Oregon Supreme Court Bars Plaintiff From Executing on Covenant Judgment Against the Defendant’s Insurer

By on October 26, 2015
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The Oregon Supreme Court recently answered a question certified to it by the Ninth Circuit Court of Appeals, which asked whether a settlement agreement that released an insured from liability could be amended to revive the liability of the insured so that the plaintiff could seek recovery from the insurer. The Oregon Supreme Court concluded that, based upon the theory presented by the plaintiff, the settlement agreement could not be amended. A&T Siding v. Capitol Specialty Insurance Corp., ___ Or. ___ (Oct. 8, 2015)

The case arose out of a lawsuit by the Brownstone Homes Condominium Association related to construction defects in the condominium complex, which Brownstone alleged were caused in part by A&T Siding. Capitol Specialty and Zurich insured A&T for the relevant time period. Capitol initially defended A&T, but withdrew its defense when it concluded that the damage alleged by Brownstone was not covered.

Brownstone later settled with A&T via a “covenant judgment.” Under the agreement, judgment would be entered against A&T for $2 million and Zurich would pay $900,000 of that judgment. A&T agreed to assign its rights against Capitol to Brownstone, and Brownstone covenanted not to execute the judgment against A&T or its assets. Instead they agreed that Brownstone would be entitled to seek recovery of the unexecuted portion of the judgment from Capitol. The parties also agreed to release each other from “all past, present and future claims” arising out of the dispute.

Brownstone then began garnishment proceedings against Capitol for the unpaid portion of the judgment. Capitol moved for summary judgment, arguing that because the settlement agreement released A&T from all liability, Capitol was likewise released from liability. The trial court agreed and entered judgment in Capitol’s favor. The court relied in part upon its decision in Stubblefield v. St. Paul Fire & Marine, 517 P.2d 262 (1973), which also involved a covenant judgment. The settlement agreement in Stubblefield excused the insured from any obligation to pay the judgment, and the insurance policy limited the insured’s coverage to sums the insured was “legally obligated” to pay. The court therefore held the underlying plaintiff had acquired no enforceable claims or rights against the insurer under the assignment.

Following the entry of judgment, Brownstone and A&T executed an “addendum” to their settlement agreement. Among other things, the addendum eliminated the original assignment to Brownstone of A&T’s claims and required A&T to pursue those claims itself under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional release of all parties with a release only of Zurich.

A&T then sued Capitol and the case eventually found its way to the Ninth Circuit, which certified the following question to the Oregon Supreme Court:

The parties’ original settlement agreement, under which [Brownstone] released A&T from liability and signed a covenant not to execute the stipulated judgment against A&T, was construed pursuant to Stubblefield * * * to also release A&T’s insurer, [Capitol] from liability. The parties to the agreement assert that such a construction is contrary to the parties’ intent. Under Oregon law, may the parties amend their settlement agreement to reflect their original intent, and thereby restore the insurer’s duty to provide coverage for A&T’s resulting liability to the extent its policy provides coverage for the loss alleged by Brownstone?

The Oregon Supreme Court accepted the certified question. Capitol argued that Brownstone originally released A&T from any liability and that the addendum they created could not undo that release in the absence of the trial court rescinding or reforming the settlement agreement. A&T argued that it and Brownstone did not intend for the language in the original settlement agreement to have the legal effect the trial court gave it. It further argued that the parties reformed the original settlement agreement when they created the addendum, even though they did not call on the equitable authority of a court to reform the agreement. A&T therefore argued that the addendum should relate back to the original settlement agreement.

The Oregon Supreme Court rejected A&T’s argument. It did not reach the question of whether A&T and Brownstone could privately reform the contract without court approval. Instead it concluded among other things that A&T and Brownstone were not entitled to the equitable remedy of reformation based on A&T’s “mistake of law” argument that the language in the original agreement had unintended consequences. Accordingly, the insured and plaintiff could not reform the original settlement agreement.

The court left open the possibility that other legal or equitable theories not argued by the parties might justify treating the addendum as relating back to the original settlement agreement, though it did not explain what those theories might be. It is clear, however, that Stubblefield remains the law in Oregon. Insurers faced with a settlement agreement and covenant judgment in Oregon should always examine the settlement documents carefully to determine whether the agreement releases the insured from all liability. In such a case the insurer may have a strong argument that it is not obligated to fund the settlement.

Filed under Commercial General Liability, Consent to Settle, Covenant Judgments, Garnishment Proceeding, Reformation

East Versus West: Washington Federal District Courts Offer Differing Views on IFCA Claims

By and on August 3, 2015
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The Washington Insurance Fair Conduct Act (“IFCA”) is generating some interesting divisions in the Washington Federal District Courts. As previously reported, Judge Marsha J. Pechman recently ruled in May, 2015 that an IFCA cause of action is only available to insureds under first party insurance policies, but not third party liability policies. This post discusses how cases brought under the IFCA are being examined differently between the Eastern and Western Federal District Courts of Washington.

As a brief background, IFCA (RCW 48.30.015) states, in part, as follows:

(1) Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.

(2) The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.

(3) The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

…

(5) A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined”;

(b) WAC 284-30-350, captioned “misrepresentation of policy provisions”;

(c) WAC 284-30-360, captioned “failure to acknowledge pertinent communications”;

(d) WAC 284-30-370, captioned “standards for prompt investigation of claims”;

(e) WAC 284-30-380, captioned “standards for prompt, fair and equitable settlements applicable to all insurers”; or

(f) An unfair claims settlement practice rule adopted under RCW 48.30.010 by the insurance commissioner intending to implement this section. The rule must be codified in chapter 284-30 of the Washington Administrative Code.

The Western Federal District Courts have held that an IFCA cause of action is only available if the insured shows that the insurer unreasonably denied a claim for coverage or that the insurer unreasonably denied payment of benefits, but not if the insurer only violated the Washington Administrative Code (“WAC”) provisions. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2010 U.S. Dist. LEXIS 110866 (W.D. Wash. October 15, 2010); Weinstein & Riley, P.S. v. Westport Ins. Corp., 2011 U.S. Dist. LEXIS 26369 (W.D. Wash. March 14, 2011); Phinney v. American Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 22328 (W.D. Wash. February 22, 2012); Cardenas v. Navigators Ins. Co., 2011 U.S. Dist. LEXIS 145194 (W.D. Wash. December 16, 2011).

However, the Eastern Federal District Courts have rejected the precedent set by the Western Federal District Courts and have held that a violation of the enumerated WAC provisions is an independent basis for a cause of action, regardless of coverage or benefits. Merrill v. Crown Life Ins. Co., 22 F. Supp.3d 1137 (E.D. Wash. 2014); Hell Yeah Cycles v. Ohio Sec. Ins. Co., 16 F. Supp.3d 1224 (E.D. Wash. 2014); Hover v. State Farm Mut. Auto. Ins. Co., 2014 U.S. Dist. LEXIS 119162 (E.D. Wash. September 12, 2014).

In Langley v. GEICO Gen. Ins. Co., 2015 U.S. Dist. LEXIS 26079 (E.D. Wash. February 24, 2015), the Court noted that it is “not persuaded that an IFCA cause of action requires a denial of coverage or benefit… The opinions [from the Western District] do not provide any analysis of the statutory construction they utilized to reach their conclusions, and appear to only be looking for express causes of action without determining whether the IFCA creates an implied cause of action for violation of an enumerated WAC.” The Court in Langley then continued by reviewing the elements for an implied cause of action, i.e. whether the plaintiff is “within the class for whose ‘especial’ benefit the statute was enacted”; whether “legislative intent, explicitly or implicitly, supports creating or denying a remedy”; and “whether implying a remedy is consistent with the underlying purpose of the legislation.” The Court determined that the plaintiff, as first party claimant under an insurance policy, was within the class of those that the legislature sought to protect; that the legislative intent was to create a claim for violating the enumerated WACs in both the language in the statute and the explanation of that language provided to the voters; and that implying a remedy is consistent with the IFCA’s purpose. As a result, the Court concluded that “at a minimum, an independent implied cause of action exists under the IFCA for a first party claimant to bring a suit for a violation of the enumerated WAC provisions.” The Court rejected “the progeny of cases from the Western District of Washington which reached a different conclusion.”

In light of the inconsistencies in the Washington Federal District Courts, it is important for insurers to understand the jurisdictional differences when evaluating an IFCA claim. In addition, insurers should be particularly sensitive to efforts by policyholders to establish jurisdiction in the more favorable Eastern Federal District Courts.

Filed under Bad Faith, Commercial General Liability, Unfair Insurance Practices

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

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

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

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

New Jersey Federal Court Permits Reformation Over Additional Insured’s Objection

By on March 4, 2015
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The United States District Court for the District of New Jersey recently granted summary judgment to an insurer seeking to reform an aircraft fleet insurance policy based on mutual mistake of the parties to the contract.  Illinois National Insurance Company v. Wyndham Worldwide Operations, Inc., 2015 U.S. Dist. LEXIS 9468 (D.N.J. Jan. 28, 2015).

Illinois National issued a series of policies to an aircraft management company, Jet Aviation International, Inc., from 2004 to 2008.  Jet managed and operated Wyndham’s aircraft fleet and provided flight planning, staffing, and maintenance.  Under its agreement with Wyndham, Jet would arrange for a substitute airplane from its own fleet if necessary for a particular flight.  Jet also promised to maintain insurance covering Wyndham’s aircraft.

INS BLOG_jet aviationThe Illinois National policies afforded blanket coverage for aircraft operated by or used at the direction of Jet.  From 2004 to 2007, the policies included a “non-owned” aircraft exclusion which meant that Wyndham could not seek coverage for damages in connection with an aircraft it did not own, and where Jet had no involvement.  In 2008, Jet requested a small modification to the policy which had the unintended effect of expanding coverage to apply to Wyndham’s “non-owned” aircraft, even without a connection to Jet.

Two Wyndham employees were killed in a 2008 accident involving a rented airplane, neither owned by Wyndham nor operated by Jet under the management agreement.  Wyndham maintained separate insurance covering its use of non-owned aircraft without Jet’s involvement, and that insurer defended and settled the claims arising from the accident.  Nevertheless, Wyndham contended that the 2008 Illinois National policy also applied based on its terms.  Illinois National filed this coverage action seeking a declaration of no coverage or, in the alternative, equitable reformation based on mutual mistake.

The court initially granted a motion to dismiss Illinois National’s complaint, but the Third Circuit reversed.  On remand (and before a different judge), the court considered the issues through cross-motions for summary judgment.  To justify reformation, Illinois National had to demonstrate: (1) at the time of the 2008 modification, Jet did not intend to grant Wyndham coverage for non-owned aircraft unrelated to Jet; (2) Illinois National shared this intent; and (3) the 2008 policy did not reflect their agreement.

The court weighed various factors to determine whether a shared intent existed.  These factors included evidence of the reason for the change, prior policy terms, Wyndham’s reasonable expectations, the substance of the Jet/Wyndham agreement, the amount of premium, and the alleged absurdity of Wyndham’s interpretation.  The court noted that Wyndham’s interpretation of the exclusion would render it meaningless.  Thus, on balance, the factors reflected a shared intent which the 2008 policy did not express.  The court rejected Wyndham’s attempt, as an interloper, to dictate the contracting parties’ intent.

Finally, the court concluded negligence, even gross negligence, of Illinois National or Jet did not bar reformation where there was a meeting of the minds not expressed in the policy.  Nor did the fact that the accident had already occurred preclude post-loss reformation absent a showing of any prejudice.

Filed under Commercial General Liability, Non-Owned Aircraft Exclusion, Reformation

Policy Exhaustion Can Limit the Duty to Defend Under Connecticut Law

By and on February 26, 2015
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Assessing whether the duty to defend terminates on policy exhaustion can become a complex analysis when a claim involves multiple plaintiffs and exposure unquestionably exceeds the policy limits, yet the insured desires a continuing defense.

A common policy provision provides that an insurer has a duty to “settle or defend” a covered claim but that upon payment of the policy limits for “judgment or settlement” the insurer no longer has an obligation to provide a defense. Connecticut appellate courts have not squarely addressed in what circumstances exhaustion of policy limits will terminate the duty to defend, but at least one Connecticut Superior Court has recognized that exhaustion of policy limits would terminate the duty to defend based on the following policy language in a commercial policy: In Aetna Life & Cas. Co. v. Gentile, No. 0122259, 1995 Conn. Super. LEXIS 3444, 5 (Dec. 12, 1995), the insurer sought a declaratory judgment that it did not have a duty to defend following payment of the policy limits in response to seven separate claims. Id. at 4, 6. The court ultimately concluded that the payment was not the result of a “settlement” because the insurer failed to obtain a full release of the insured for one of the seven claims. Id. at 6-7. Despite its conclusion, the court plainly recognized that “if [the payment was a “settlement”] the policy limits are exhausted and there is no further duty to defend.” Id. at 7. The court concluded that the failure to obtain a release as to one of the claims precluded a finding that the payment was the result of a “settlement.” Id. at 9, 11. Thus, even though the insurer had made a payment in the amount of policy limits, the duty to defend was not terminated. Id.

Though the Gentile court initially acknowledged the potential enforceability of the exhaustion provision to terminate the duty to defend, the fact that the insurer left the insured to face excess exposure resulted in a finding that it had a continuing duty to defend and indemnify. Id. at 13. Notably, the court denied declaratory relief to the insured and awarded attorneys’ fees to the insured for both the underlying action and the declaratory judgment action. Id. at 13, 17.

Another instructive case is Chicago Title Insurance Company v. Kent School Corporation, 361 F. Supp. 2d 4, 7 (D. Conn. 2005). In that case, the United States District Court for the District of Connecticut addressed whether a policy of title insurance permitted the insurer to tender its policy limits to its insured and thereby terminate its duty to defend. The policy provided that the insurer “may terminate its liability hereunder by paying or tendering the full amount of this policy.” Id. at 8. Despite this clause, because the policy provided that “the costs and expenses of defending the title” were in addition to the policy limits and the policy was ambiguous in its failure to define the term “liability,” the court found that the insurer had a continuing duty to defend. Id. at 9-10. In so concluding, however, the court did not rule out a different conclusion based on clearer policy language.

While it does not appear that any Connecticut court has actually applied the rule permitting an insurer to terminate its duty to defend by making full payment of policy limits to enforce such a result, both the Gentile court and Chicago Title court clearly recognize this rule and the enforceability of exhaustion clauses. Gentile, 1995 Conn. Super. LEXIS 3444, 7; Chicago Title, 361 F. Supp. 2d 4, 9. Such recognition is found in other jurisdictions, as well. Further, though such decisions are presently absent from Connecticut jurisprudence, courts in other jurisdictions have allowed an insurer to exhaust limits and terminate its duty to defend.  Seem e.g. In Re: East 51st Street Crane Collapse Litigation, No. 769000/08, 2010 N.Y. Misc. LEXIS 6310 (N.Y. Sup. Ct. Feb. 18, 2010).

For an expanded analysis, click here.

Filed under Commercial General Liability, Duty to Defend, Exhaustion

Washington’s Insurance Fair Conduct Act Only Applies to First-Party Claims

By , and on January 20, 2015
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Ever since the Washington Insurance Fair Conduct Act (“IFCA”) took effect on December 6, 2007, insureds have asserted a claim for IFCA violation in lawsuits against an insurance company.  While IFCA specifies that “[a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action,” insureds under both first-party policies and third-party liability policies have asserted IFCA claims in light of Washington courts’ very pro-policyholder attitude.  An IFCA claim is very attractive to the insureds because if a court finds that an insurer acted unreasonably in denying a claim for coverage or payment of benefits, an insured is entitled to actual damages (not limited to the benefits that were unreasonably denied), treble of those damages, and attorneys’ fees and costs.

Earlier this year, however, Judge Marsha Pechman dismissed plaintiffs’ IFCA claim against Continental Casualty Company (Continental), ruling that IFCA does not apply to third-party liability claims.  Cox v. Cont’l Cas. Co., 2014 U.S. Dist. LEXIS 68081 (W.D. Wash. May 15, 2014). Judge Pechman explained that only a “first party claimant to a policy of insurance” has a right of action under IFCA.

Cox arises out of a malpractice action against retired dentist, Dr. Henri Duyzend.  In the malpractice action, a group of Dr. Duyzend’s former patients secured a judgment totaling $35,212,000 against Dr. Duyzend for their malpractice claims.  Thereafter, on an assignment of claims from Dr. Duyzend, the dental patients sued Continental, alleging in part that Continental acted in bad faith and violated the IFCA by not pursing a global settlement with them and risking an excess judgment against Dr. Duyzend.  Continental had issued a professional liability policy to Dr. Duyzend.

With regard to the plaintiffs’ IFCA claim, Judge Pechman explained that “[a]n IFCA claim arises when ‘any first party claimant’ to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.”  Judge Pechman noted that a third-party insurance policy “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.”  The professional liability policy at issue in Cox was a third-party liability policy, not a first-party insurance policy.  As a result, Dr. Duyzend was never a first-party claimant under the IFCA and could not assign an IFCA claim to the plaintiffs.  Therefore, Judge Pechman dismissed the plaintiffs’ IFCA claim.

In one subsequent case, Judge Pechman held consistently with her decision in Cox.  Judge Pechman denied a plaintiff’s motion to amend the complaint to assert an IFCA violation against an insurer under a third-party liability policy, holding that such claims are not permitted under the rule.  Judge Pechman refused to certify to the Washington Supreme Court the question of whether an insured under a third-party liability policy may have an IFCA claim.  In so holding, the court affirmed that under Washington law, coverage which “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him is third-party coverage.  As discussed in Cox, the IFCA defines ‘first party claimant’ in a narrow way that applies only to first-party insurance.”

Filed under Bad Faith, Commercial General Liability, First Party Policy, Unfair Insurance Practices

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