrences joining the majority’s analysis with respect to whether the underlying claims alleged an “accident” but dissenting with respect to the analysis of the “occurrences” issue. Chief Justice Cappy argued that the majority had been inconsistent in finding that the definition of “occurrence” focused on the violent acts of Richard Baumhammers in shooting his victims whereas its analysis of “occurrences” had focused on the negligent acts of the parents and that the majority should have adopted the “cause” approach proposed by the Florida Supreme Court in Koikos v. Travelers Ins. Co., 849 So.2d 263 (Fla. 2003) wherein “cause” was the immediate act causing bodily injury. Justice Baer took a somewhat different approach arguing that the number of occurrences should be determined not based on the negligent acts of the insured or the events directly causing each individual’s injury or death. 
Comment: A depressing number of appellate rulings in this decade addressed serial crimes. With this ruling, the Pennsylvania Supreme Court, despite its deep divisions, took a relatively pragmatic approach, finding coverage for the innocent defendants whose conduct may have contributed to the perpetrator’s violence while reining in the nearly unlimited amounts of coverage that other courts had allowed in such cases.
 
In Re: Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)
Rejecting a District Court’s distinction between floods that result from natural and manmade causes, the Fifth Circuit has held that property policies do not cover Katrina claims. Mere weeks after hearing oral argument, the panel ruled that the policies’ flood exclusions were not ambiguous, nor should ambiguity be inferred merely because they could have been worded more explicitly to make their intent clearer as was the case with similar water damage exclusions. Further, the court held that numerous dictionary definitions failed to apply the distinction that the District Court had relied on and, indeed, in certain cases had included the inundation of land from burst levies as an example of a “flood.” Nor was the court persuaded that other terms in these exclusions implied an intent on the part of underwriters to limit the scope of the exclusion to natural events. The court declined to reach the issue of whether anti-concurrent causation language applied here, declaring that the efficient proximate cause doctrine would only arise in cases where there were two distinct perils, one covered and one excluded, that resulted in a loss whereas here the plaintiffs’ loss was solely attributable to a flood. The court declared that negligent design, construction or maintenance of the levies may have contributed to the plaintiffs’ losses but was only one factor in bringing about the flood; “the peril of negligence did not act, apart from flood, to bring about damage to the insureds’ property.” For similar reasons, the court precluded any argument on the part of the policyholders that sought to recharacterize their flood damage as actually resulting from negligent design, holding that the flood exclusions were meant to apply regardless of what other factors contributed to the development of the flood.
Comment:   Hurricane Katrina brought on a flood of coverage litigation against property insurers along the Gulf Coast in Louisiana and Mississippi, along with a political firestorm orchestrated by Dickie Scruggs and his political allies in Mississippi. Central to many of these disputes was the debate over whether the plaintiffs’ homes were damaged by wind (covered) or water (not) and the efficacy of anti-concurrent causation language that insurers contended barred coverage where covered causes of loss contributed to damage resulting from excluded causes. This crucial Fifth Circuit opinion proved to be a tipping point in this struggle.   Despite vast amounts of unfavorable publicity and the formidable political forces arrayed against State Farm and other insurers, state and federal appellate courts did a remarkably rational job throughout in giving effect to plain policy wordings.  
 
Lamar Homes Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)
A year and a half after hearing oral argument, a bitterly divided Texas Supreme Court has ruled that construction defect claims can be an “occurrence.” In keeping with recent opinions from states such as Wisconsin, the majority declared that whether faulty workmanship claims are covered should be a function of policy exclusions, not insuring agreement elements such as “occurrence” or “property damage.” The court further refused to find that the “economic loss” doctrine precluded coverage. The Texas Supreme Court took note of the fact that certain policy exclusions, notably Exclusion J(6) were clearly directed to the consequences of faulty workmanship causing property damage and preclude coverage for such claims except in circumstances where they result from the work of a subcontractor. The Texas Supreme Court ruled that, “The proper inquiry is whether an occurrence has caused property damage, not whether the ultimate remedy of that claim was in contract or tort.” Three dissenting judges took issue with this conclusion, arguing that “selling damaged property is not the same as damaging property,” and arguing instead that the economic loss doctrine should preclude any coverage for such claims. Three dissenting justices argued that claims for breach of contract due to faulty workmanship are a mere “economic loss” and thus not covered.
CommentLamar Homes concluded the coverage cycle that began with cases such as Vandenberg in California and American Girl in Wisconsin. It also came during a period when an extraordinary number of major appeals and certified questions were pending before the Texas Supreme Court. When the logjam finally broke in 2007-2008, insurers learned to rue the day that they had complained about how long it was taking the Supreme Court to answer these questions.
 
Philip Morris, USA v. Williams, 549 U.S. 346 (2007)
Returning to the issue of the constitutionality of punitive damage awards only four years after its landmark opinion in State Farm v. Campbell, a narrowly divided court ruled 5-4 that awards based on a jury's desire to punish a defendant for harming those who are not parties to the lawsuit amounted to a taking of property from the defendant in violation of the defendant’s constitutional due process rights. The court therefore set aside a $97 million punitive damages award that had been upheld by the Oregon Supreme Court. Justices Stevens, Ginsberg, Scalia and Thomas issued three separate dissents arguing that the court should not impose limits on the right of the courts to impose damages in such cases.
Comment: In Williams, the U.S. Supreme Court made explicit what it had previously suggested in State Farm v. Campbell, namely that juries may not punish civil defendants for injury to parties who are not parties to the litigation. Although widely-hailed at the time, the court’s opinion proved to be of little benefit to Philip Morris. On remand, the Oregon Supreme Court reinstated the $97 million award on the basis of a state law jury instruction. Although the U.S. Supreme Court took the unusual step of accepting the case again in 2008, it dismissed the petitioner’s cert claim following oral argument, apparently due to frustration at the confusing factual record. Williams does, however, signal a shift in punitive damages jurisprudence from disputes over ratios to a renewed focus on jury instructions.
 
Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 723-24 (2007)
Despite an auto insurer’s contention that it was insulated against any claim that it could not have acted in bad faith when it denied the insured’s UIM claim, as there was a genuine dispute with respect to whether the plaintiff’s spinal injuries had been caused by the accident or were the result of a pre-existing condition, the California Supreme Court ruled 5-2 that the trial court had not erred in refusing summary judgment to the insurer, as the insured had established triable issues of fact with respect to whether the insurer had undertaken an adequate investigation, particularly as it appears that the denial was not supported by the medical evidence. The court ruled that the “genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim” and that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. By contrast, the court declared that a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances. Writing in dissent, Justices Chin and Baxter argued that the insurer’s denial was reasonable in light of x-rays that were taken immediately after the accident showing no fracture or degenerative change as well as the fact that the plaintiff thereafter went on an extended backpacking trip in Europe.
Comment: With this opinion, the California Supreme Court made clear just how thin a defense to bad faith claims the “genuine dispute” doctrine could be. Wilson is the culmination of a trend that started at the beginning of the decade, when the Ninth Circuit ruled 2-1 in Guebara v. Allstate Ins. Co., 237 F.3d 987 (9th Cir. 2001), that expert testimony did not automatically insulate an insurer from bad faith claims based on biased investigations, but could, as in this case, create a genuine issue of coverage sufficient to preclude a finding of bad faith. Following Guebara, several California courts have refused to grant summary judgment to insurers in bad faith cases based on the insurer’s inadequate investigation of the insured’s claim. See Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1072 (2007) and Chateau Chamberay Homeowner’s Assn. v. Associated International Ins. Co., 90 Cal. App.4th 335 (2001). 
 
Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007)
In what may well be a low point (and one of the most gruesome fact patterns) in Washington insurance jurisprudence, the state Supreme Court has ruled that a lower court erred in refusing to find GL and E&O coverage for emotional distress claims by a dentist’s employee after a bizarre practical joke in which the insured posed the plaintiff with boar’s tusks in her mouth while under anesthesia and took photos of her. Whereas the Court of Appeals had declared that no reasonable patient would construe such misconduct as involving the rendering of professional dentistry services, the Supreme Court held that E&O coverage applies as the act occurred in the course of preparing the patient for surgery and was “integrated into and inseparable from the overall procedure” and that the insertion of the boar tusk “flipper,” however oddly shaped, conceivably fell within the policy’s broad definition of the practice of dentistry. The Supreme Court observed that an obligation to defend existed if the law was in doubt, observing that Fireman’s Fund’s decision not to defend was based upon an outside opinion from counsel that was somewhat equivocal. The Supreme Court also held that the dentist could obtain coverage through his general liability policy, despite the fact that the plaintiff only alleged emotional distress, in light of allegations of depression, panic attacks, nightmares and suicidal impulses. Further, the court found that the practical joke, despite its intentional nature, was a covered “fortuitous circumstance, event or happening” since the policy required not only that the act be intended but the resulting injuries also be expected or intended by the insured. In this case, the court found that although the dentist’s conduct was intentional, it was conceivable that he had not intended his conduct to result in the plaintiff’s injuries. Four justices dissented, arguing that the claims clearly involved intentional conduct none of which involved professional services and that no reasonable person would have understood that such claims would be covered. The Supreme Court did rule, however, that Fireman’s Fund had no obligation to provide EPL coverage.
Comment: The Washington Supreme Court is something of a puzzle palace. Its opinions are often deeply divided, regularly generating more dissents and concurring opinions than any other appellate court in the country. Even so, a majority of the court seemed determined to stake out the broadest territory that it could in compelling coverage for an incredibly dubious claim.
 
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