The Scope of Continuous Trigger in Pennsylvania

The continuous trigger rule is well-known to those in the insurance industry. However, the scope of its application continues to evolve as new risks emerge. While the concept of continuous trigger generally came about to address long-tail environmental pollution and asbestos bodily injury claims, the courts that first implemented and adopted the rule were not facing claims based on sexual molestation, sports-related concussions, wrongful incarceration, large-scale construction defects, complex food recalls, etc.

Pennsylvania has long been a first manifestation state, meaning that only the policy on the risk when underlying bodily injury or property damage is first known or reasonably ascertainable must respond to a loss. The Pennsylvania Supreme Court adopted the continuous trigger rule in J.H. France, which involved coverage for asbestos bodily injury claims. J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993). The continuous trigger rule, over time, has also been applied to pollution cases.

For that reason, the industry took great interest in the St. John case, decided at the end of 2014, in which the Pennsylvania Supreme Court rejected efforts by an insured to trigger four years of consecutive policies in connection with an underlying lawsuit alleging that the insured’s defective installation of a new plumbing system caused damage to a dairy farm. Pennsylvania Nat. Mut. Cas. Ins. Co. v. St. John, 106 A.3d 1 (Pa. 2014). Specifically, the insured installed the new plumbing system in 2003, the dairy farm’s cows suffered health problems and produced less milk starting in 2004, and the dairy farm owners discovered the cause – contaminated drinking water due to defects in the plumbing system – in 2006. The court ruled that the 2004 policy was the only triggered policy, but it made a few comments that raised eyebrows. The court noted that Pennsylvania follows the first manifestation rule, “with the lone exception of asbestos injury claims” and that “[o]ur holding in J.H. France remains an exception to the general rule under Pennsylvania jurisprudence that the first manifestation rule governs a trigger of coverage analysis for policies containing standard CGL language.”

The Pennsylvania Supreme Court’s strict application of the manifestation trigger, and its characterization of the exception being limited to asbestos claims, caused a ripple effect in non-asbestos related coverage actions such as pollution cases involving damage that occurs across multiple policy periods. While experience thus far has shown that trial courts are hesitant to apply St. John to limit coverage for pollution claims to a single policy year, the issue is still lingering in many cases. St. John most recently surfaced in the Penn State coverage action related to underlying claims brought against the school by victims of convicted child molester Jerry Sandusky. There, a Philadelphia trial court judge ruled that a victim’s continued sexual abuse over time does not justify application of the continuous trigger rule, and that Penn State could only access the policy during which the bodily injury to a particular victim first manifested. Pa. State Univ. v. Pa. Manufacturers’ Ass’n Ins. Co., 2016 Phila. Ct. Com. Pl. LEXIS 158 (May 4, 2016). Interestingly, the court stated that sexual abuse was different from “environmental pollution or asbestos coverage,” meaning that perhaps the court did not read St. John so literally.

Whether the court intended it or not, the sound bites in the St. John decision still have insurers and insureds paying close attention to the scope of the continuous trigger rule.

Wisconsin Supreme Court Rules That Inclusion of Defective Ingredient Does Not Constitute Property Damage

In Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., et al., 2016 Wisc. LEXIS 12 (March 1, 2016), the Wisconsin Supreme Court in a 3-2 decision determined that two insurers had no duty to cover claims related to damages caused by the inclusion of a defective ingredient in a probiotic supplement because the inclusion of the defective ingredient did not damage other property and did not result in loss of use of property.

Brief Factual Background

Wisconsin Pharmacal Co., LLC (“Pharmacal”) manufactured a chewable Daily Probiotic Feminine Supplement which contained various ingredients, including a probiotic bacterial species known as Lactobacillus rhamnosus (LRA). In July of 2008, Pharmacal contracted with Nutritional Manufacturing Services, LLC (“NMS”) to procure LRA and manufacture the tablets. NMS in turn contracted with Nebraska Cultures for the LRA, and Nebraska Cultures then bought the LRA from Jeneil. The problem, of course, was that Jeniel supplied NMS with the wrong bacteria.

NMS manufactured the tablet with the ingredient it believed to be LRA but discovered that it had used a different bacteria known as Lactobacillus acidophilus (LA). In April 2009, after Pharmacal packaged and supplied the supplement to its retailer, Pharmacal learned that the supplement contained LA instead of LRA. As a result, the retailer recalled the supplement and Pharmacal destroyed the tablets containing the defective ingredient. NMS assigned its causes of action against Nebraska Cultures and Jeneil to Pharmacal, which sued Nebraska Cultures and its general liability insurer, Evanston Insurance Co., as well as Jeneil and its general liability insurer, The Netherlands Insurance Co.


The insurers filed motions for summary judgment, arguing that they did not owe coverage for the loss. The trial court concluded that the insurers had no duty to defend because the incorporation of a defective probiotic ingredient into the tablets did not constitute “property damage caused by an occurrence” because only the product itself was harmed. The intermediate appellate court reversed, concluding the policies provided coverage. The Wisconsin Supreme Court reversed the appeals court and determined that no coverage existed under the policies.

The Netherland’s CGL policy provided coverage for Jeneil’s losses that the “insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’…caused by an ‘occurrence.’” The policy defined property damage as “a) Physical injury to tangible property, including all resulting loss of use of that property. . . .; or (b) Loss of use of tangible property that is not physically injured.”

Evanston’s CGL policy similarly provided coverage for Nebraska Cultures’ losses arising out of “bodily injury” or “property damage” caused by an “occurrence.” The policy defined “property damage” as “physical injury to or destruction of tangible property including, consequential loss of use thereof; o[r] loss of use of tangible property which has not been physically injured or destroyed.”

No Property Damage

The majority determined that there was no property damage, because combining a defective ingredient with other ingredients and incorporating them into supplement tablets formed an “integrated system,” or unified whole. Therefore, the Court reasoned that the defective ingredient (LA), could not be separated from the other ingredients, and no damage resulted to property other than ingredients of the integrated system.  Because the injury was sustained by the integrated system itself, the resulting damage caused by LA’s inclusion in the tablet did not occur to other property.

The Court additionally noted that the defective ingredient rendered the tablets inadequate for their contracted purpose; however, the mere presence of a defective ingredient did not render them hazardous. For this reason, the Court concluded there was no property damage under the Evanston policy.

No Loss of Use

Similarly, the majority rejected the parties’ argument that the incorporation of a defective ingredient rendered the other ingredients and the supplement tablets totally useless to Pharmacal, thereby constituting property damage due to “loss of use of tangible property that is not physically injured.” The Court reiterated that a “diminution in value, even to the point of worthlessness” was not the same as “loss of use.” The Court rejected the insured’s argument and found that Pharmacal did not actually lose use of the tablets, but rather lost the value of the tablets. Thus, the Court held that there was no property damage due to “loss of use of tangible property that has not been physically injured.”

No Occurrence

The policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Although it was undisputed that Jeneil’s provision of the defective ingredient was accidental, the Court was not persuaded that the “accidental provision” of a defective ingredient, standing alone, satisfied the Netherlands policy’s definition of occurrence. Under Wisconsin’s American Girl case, the negligent conduct is not the occurrence, but it can cause an “occurrence,” which in turn causes property damage. Here, the provision of the defective ingredient did not cause an occurrence that led to property damage. In other words, the defective ingredient did not cause other property to malfunction or a third party to get sick, so the provision of the defective ingredient alone was not an occurrence.

The Court applied California law to the Evanston policy and followed a line of cases finding that deliberate conduct cannot be an occurrence even if the insured did not intend to cause the injury. So although Jeneil’s provision of a defective ingredient may have been negligent, Jeneil deliberately supplied the ingredient to Nebraska Cultures and intended the ingredient to be incorporated into the tablets. Given the deliberate nature of these actions, the Court found that the provision of a defective ingredient cannot be said to constitute an “occurrence” under California law.

In a dissenting opinion, Justice Shirley S. Abrahamson she disagreed with the majority opinion’s “unwise and unprecedented” application of the integrated system rule, which originates in the economic loss doctrine, to the interpretation of insurance policies. Justice Abrahamson, who was joined in the dissent by Justice Ann Walsh Bradley, compared the application of the economic loss doctrine to the alien creature in the classic science fiction film “The Blob,” noting the doctrine was often incoherent. Justice Abrahamson criticized the majority’s decision for infusing the economic loss doctrine, a tort principle, into insurance policy interpretation. Justice Abrahamson feared that the majority’s approach departed from a reviewing Court’s normal duty of strictly interpreting the plain language of the subject insurance policy.

This decision is available here.

Liquor Liability Exclusion Bars Coverage for the Four Loko Bodily Injury Lawsuits

In Phusion Projects, Inc. v. Selective Ins. Co., No. 1-15-0172, 2015 Ill. App. LEXIS 942 (Ill. App. Dec. 18, 2015), the manufacturers of the alcoholic beverage “Four Loko” (collectively “Phusion”) filed a declaratory judgment action seeking a declaration that their commercial liability insurer was required to defend and indemnify Phusion in six underlying bodily injury claims. Selective claimed it was not required to defend Phusion because of the policy’s liquor liability exclusion. The trial court agreed and dismissed Phusion’s complaint. Phusion appealed, and the Appellate Court affirmed the underlying decision.

Four Loko is a fruit-flavored malt beverage which contains 12% alcohol by volume, as well as taurine and guarana. During the relevant time period, Four Loko also contained 135 milligrams of caffeine. The underlying suits alleged that the plaintiffs’ injuries were caused by either their own or another individual’s consumption of Four Loko and subsequent intoxication, mainly due to the inclusion of the stimulants in the Four Loko product.

The CGL policy excluded coverage for “bodily injury…for which any insured may be held liable by reason of (1) causing or contributing to the intoxication of any person.” The exclusion applied only where the insured was “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In its initial motion to dismiss the declaratory judgment action, Selective relied on the policy’s liquor liability exclusion. Selective cited to a Federal District Court opinion excluding coverage for Phusion based on an identical liquor liability exclusion. Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 WL 123921 (N.D. Ill. Jan 17, 2012). Phusion argued the underlying lawsuits were not based on liquor liability, but were based on “stimulant liability,” pointing to the allegations that Phusion was liable for adulterating its Four Loko products with caffeine, guarana, and taurine. Phusion pointed to the underlying plaintiffs’ claims that the addition of these stimulants desensitized consumers of Four Loko to the symptoms of intoxication, and caused them to act recklessly. In its reply, Selective relied on the Seventh Circuit’s holding in Netherlands, which recognized that “the presence of energy stimulants in a [sic] alcoholic drink has no legal effect on the applicability of a liquor liability exclusion.” The trial court held the terms of the insurance policy and liquor liability exclusion made it “clear that coverage is excluded when there are claim[s] that an individual sustained bodily injury caused by intoxication,” and therefore Selective had no duty to defend or indemnify Phusion for the lawsuits.

On appeal, Phusion argued that the exclusion did not apply to manufacturers, but rather only to “those in the liquor business to preserve host liquor liability coverage.” Phusion relied on cases establishing that the voluntary consumption of alcohol is the proximate cause of an injury rather than the manufacture of the beverages. The Appellate Court rejected this argument as relevant only to Phusion’s liability in the underlying suits, and not Selective’s duty to defend or indemnify Phusion in those suits. The court instead followed the Seventh Circuit’s interpretation of the exclusion in Netherlands, finding the plain and ordinary meaning of the exclusion applied to “claims of bodily injury…where Phusion may be held liable because it either caused or contributed to the intoxication of any person,” an exclusion which applied specifically to those in the business of manufacturing alcoholic beverages.

Phusion also argued that intoxication was not the “sole and proximate cause” of the injuries asserted in the underlying lawsuits, but that some allegations such as the addition of stimulants to the product fell outside the liquor liability exclusion and were therefore potentially covered by the policy. The court disagreed, finding that Illinois law actually requires an allegation of a proximate cause “wholly independent” from the excluded coverage. The court found that “in order for the underlying lawsuits at issue here to fall within the insurance policy and, thus, outside the liquor liability exclusion, each of the complaints must allege facts that are independent from the event that led to the injury,” requiring that the underlying complaints allege facts “that are independent of ‘causing or contributing to the intoxication of any person.’” Here, it was impossible for anyone to suffer injuries due to the inclusion of stimulants in the product absent consumption of and subsequent intoxication due to Four Loko. It was “[t]he supply of alcohol, regardless of what it is mixed with,” that was “the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.” Quoting the Seventh Circuit, the Court found Phusion’s decision to mix energy stimulants and alcohol “might not have been a very good one,” but did “not amount to tortious conduct that is divorced from the serving of alcohol.” Therefore, the allegations of the underlying complaint fell within the liquor liability exclusion, and Selective had no duty to defend Phusion in the underlying actions.

Courts often struggle with whether to apply policy exclusions in the face of alternative theories of liability in the underlying case, especially when one of those theories arguably falls outside the scope of the exclusion. Here, however, the court appropriately relied on the broad scope of the exclusion and rejected the insured’s efforts to circumvent the exclusion by parsing the allegations of the underlying complaint.

Food Fight: Chicken Producer Awarded Coverage Under Accidental Contamination and Government Recall Coverage Parts

In Foster Poultry Farms, Inc. v. Certain Underwriters at Lloyd’s, London, Civil Action No. 1:14-953, 2015 U.S. Dist. LEXIS 138609 (E.D. Cal. Oct. 9, 2015), the Eastern District of California, applying New York law, granted plaintiff-chicken producer Foster Poultry Farms’ (“Foster”) motion for partial summary judgment on its declaratory relief action, and denied the defendant-insurers (“Lloyd’s”) motion for summary judgment on both of Foster’s claims.

11-19During the relevant policy period, the United States Department of Agriculture Food Safety and Inspection Service (“FSIS”) issued a Notice of Intended Enforcement (“NOIE”) to withhold marks of inspection for products produced at Foster’s facility, making the chicken products ineligible for sale. As a result, Foster destroyed 1.3 million pounds of chicken. Foster then submitted a claim to Lloyd’s seeking coverage under its product contamination policy for over $12 million in expenses associated with the destruction of the chicken. The policy provided coverage for all “loss” arising out of “insured events,” the two of which at issue in this case were “accidental contamination” and “government recall.” Lloyd’s denied coverage under both provisions of the policy, leading Foster to file an action for declaratory relief and breach of the insurance contract.

On cross-motions for summary judgment, the Court first found that coverage existed under the Accidental Contamination provision of the policy, which provided coverage where Foster could demonstrate “(1) an error in the production of its chicken product, (2) the consumption of which ‘would lead to’ bodily injury.” The first step was established by Foster’s failure to comply with federal sanitation regulations, which resulted in a high frequency of salmonella in the finished chicken products and an outbreak of salmonella illness in the community. The court found compliance with the federal regulations was “vital to controlling food safety hazards during [food] production,” and a failure to do so therefore constituted an “error” in the production of the chicken product.

The second element required showing that the “‘erroneously produced’ chicken product ‘would lead to bodily injury, sickness, disease or death.’” Lloyd’s denied coverage on the basis that Foster had to prove actual contamination of the chicken in order to establish that consumption would be harmful. While Lloyd’s cited heavily to cases that validated denials of coverage due to an insured’s inability to prove actual contamination, the Court determined these cases were distinguishable from Foster’s because coverage under Foster’s policy was triggered by an error in production, not actual contamination. The Court noted, however, that even if Foster’s policy did require actual contamination, that requirement would have been met, because it was undisputed that Foster’s chicken product consistently tested positive for salmonella in the six months prior to its destroying the product for which it sought coverage.

Lloyd’s also argued that the presence of salmonella did not by itself render the product harmful because normal cooking practices would destroy the salmonella organism. The Court rejected this argument, as FSIS identified the Foster facility as the likely source of a salmonella illness outbreak in over two hundred people from fifteen states across the country. Finally, Lloyd’s argued that the policy language required Foster to demonstrate a causal link between its “error” and injury that would have resulted from consuming the product. The court rejected this argument, finding Foster only needed to prove that an error occurred and that the product would have caused harm if consumed, as the provision did not use any causation language. The Court therefore granted Foster partial summary judgment on the accidental contamination policy.

The Court also granted Foster’s motion for partial summary judgment on the government recall provision. The Policy provided coverage for “a voluntary or compulsory recall of Insured Products arising directly from a Regulatory Body’s determination that there is a reasonable probability that Insured Products will cause ‘serious adverse health consequences or death.’” Lloyd’s denied coverage because Foster’s destruction of its product did not constitute a “recall” given that the chicken never left Foster’s control and was never introduced into the stream of commerce. Foster argued that the destroyed chicken had been recalled because the policy’s definition of pre-recall expenses included ascertaining whether the product was contaminated and the potential effects of such contamination, and recall expenses included destroying contaminated products without mention of who was in possession of the product. The Court found both interpretations of the term were reasonable, but because the term was subject to more than one interpretation it was deemed ambiguous, and the contract was thus interpreted in favor of Foster as the insured.

As the body of case law interpreting the newer wave of specialty policies in the food and beverage industry continues to grow, it is extremely important for insurers to analyze the specific policy language and recall/contamination scenarios at issue in those cases when evaluating coverage under their own policies. This particular case has some interesting takeaways on issues such as causation and ambiguity that should guide us going forward.

Illinois Supreme Court Slams Door on Long-Tail Toxic Tort Claims Against Employers

We previously wrote about the potential new risks facing employers’ liability insurers in light of recent case law from Pennsylvania and Illinois permitting employees to maintain long-tail occupational disease claims against former employers in the tort system, outside of the traditionally exclusive workers compensation regimes. For now, employers and their insurers can breathe a sigh of relief, at least in Illinois.

On November 4, 2015, the Illinois Supreme Court reversed an Illinois intermediate appellate court which had permitted an employee’s estate to sue his former employer in the tort system. Folta v. Ferro Eng’g, 2015 IL 118070 (Ill. Nov. 4, 2015). That employee, James Folta, worked for Ferro Engineering from 1966 to 1970 as a shipping clerk and product tester, and allegedly developed mesothelioma in part as a result of his exposure to asbestos-containing products at Ferro. The intermediate appellate court held that the identical exclusivity provisions in the Illinois Workers’ Occupational Disease Act and the Workers’ Compensation Act (collectively, the “Act”) did not bar Folta’s tort claim against Ferro because he first discovered his asbestos-related injury outside of the Act’s statute of repose. Folta v. Ferro Engineering, 14 N.E.3d 717 (Ill. App. Ct. 1st Dist. 2014).

In reversing the appellate court, the Illinois Supreme Court held that Folta’s tort claim against Ferro was barred by the exclusive remedy provisions of the Act even though Folta had no rights under the Act because his injuries manifested after the 25-year statutory time limits to file claims. Under Illinois law, “an employee can escape the exclusivity provisions of the Act if the employee establishes that the injury (1) was not accidental; (2) did not arise from his employment; (3) was not received during the course of employment; or (4) was not compensable under the Act.”  Id. at *14. In Folta, the plaintiff argued – and the intermediate appellate court accepted – that his claim was “not compensable” because his disease manifested outside of the Act’s statutory time limits to file a claim. In other words, plaintiff argued that “he never had an opportunity to recover any benefits under the Act. That is, through no fault of his own, the claim was time-barred before his disease manifested.” Id. at *16. On the other hand, the employer argued that an injury was “compensable” if the type of injury fell within the scope of the Act, regardless of whether an employee could recover thereunder.

The Folta court agreed with the employer, explaining that the legislatively-enacted time limit acts as a “statute of repose, and creates an absolute bar on the right to bring a claim.” Id. at *33. Further, the Folta court explained that such a statute of repose was not manifestly unfair because the time limitation did “not prevent an employee from seeking a remedy against other third parties for an injury or disease.” In dissent, however, Justice Freeman heralded Pennsylvania’s “persuasive” Tooey decision, which permitted employees to sue their former employers in tort for long-tail occupational disease injuries.

It remains to be seen whether other jurisdictions will follow the Pennsylvania or Illinois approach but, for now, employers and their employers’ liability insurers should continue to be prepared to address these potential newfound liabilities.

Insurer Bound by Renewal Endorsement in Expiring Policy to Offer “Substantially Similar” Coverage Despite Known Losses

In a somewhat unusual insurance coverage case, the Third Circuit gave teeth to a “renewal” clause contained within a ten-year pollution and remediation policy and prohibited the insurer from materially changing the policy terms for the renewal period. Indian Harbor Insurance Co. v. F&M Equipment, Ltd., No. 14-1897 (3d Cir. 2015). Indian Harbor issued a ten-year pollution policy with a $10 million dollar limit (later upped to $14 million) to F&M Equipment’s predecessor in 2001 that covered twelve specific sites (the “Policy”). The Policy contained an endorsement (the “Renewal Endorsement”) requiring Indian Harbor to offer F&M a renewal unless one of five specific enumerated conditions was met.

Indian Harbor, however, offered a materially different “renewal” policy: a one-year policy with a $5 million dollar limit that excluded coverage for one of the twelve sites (the only site where claims had been made). F&M rejected Indian Harbor’s offer and asserted that the Renewal Endorsement required Indian Harbor to provide a renewal policy with terms and conditions that are identical to the original Policy. After the insured sent Indian Harbor a premium check for a renewal policy, Indian Harbor filed a declaratory judgment action. Indian Harbor succeeded in obtaining a declaratory judgment from the district court, which reasoned that Pennsylvania law permits a “renewal” of a policy with different terms and conditions, provided that the insured is given notice of the different terms.

The Third Circuit reversed and remanded to determine the remedy for Indian Harbor’s breach of the Policy. Though it noted that there was scant authoritative Pennsylvania law on point the court was persuaded by the Eighth Circuit’s decision in McCuen v. Am. Cas. Co., 946 F.2d 1401, 1403 (8th Cir. 1991), and held that Indian Harbor’s “renewal” obligation required it to offer F&M a policy with substantially similar terms and conditions. The court specifically rejected Indian Harbor’s argument that its “renewal” obligation was met as long as the policy was not commercially unreasonable: “the relevant provision of the contract is a promise to offer a renewal, not a reasonable insurance contract.”

The Indian Harbor court, however, declined to fully answer the relevant question presented by the case: “how similar the new contract must be” to constitute a “renewal.” Instead, the particular facts of the case lead to the court’s holding that “regardless of the particular degree of similarity required, Indian Harbor’s position cannot be what the parties intended.” In short, the court explained, a renewal policy requires greater similarity to the original policy than just the same parties and “general subject matter.”

The Indian Harbor decision leaves a number of unanswered questions. First, while a “renewal need not be identical to the original,” the court declined to provide any guidance as to how similar a “renewal” must be.  Second, while the court suggested that an insurer could demand a “reasonable change in price” for a renewal, it did not define “reasonable.” Although the court did not allow the insured to exclude coverage for a site with known losses, it left open the question as to how the insurer may price the risk and what constitutes a reasonable change. Finally, the court punted on the question of whether the renewal provision itself is a substantially similar term which must be included in any renewal policy, leaving open the possibility that an insurer issuing a policy with a “renewal” term is obligated to cover an insured along the same terms and conditions in perpetuity. This is certainly a unique case but it deserves attention to the extent that the district court on remand holds the insurer to a potentially absurd result that was not intended by the parties at the time of contracting.

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

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.

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

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.”)

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

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.

Delinquent Claims Are Timely Claims: Eighth Circuit Declares Notice Provision Ambiguous

In George K. Baum & Co. v. Twin City Fire Insurance Co., No. 12-3982 (8th Cir. July 16, 2014), the Eighth U.S. Circuit Court of Appeals ruled that the “as soon as practicable” notice language in a claims made professional services policy was ambiguous, rejecting the insurer’s late notice defense.

The insured, a municipal bonds dealer, secured professional services insurance from Twin City for a policy period from 2003 to 2004.  In 2003, the Internal Revenue Service opened an investigation based on the insured’s faulty representation that interest on the municipal bonds was tax exempt.  The insured notified its insurer of actual claims by the IRS and future potential claims by the insured’s municipal clients.  The insurer treated the IRS investigation as a claim under the policy and the insured ultimately settled with the IRS for $7.7 million without admitting misconduct.  In 2008, two years after settling with the IRS, various municipalities filed derivative suits against the insured, which were consolidated into an MDL in Southern District of New York.  The insured did not notify Twin City of the litigation until 2010, another two years later.

The insurer initially denied coverage on the basis that the derivatives claims were not claims made during the 2003-2004 policy period, but it later withdrew its position because the claims related back to the timely-reported IRS investigation.  The insurer also denied coverage based on late notice, arguing that under New York law, it did not have to prove prejudice.

The U.S. District Court for the Western District of Missouri ruled that Missouri law applied and that the insurer could not prove the prejudice required to deny coverage based on late notice.  The Eighth Circuit Court of Appeals affirmed rejection of the late notice defense, but on different grounds.   The court first ruled that New York law applied because the policy was issued to the insured’s office in New York specifically to avoid paying Missouri’s surplus lines tax.  Although the insurer was correct that it was not required to prove prejudice under New York law, the court found that the policy’s notice requirement was ambiguous.

The policy’s insuring agreement required notice “as soon as practicable, but in no event later than sixty (60) days after the POLICY EXPIRATION DATE” in 2004.  The policy also provided that “all claims based upon, or arising out of, the same wrongful act or interrelated wrongful acts shall be considered a single claim for all purposes…which shall be deemed first made at the time the earliest of all such claims was first made.” Thus, the court concluded that the subsequent multi-district litigation “constitute[d] ‘a single claim for all purposes,’ including notice” that was provided in 2003.  The court also found that the “as soon as practicable requirement” was ambiguous when considered in conjunction with the 60-day time limitation and the relation back language.  Finally, the court rejected the insurer’s alternative argument that the insured’s interpretation would allow it “to wait weeks, months or even years” before providing notice. The court was unpersuaded by “the complaints of a poor draftsman” and it warned that it would not “rescue an insurer from its own drafting decisions.”

Baum reminds us that courts continue to construe notice provisions generously in the insured’s favor and encourages a vigilant approach both to drafting and to litigation strategy regarding how that drafting might be later perceived by a court.