Pennsylvania High Court Allows Policyholder to Recover Voluntary Settlements Paid without Insurer Consent Even Absent Insurer Bad Faith

By on July 28, 2015
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On July 21, 2015 a sharply divided (and short-handed) Pennsylvania Supreme Court ruled 3-2 that an insurer defending an insured subject to a reservation of rights may be required to reimburse its insured for any “fair and reasonable” settlement its insured enters into even when the insurer does not consent to the settlement, and even where the insurer has not acted in bad faith. Babcock & Wilcox Co., et al. v. American Nuclear Insurers, et al., 2015 Pa. LEXIS 1551, No. 2 WAP 2014. The Court, however, did not give carte blanche to insureds to settle without insurer consent. Instead, the Court held that such a right is “limited to those cases where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.” In other words, the Court held that an insurer defending under a reservation of rights either must (1) consent to and pay a fair and reasonable settlement offer presented to its insured, (2) withdraw any reservation of rights, or (3) risk having to reimburse its insured who settles without consent if the claim is found to have been covered under the policy. As the dissent emphasized, the Court’s ruling represents a substantial abrogation of the contractual rights of insurers under Pennsylvania law, which previously permitted policyholders to circumvent the “voluntary payments” provisions of typical liability policies only where their insurers were guilty of having acted in bad faith conduct in failing to settle the underlying claim.

Babcock & Wilcox (“B&W”), along with ARCO, had been sued in a long-running class action involving over 500 plaintiffs claiming bodily injury and property damage from alleged emissions from the defendants’ nuclear faculties. B&W’s insurer, ANI, had provided an aggressive defense, subject to a reservation of rights, expending more than $40 million over the course of two decades, pursuant to a policy with $320 million in limits (which were eroded by defense costs). The policy contained a standard consent to settlement/cooperation clause that provided, inter alia, that “[t]he insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.”

Believing that there was a strong likelihood of a obtaining a complete defense judgment, and seeking to discourage potential “copycat” claims, ANI rejected all settlement offers presented. B&W, which for some time had been pressuring ANI to settle, entered into an $80 million settlement (well within the $280 million remaining policy limits) without ANI’s consent. B&W then sued ANI in state court for reimbursement of the settlement amount.

In the trial court, ANI contended that it had no obligation to reimburse Babcock & Wilcox because B&W breached the policy’s consent to settle requirement. Relying upon Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223 (Pa. 1957) (holding that “an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits”), ANI argued that, under Pennsylvania law, an insurer could only be required to reimburse its insured for a settlement reached without its consent if the insurer acted in bad faith in refusing to settle. By contrast, B&W, framing the argument as one of first impression in Pennsylvania, and relying on case authority from other states, argued that an insurer is obligated to reimburse its insured for any fair and reasonable settlement entered into in good faith, regardless of a cooperation clause.

The trial court eventually held that “an insurer, defending subject to a reservation of rights, is required to reimburse an insured for a settlement reached in violation of the consent to settle clause where coverage is found to exist and the settlement is ‘fair and reasonable’ and made in ‘good faith and without collusion.’” Applying this standard, a jury found that the settlement reached between B&W and the underlying plaintiffs was reasonable and, accordingly, ANI was obliged to reimburse B&W.

ANI appealed and the Pennsylvania Superior Court reversed and adopted Florida’s “insured’s choice” test where an insured can either: 1) accept a defense pursuant to a reservation of rights and be bound by a consent to settlement provision provided that the insurer does not act in bad faith; or 2) reject a defense pursuant to a reservation of rights and, if coverage is found, hold the insurer liable for defenses costs and the costs of any reasonable settlement.

The Supreme Court, in turn, reversed the Superior Court’s decision, holding that the “insured’s choice” test is irreconcilable with Pennsylvania law because an insured’s rejection of a defense under a reservation of rights relieves an insurer of its coverage obligation. Further, the Court criticized the “insured’s choice” as being largely illusory because many, if not most, insureds lack resources to fund an adequate defense. The Justices, however, diverged sharply as to what the applicable test should be for “determining whether an insurer is liable under its insurance policy for a settlement made by its insured without securing the insurer’s consent, when the insurer is defending the claim subject to a reservation of rights.” After reviewing the policy arguments proffered by the parties and their amici, and examining how courts in other jurisdictions have approached the issue, the Court held that “where an insurer defends subject to a reservation of rights and breaches its duty to settle . . . an insured may accept a settlement over the insurer’s refusal where the settlement is fair, reasonable, and non-collusive.” The Court’s holding was limited to situations when an insurer is defending under a reservation of rights and – because of the nature of the particular reservation of rights – its interests diverge from those of its insured. In such a situation, the “determination of whether the settlement is fair and reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.” Here, the Court held that its new standard had been satisfied and reinstated the trial court’s judgment requiring ANI to reimburse B&W for the $80 million settlement.

In dissent, Justice Eakin, joined by Chief Justice Saylor, vociferously criticized the majority’s adoption of the “fair and reasonable” standard.  In the dissenting Justices’ view, this was not a case of first impression at all. Rather, the dissenters insisted that the outcome of the case clearly was governed by the holding of Cowden, imposing liability for an excess verdict where the insurer’s failure to settle within policy limits was in bad faith. In the dissenters’ view, so long as ANI’s decision to continue defending rather than settling the underlying litigation was made in good faith, ANI was within its right to do so. The dissenting Justices criticized the new standard adopted by the Majority:

[The “fair and reasonable” standard] allows an insured to breach the contract’s requirement that the insurer must consent to any settlement when the insured anticipates an excess future verdict and, as a practical matter, permits the insured to determine for itself (in the first instance) that the insurer acted unreasonably in refusing to settle.

The majority repeatedly emphasized that not all reservations of rights are created equal, and that whether an insurers’ refusal to settle or give up its reservation of rights constitutes a policy breach must be examined on a case-by-case basis. The Court also admonished that settlements be closely vetted to ensure that they are in fact reasonable under the circumstances and non-collusive. Despite these cautionary notes, policyholders will doubtless argue that this decision gives them a broad license to settle over insurer objection, ultimately with an insurer’s money, whenever an insurer is defending subject to a reservation of rights that might defeat or limit coverage. Moreover, this decision, together with the Court’s ruling in December 2014 in Allstate Property and Cas. Ins. Co. v. Wolfe, 90 A.3d 699 (Pa. 2014), that statutory insurance bad faith claims are assignable, threaten to seriously undermine the insurer’s bargained-for rights to control the defense and settlement of claims against their policyholders.

Filed under Bad Faith, Commercial General Liability, Consent to Settle/Unreasonable Settlements, Duty to Cooperate, Duty to Defend, Reservation of Rights

Pennsylvania Superior Court Issues Critical Ruling on Statute of Limitations for Declaratory Judgment Actions

By on July 23, 2015
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A recent decision by the Pennsylvania Superior Court clarifies when the four-year statute of limitations begins to run on an insurer’s ability to bring a declaratory judgment action against its insured. In Selective Way Insurance Co. v. Hospital Group Services, Inc., 2015 PA Super 146 (2015), the Superior Court ruled that the statute begins to run when an insurer has a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.

The litigation in Selective Way arose out of a 2006 automobile accident which resulted in the death of an intoxicated 17-year old driver. The driver was found to have a .14 BAC at the time of his death, and the plaintiffs alleged that he drank alcohol while working a lengthy shift at a Ramada Inn hotel. After his family sued the hotel’s management company for various negligence claims, the management company tendered the claim to its insurer, Selective Way Insurance Company (“Selective”). Selective defended under a reservation of rights, but almost five years later, it filed a declaratory judgment action seeking a declaration of no coverage.

The trial court eventually granted summary judgment in favor of the plaintiff and insured, holding that the statute of limitations had already run because the statutory period commenced when the insurer received the complaint relating to the underlying litigation. Under that analysis, the trial court dismissed the action because Selective waited almost five years to file for declaratory judgment.

On appeal, the Superior Court reversed and held that the statute of limitations begins to run only when an insurer has the factual basis to believe that there could be a dispute as to coverage. The court noted that more generally, under Pennsylvania law, a statute of limitations begins to run from the date on which the cause of action arises, and a cause of action arises on the date on which a plaintiff could first maintain an action to a successful conclusion. The court reasoned that until the insurer actually has a factual basis for denying coverage, which it will not always have simply from reading the complaint, there is no controversy or corresponding cause of action. In other words, until the insurer has reason to deny coverage, there is no dispute which a court could resolve. Thus, when the insurer can determine from the face of the complaint that there will be coverage issues, the statute of limitations begins to run when the insurer receives the complaint. But when the insurer cannot tell if there will be coverage issues until the case has progressed and the exact legal issues involved are clearer, the statute of limitations does not run until the insurer has the factual basis to conclude that coverage may not exist.

The Superior Court’s ruling is important because it gives insurers more leeway to conduct thorough coverage investigations without the need to file a Declaratory Judgment Action solely to protect the statute of limitations. This leeway, in theory, should limit the unnecessary Declaratory Judgment Action and the bad faith counterclaims that come with it. However, these cases could open the door to additional discovery against insurers as to precisely when an insurer became aware of facts which could negate coverage.

Filed under Declaratory Judgment Actions, Statute of Limitations

Fourth Circuit Rules That Separation of Insureds Clause Does Not Prevent Intent From Being Imputed to Insured Principal

By on July 21, 2015
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The Fourth Circuit Court of Appeals recently held that an insurer had no duty to defend the insured university in a suit by a mother alleging that the university and its employees participated in kidnapping her daughter. The court ruled that the policy’s “Separation of Insureds” clause did not prevent the intent of the university’s agents from being imputed to the university. Liberty University Inc. v. Citizens Ins. Co. of America et al., No. 14-2254, 2015 U.S. App. LEXIS 11888 (4th Cir. Va. July 10, 2015).

In a unique, complex and rather disturbing set of facts, the underlying plaintiff sued Liberty University and numerous individuals involved in the alleged kidnapping of the her daughter. The University, certain employees and various affiliated entities allegedly conspired with the plaintiff’s former domestic partner to violate court-ordered custody and visitation orders to prevent the plaintiff from having contact with the couple’s young daughter. In her suit against the university and its employees, the plaintiff alleged that the university “was directly liable for conspiring to ‘commit the intentional tort of kidnapping’” and violating RICO by “conspiring ‘through [a] pattern of racketeering’ to kidnap the child.’” Id. at 4. The plaintiff also alleged that the university was vicariously liable for its agents’ racketeering, participation in kidnapping and conspiring to violate the plaintiff’s parent-child relationship. Id. at 5. Specifically, the plaintiff contended that the university’s law school dean and professor assisted the partner in violating court orders and solicited donations to help her abscond to Nicaragua with the child. Id. at 5. A law school employee also allegedly had her father drive the partner and child to the Canadian border in disguise, using university phone lines. Id. at 6.

After the insurer refused to defend the underlying lawsuit, the university sought declaratory judgment. The United States District Court for the Western District of Virginia found for the university on summary judgment. Id. at 11. The liability policy at issue covered occurrences and suits alleging personal and advertising injury. It had exclusions for expected or intended injuries, criminal acts and knowing violations of others’ rights. Id. at 7-10. Critically, the policy also contained a separation of insureds clause, which bound the insurer “to evaluate the claims against each named insured individually…so that excluded conduct by one insured does not preclude claims brought by other insureds.” Id. at 10-11.

The district court ruled that the separation of insureds clause “forbade the court from imputing to [the university] the intent of its agents.” Id. at 13. The court determined that under the clause, it was required to separate the intent of the university from those of its individual agents. Id. at 12. Here, the district court focused on the fact that the underlying complaint did not allege that the university “individually expected or intended the alleged kidnapping.” Id. at 13. The district court also held that the complaint did not “sufficiently allege” the university’s vicarious liability, providing “only conclusory allegations that tie [the university] to the actions of its alleged agents and employees.” Id. at 14.

The Fourth Circuit Court of Appeals disagreed and reversed, based largely on its different reading of the separation of insureds clause. The clause did not “displace Virginia’s rule that an agent’s intentionally tortious act cannot be ‘unexpected’ by the principal who is vicariously liable for the act.” Id. at 19-20. There was “ample reason” to anticipate that Virginia would impute the intent of the university’s agents to the university. Id. at 20. Also, one such agent who acted with intent (the law school employee) was a named defendant. Id. Because she was either an employee or volunteer worker under the policy, she “would qualify as a named insured” such that the university was not “the only insured requesting a defense under the policy.” Id. at 20. Further, the complaint explicitly alleged that the university was “directly liable for harm arising from its intentional participation in conspiracies and vicariously liable for the intentional acts of its agents.” Id. at 24. In other words, the complaint did not allege the university’s liability for its agents’ intentional acts on a negligence theory. Id. at 22-24. The court thereby found that the separation of insureds clause “unambiguously would not displace the ordinary rule …that a complaint alleging a principal’s liability solely in respondeat superior for the acts of its agent does not state an ‘occurrence.’” Id. at 24. In addition, the court found the clause unambiguous and that even if it were ambiguous, the court could not “entertain an absurd result” and enlarge coverage. Id. Lastly, the court determined that the complaint “clearly” demonstrated the university’s respondeat superior liability beyond “conclusory allegations,” since it alleged facts and circumstances demonstrating the law school employee’s role in kidnapping and racketeering. Id. at 27.

Liberty prompts us to scrutinize separation of insureds clauses, both in drafting and litigation. Drafters must think ahead to how policyholders may try to appropriate these provisions to establish or extend coverage in the absence of valid claims. In litigation, insurers may benefit from proactively establishing that the clause does not serve as a shield to insured principals.

Filed under Commercial General Liability, Separation of Insureds

General Liability Insurer Entitled to Subrogate Against its Insured’s Indemnitor

By and on July 20, 2015
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In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest was a general contractor for exterior improvements at the St. Regis resort and subcontracted with Mission Pools to install a swimming pool. The subcontract provided that Mission Pools would defend and indemnify Valley Crest. Jeffrey Epp suffered a severe spinal cord injury diving into the pool and he subsequently sued Valley Crest and Mission Pools. The Epps alleged that Mission Pools was liable because the vertical tile depth markers were illegible and the use of “French gray” plaster in the pool made it difficult to determine depth.

Valley Crest’s general liability insurer, National Union, defended and indemnified Valley Crest, but Mission Pools did not. Valley Crest cross complained against Mission Pools for breach of the subcontract’s indemnity provision. National Union subsequently intervened as a cross-complainant asserting an equitable subrogation claim against Mission Pools.

The trial court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The court of appeal affirmed, rejecting Mission Pools’ argument that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position.

The court considered a number of equitable factors. It ultimately found that the factor which tipped the scale in favor of National Union was compliance with contractual obligations. It determined that because National Union had honored its contractual obligations to Valley Crest by agreeing to provide a defense, while Mission Pools had not, National Union was entitled to equitably subrogate.

Filed under Appellate, General Liability

Washington Supreme Court Defines Collapse in a Property Policy

By , and on June 25, 2015
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Until recently, Washington law on what constitutes “collapse” in a first-party property insurance policy has been unsettled. But that issue has now been resolved with the Washington Supreme Court’s answer to the Ninth Circuit Court of Appeals certified question on the definition of “collapse” as “substantial impairment of structural integrity.”

The Queen Anne Park Condominium in Seattle, Washington, was originally constructed in the 1980’s. In 2009, the Queen Anne Park Homeowners Association (“HOA”) discovered that the siding on the buildings was leaking, which caused hidden decay. The building was insured by State Farm Fire and Casualty Company (“State Farm”) from October 18, 1992 to October 18, 1998 (“Policy”). The Policy included a collapse coverage form, which provided coverage for “any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: …(2) hidden decay.” The collapse coverage form further stated that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” The term “collapse” was not defined in the State Farm Policy.

5-25The Washington Supreme Court held that the undefined term “collapse” is ambiguous because it is susceptible to more than one reasonable interpretation. In support of its holding, the Court noted that in Sprague v. Safeco Ins. Co. of America, 174 Wn.2d 524, 276 P.3d 1270 (2012), different definitions of “collapse” were proposed by the dissent (“to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass”) and by the concurrence (“a breakdown of vital energy, strength, or stamina”). The Court also noted that courts throughout the country have adopted different but reasonable definitions of “collapse” in insurance policies, i.e. Olmstead v. Lumbermens Mut. Ins. Co., 22 Ohio St. 2d 212,259 N.E.2d 123, 126 (1970) (“collapse” defined as “a falling down, falling together, or caving into an unorganized mass”); Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1227 (D. Utah 1996) (collapse” defined as substantial impairment of structural integrity); Buczek v. Cont’l Cas. Ins. Co., 378 F.3d 284, 290 (3d Cir. 2004) (“collapse” defined as substantial impairment of structural integrity that “’connotes imminent collapse threatening the preservation of the building as a structure or…health and safety”). In particular, the Court observed that in at least one other case, State Farm had agreed with the insured that the term “collapse” meant “substantial impairment of structural integrity.” Mercer Place Condominium Assoc. v. State Farm Fire & Cas. Co., 104 Wn. App. 597, 17 P.3d 626 (2000).

Because the term “collapse” was ambiguous, the Court adopted a definition that is reasonable and most favorable to the insured, i.e. “substantial impairment of structural integrity.” The Court explained that the “structural integrity” of a building means a building’s ability to remain upright and that “substantial impairment” means a severe impairment. The Court stated that, “[t]aken together, ‘substantial impairment’ of ‘structural integrity’ means an impairment so severe as to materially impair a building’s ability to remain upright. Considering the Policy as a whole, we conclude that ‘substantial impairment of structural integrity’ means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe and, in this case, means more than mere settling, cracking, shrinkage, bulging, or expansion.”

Because the newer collapse coverage forms usually define the term “collapse” as an actual falling down or caving in of a building or any part of a building, the Washington Supreme Court’s clarification on the definition of “collapse” will not be an issue. However, when the term “collapse” is undefined, the parties will likely engage in an expensive and prolonged battle of the experts as to what constitutes a building or part of a building to be “unfit for its function or unsafe,” and when such condition occurred.

 

Image courtesy of Flickr by Paul Sableman

Filed under Collapse, First Party Policy

Third Circuit Holds That Punitive Damages Award Against the Insured is Not Recoverable in Subsequent Bad Faith Action

By and on June 22, 2015
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In Wolfe v. Allstate Prop. & Casualty Ins. Co., Civil Action No. 12-4450, 2015 U.S. App. LEXIS 9876, (3d Cir. June 12, 2015), the Third Circuit, interpreting Pennsylvania law, held that punitive damages awarded against an insured in a personal injury suit may not be recovered in a later breach of contract or bad faith suit against the insurer. We covered the Wolfe case back in December when the Pennsylvania Supreme Court ruled that the insured could assign statutory bad faith claims to the underlying plaintiff.

In the underlying suit, Allstate’s insured rear-ended the plaintiff while under the influence of alcohol. The insured’s policy provided liability coverage up to $50,000, and required Allstate to defend suits by third parties arising out of automobile accidents, but provided that Allstate “would ‘not defend an insured person sued for damages which are not covered by this policy.’” Id. at *2. Plaintiff made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate provided Plaintiff with a counteroffer of $1,200, which plaintiff rejected. After the plaintiff filed suit, Allstate warned the insured that if the damages at trial exceeded his $50,000 policy limit, the insured would be personally responsible for the excess portion of the award. During the course of the litigation, Plaintiff learned of the insured’s intoxication and amended his complaint to include a claim for punitive damages. Allstate informed the insured about the potential for punitive damages, and reminded him “that those damages were not covered under his policy,” and that “Allstate would not pay that portion of [any] verdict, and he would be held responsible for it.” Id. at *3. Throughout the course of litigation, neither party moved from its initial offer or demand, and the case advanced to trial. At trial, the jury awarded Plaintiff $15,000 in compensatory damages, and $50,000 in punitive damages. Allstate paid the compensatory damage award, but not the punitive damage award. In return for plaintiff’s agreement not to enforce the punitive damages judgment against him personally, the insured assigned his rights against Allstate to plaintiff.

Prior to trial in the subsequent bad faith action, Allstate filed a motion in limine seeking to bar evidence of the punitive damages award in the underlying trial as damages in the bad faith suit, as Pennsylvania law prohibits an insurer from paying a punitive damages award. The District Court denied the motion, but the Third Circuit reversed, predicting the Pennsylvania Supreme Court would conclude “in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit.” Id. at *10. Thus, the District Court erred in denying Allstate’s motion in limine to preclude such evidence from being presented to the jury. Furthermore, based on this finding, the Third Circuit held “an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case.” Id. at *21. Imposing such a duty, the Third Court held, would be tantamount to making the insurer responsible for punitive damages, which are not insurable under Pennsylvania public policy. Based on these holdings, the Third Circuit granted Allstate a new trial on the bad faith claims, where plaintiff was barred from presenting evidence relating to the $50,000 in punitive damages, but was allowed to seek compensatory damages based on any injuries other than the punitive damages award.

Allstate also filed a motion for summary judgment on the breach of contract and bad faith claims prior to trial. Allstate argued that once the punitive damages award was removed from the plaintiff’s damages claim, the case should be dismissed because the underlying compensatory damage award was within policy limits and therefore the insured suffered no harm. The District Court denied the motion in its entirety. The Third Circuit affirmed the District Court’s denial, first noting that an insurer “can still be liable for nominal damages for violating its contractual duty of good faith by failing to settle.” Id. at *25. Secondly, the Third Circuit upheld the District Court’s denial of summary judgment on the statutory bad faith claim, as the statute makes no requirement that the plaintiff be entitled to damages for the insurer’s bad faith to bring such a claim. This holding reflects the policy behind the statute, which is intended to deter insurance companies from engaging in bad faith practices, not compensate injured insureds. Thus, an insured “does not need compensatory damages to succeed on his statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.” Id. at *28.

The Wolfe decision is particularly notable for its holding that (1) an insured cannot recover an underlying punitive damages award in a subsequent bad faith claim, and (2) an insurer is not necessarily obligated to consider the potential for punitive damages exposure in the underlying case when evaluating a claim for settlement. It remains to be seen whether a Pennsylvania state court would agree with the Third Circuit’s determination. In addition, Wolfe may have limited application going forward depending on the facts and circumstances of future cases.

Filed under Auto, Bad Faith, Punitive Damages

Indiana Supreme Court Refuses to Hear Insured’s Challenge to Pro Rata Allocation Ruling

By on June 11, 2015
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Indiana has traditionally been thought of as an “all sums” jurisdiction. Allstate Ins. Co. v. Dana Corp., 759 N.E.2d 1049, 1060 (Ind. 2001) (“whether or not the damaging effects of an occurrence continue beyond the end of the policy period, if coverage is triggered by an occurrence, it is triggered for ‘all sums’ related to that occurrence.”) However, the Indiana Supreme Court – over the strident dissent of its Chief Justice and one other Justice of the five Justice court – recently refused to hear an appeal from an intermediate appellate court decision which applied pro rata allocation in an insurance coverage action involving long-tail toxic exposure claims asserted by former employees against the insured. Thomson Inc. v. Ins. Co. of N. Am., 2015 Ind. LEXIS 397 (Ind. May 15, 2015).

In Thomson, the insured was sued by former Taiwanese employees who were allegedly exposed to industrial solvents from 1970 through 1992. These employees claimed that this exposure caused cancer, or increased their risk of developing cancer in the future.  The insured sought defense and indemnity under commercial general liability policies issued to it between 1991 and 2007. The insured contended that an all sums allocation method applied under the Indiana Supreme Court’s holding in Dana. The trial court agreed and issued an “all sums” ruling.

The appellate court reversed the trial court’s allocation holding. The appellate court distinguished Dana based on differences in the applicable policy language. Specifically, the insuring agreements at issue in Dana required the insured to “indemnify the insured for all sums. . .” the insured became obligated to pay because of an occurrence. Id. at n. 3-4. In contrast, the insuring agreements in the Thomson policies required the insured to “pay those sums. . .” the insured became obligated to pay “during the policy period.” Id. at 1003. The Thomson court held that this different, “limiting” policy language merited a departure from Dana: “the plain meaning of the limiting phrases ‘those sums’ and ‘during the policy period’ and does not render any of the remaining language meaningless.” Id. at 1020. In other words, the Thomson insurers only were required to cover damages occurring during the policy period and not all damages resulting from any occurrence during the policy period.

However, the Thomson court did not provide any guidance to the trial court as to the proper pro rata allocation method: it did not indicate whether “time on the risk,” “years and limits,” or some other method was advisable. Rather, the court remanded the allocation issue to the trial court:

The trial court will be best situated to select (and customize, if necessary) the fairest method of apportioning liability among the insurers in light of the factual complexities of the case at the appropriate time. And for that reason, we believe that the trial court should be afforded broad discretion in selecting and applying an apportionment method.

Id. at 1022-23.

There is no “one-size-fits-all” approach to allocation in Indiana in light of Thomson. Rather, as the Supreme Court dissenters recognized, courts applying Indiana law must engage in careful scrutiny of policy language to determine proper allocation in long-tail exposure cases. See Thomson Inc. v. Ins. Co. of N. Am., 2015 Ind. LEXIS 397, *2 (Ind. May 15, 2015) (Rush, C.J., dissenting) (“We should not burden trial courts with that task [of determining allocation] based on policy language that is ambiguous at best.”)

Filed under Allocation, Appellate, Commercial General Liability, Trigger of Coverage

Federal District Court Rejects Insureds’ $40 Million Bad Faith Claim

By and on June 9, 2015
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In Kollman v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 1:04-cv-3106-PA, Judge Owen Panner of the United States District Court for the District of Oregon recently ruled as a matter of law that even though National Union incorrectly denied coverage to its insureds, National Union did not act in bad faith in refusing to defend the underlying case. Therefore, the Court found that National Union was not liable for a $40 million judgment against the insureds.

The coverage litigation stemmed from a lawsuit filed in 2002 by Daryl Kollman against National Union’s insureds. The insureds tendered Kollman’s claims under an Executive and Organization Liability Policy. National Union denied coverage, relying primarily upon the “insured-versus-insured” exclusion, which excluded coverage for claims brought by an insured against another insured. Kollman was a former director of the insured’s subsidiary, and National Union stated that coverage for his claim was excluded. National Union declined to participate in the defense of the insureds and did not attempt to settle the matter within the $5 million policy limits.

The state court trial resulted in a $40 million judgment against the insureds. The insureds sued National Union, alleging they were entitled to coverage and that National Union acted in bad faith by unreasonably denying coverage and by failing to settle with Kollman for policy limits when it purportedly had the opportunity to do so. The insureds sought to hold National liable for the $40 million judgment, plus attorney fees and costs.

On summary judgment, the Court concluded that National Union had incorrectly denied coverage based on the policy’s insured-versus-insured exclusion, and it therefore had a duty to defend. However, the Court granted National Union’s Motion for Summary Judgment on the bad faith claims. Relying upon Georgetown Realty v. Home Ins. Co., 313 Or. 97, 831 P.2d 7 (1992), the Court ruled that Oregon law did not permit a bad faith failure-to-settle claim against an insurer that did not assume the duty to defend in the first instance. The Court also ruled that even though National Union was incorrect in its coverage determination with respect to the insured-versus-insured exclusion, its coverage decision was reasonable. The Court therefore dismissed all bad faith claims.

Filed under Bad Faith, Exclusion, Executive and Organization Liability Policy

Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance

By on June 4, 2015
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Gordon & Rees Partner, Matthew Foy, recently co-authored an article published in the Spring 2015 edition of DRI’s In-House Defense Quarterly, entitled “Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance.” The article addresses the implications of the November 2014 Sony data breach and discusses why companies of all sizes should be giving a hard look at the cyberinsurance market and not simply relying on their CGL policies.

To read the full article, click here.

Filed under Cyberinsurance, Data Breach

Pennsylvania Supreme Court Holds That Employer’s Liability Exclusion Does Not Exclude Coverage for Employee Claim Against Non-Employer Additional Insured

By on June 1, 2015
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The Pennsylvania Supreme Court recently held that an employer’s liability exclusion in an umbrella policy did not apply to a claim brought by the named insured’s employee against an additional insured. Mutual Benefit v. Politsopoulous, — A.3d — (Pa. 2015). In Politsopoulous, the insurer issued a commercial umbrella liability policy to a restaurant that conferred additional insured status on the restaurant’s landlord by virtue of the policy’s blanket additional insured endorsement and the corresponding insurance requirements of the lease agreement. A restaurant employee sued the landlord for injuries sustained when she fell down a flight of stairs. The insurer denied the landlord’s request for coverage based on the employer’s liability exclusion and filed a declaratory judgment action in the Lancaster County Court of Common Pleas.  That exclusion barred coverage for an injury to “[a]n ‘employee’ of the insured arising out of and in the course of . . . [e]mployment by the insured].” Mutual Benefit contended that the phrase “the insured” meant that coverage was excluded for injuries to employees of the named insured, while the additional insured contended that the exclusion should be applied separately to each insured seeking coverage. In other words, because the plaintiff was not the landlord’s employee, the exclusion should not apply.

The trial court granted summary judgment in favor of Mutual Benefit explaining that it was bound by Pa. Mfrs’ Assoc. Ins. Co. v. Aetna Cas. & Sur. Ins. Co., 233 A.2d 548, 549 (Pa. 1967). In that case, the court held that the phrase “’[t]he insured’ has not been interpreted to mean ‘an insured’ or ‘any insured.’ It has merely been interpreted as the language dictates, to include the named insured.” 33 A.2d at 550. Because it was bound by PMA, the trial court held that the phrase “the insured” in the restaurant policy’s employer’s liability exclusion encompassed the named insured as a matter of law. Accordingly, the trial court held that the exclusion applied because the employee suing the additional insured was an employee of the named insured. The trial court, however, criticized the logic of the PMA decision and invited appellate review.

The Superior Court reversed the trial court on the basis of the policy’s severability clause, explaining that the severability clause required the court to take the following approach to policy interpretation:

When determining coverage as to any one insured, the policy must be applied as though there were only one insured, i.e., the one as to which coverage is to be determined . . . [this] policy language directs us to evaluate coverage as though Employer does not exist.

Mut. Benefit Ins. Co. v. Politopoulos, 75 A.3d 528, 536 (Pa. Super. Ct. 2013). Accordingly, the Superior Court reasoned that, when treating the landlords as the only insureds under the policy, the employer’s liability exclusion did not apply since the landlords did not employ the underlying plaintiff. Id. at 537.

The Supreme Court affirmed the Superior Court’s decision, but disagreed with its reasoning. Though it did not overrule PMA, the Politsopoulous Court “decline[d] to extend PMA’s expansive construction of the term ‘the insured’ to an instance in which a commercial general liability policy variously makes use of the terms ‘the insured’ and ‘any insured.’” Accordingly, the Court held that the phrase “the insured” was ambiguous: “[A]t least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonable taken as signifying the particular insured against whom a claim is asserted.” Since, under Pennsylvania law, ambiguous exclusionary language is construed against the insurer, the Politopoulos court held that the exclusion did not apply because “the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed.”

Although the outcome of this particular case is not surprising, the Supreme Court provided an articulate analysis of how the use of definite and indefinite articles in association with the word “insured” throughout a policy can give rise to an ambiguity when considered in the context of particular policy exclusions. The debate over “the insured” versus “any insured” is sure to continue, but we can expect the Politopoulos case to be a part of that discussion in Pennsylvania going forward.

Filed under Commercial General Liability, Employer’s Liability, Exclusion

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