No Duty to Defend Drug Makers in Actions Alleging Deceptive Marketing Fueled Opioid Abuse and Addiction

On November 6, 2017, the California Court of Appeal for the Fourth Appellate District affirmed a trial judge’s decision that The Traveler’s Property Casualty Company of America (“Travelers”) did not owe a duty to defend various pharmaceutical manufacturers in two actions alleging deceptive marketing of opioid products because the alleged injuries in the underlying actions were not caused by an accident. Traveler’s Prop. Cas. Co. of Am. v. Actavis, Inc. (Nov. 6, 2017, No. G053749) 2017 Cal. App. LEXIS 976.

The County of Santa Clara and the County of Orange brought a lawsuit (the “California action”) against Actavis, Inc. and other pharmaceutical companies engaged in a “common, sophisticated, and highly deceptive marketing campaign” designed to increase the sale of opioid products by promoting them for treatment of long-term chronic pain, a purpose for which Actavis allegedly knew its opioid products were not suited. The City of Chicago brought a separate lawsuit (the “Chicago action”) against Actavis making essentially the same allegations. Both actions alleged that Actavis’ marketing scheme resulted in a “catastrophic” and nationwide “opioid-induced ‘public health epidemic’” and a resurgence in heroin use. Both actions also alleged that the Counties and City have and will incur increased costs of care and services to their citizens injured by prescription and illegal opioid abuse and addiction.

Travelers declined any duty to defend under commercial general liability policies issued by Travelers and St. Paul Fire and Marine Insurance Co. (collectively “Travelers”), and brought this action seeking a declaration that it had no duty to defend or indemnify Actavis with respect to both actions.

The St. Paul policies cover “damages for covered bodily injury or property damage” that are “caused by an event.” The policies defined “event” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Similarly, the Travelers policies cover damages “because of ‘bodily injury’ or ‘property damage’” caused by an “occurrence.” The term “occurrence” is also defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The St. Paul and Travelers policies also include product exclusions that bar coverage for bodily injury or property damage resulting from or arising out of “your product” or “your work.”

Following a bench trial on stipulated facts, the trial court issued a statement of decision concluding that neither the California nor Chicago action alleged an “accident” as required by the policies to create a duty to defend, and the product exclusions precluded coverage for the claims.

The Court of Appeal agreed, noting that under California law, a deliberate act is not an accident, even if the resulting injury was unintended, unless the injury was caused by an additional, unexpected, independent, and unforeseen happening. The Court found that the allegations that Actavis engaged in “a common, sophisticated, and highly deceptive marking campaign” to increase the sale of opioids and corporate profits “can only describe deliberate, intentional acts” for which there could be no insurable “accident” unless “some additional, unexpected, independent, and unforeseen happening” produced the injuries alleged in the underlying actions.

The Court rejected Actavis’ assertion that the injuries were indirect and unintended results caused by “mere negligence and fortuities” outside of Actavis’ control. “[W]hether [Actavis] intended to cause injury or mistakenly believed its deliberate conduct would not or could not produce injury is irrelevant to determining whether an insurable accident occurred.” Instead, the Court must look to “whether the California Complaint and the Chicago Complaint allege, directly or by inference, it was [Actavis’] deliberate conduct, or an additional, unexpected, independent, and unforeseen happening, that produced the alleged injuries.” The Court found that it was neither unexpected nor unforeseen that a massive marketing campaign to promote the use of opioids for purposes for which they are not suited would lead to a nation “awash in opioids” or an increase in opioid addiction and overdoses.

The Court also rejected Actavis’ contention that the alleged injuries are not the “normal consequences of the acts alleged” because in order for the opioid products to end up in the hands of abusers, doctors must prescribe the drugs to them. “The test, however, is not whether the consequences are normal; the test is whether an additional, unexpected, independent, and unforeseen happening produced the consequences.” The Court opined that the role of doctors in prescribing, or even misprescribing, opioids is not an independent or unforeseen happening.

Although the trial court declined to determine whether the California or Chicago actions sought damages because of potentially covered “bodily injury,” the Court found that those actions alleged two categories of “bodily injury”: (1) the use and abuse of opioid painkillers including overdose, addiction, death, and long-term disability; and (2) use and abuse of heroin, the resurgence of which was alleged to have been triggered by use and misuse of opioids. Applying a broad interpretation of “arising out of” as used in the product exclusions, the Court held that both categories of “bodily injury” arise out of Actavis’ opioid products, and are, therefore, barred by the product exclusions in the policies.

The Court also noted a split of authority whether product exclusions apply only to defective products. Although recognizing that the California Supreme Court has not addressed the issue, the Court agreed with the Florida Supreme Court’s reasoning in Taurus Holdings v. U.S. Fidelity (Fla. 2005) 913 So.2d 528, that the term “any product” in the product exclusions applies broadly and does not limit the application of the exclusions to defective products.

Actavis reaffirms California law that a deliberate act resulting in unintended injuries is not an “accident,” unless the injuries were caused by an additional, unexpected, independent, and unforeseen happening. This decision also reiterates California’s broad interpretation of “arising out of” as used in coverage provisions and exclusions.

Winning Arbitration Battle in the Connecticut Supreme Court Regarding Historic Home Restoration Costs Still Leaves Insurer Defending Legal War in State Trial Court

Concluding that the trial court “improperly substituted its judgment” for that of an appraisal panel, the Connecticut Supreme Court invalidated the trial court’s decision to vacate an arbitration award for property loss caused by a tree falling on the insured’s home. See Kellogg v. Middlesex Mut. Assurance Co., 326 Conn. 638 (2017). Pending the outcome of this appeal, the insured filed a second suit against her insurer, Middlesex Mutual Assurance Company (“Middlesex”), alleging breach of contract under the homeowner’s “Restorationist” insurance policy, as well as various extra-contractual claims based on the allegedly improper and delayed adjustment of the claim. Notwithstanding the overlapping nature of these claims with those addressed by the arbitration panel, the court denied the insurer’s Motion to Dismiss. Thus, the second lawsuit remains pending despite the Supreme Court’s finding in favor of the insurer.

Both cases revolve around Sally Kellogg’s single-family property located in Norwalk, Connecticut, which is listed on the National Registry of Historic Places and sits in Norwalk’s Green Historic District. When Kellogg, an interior designer, purchased the property in 2002, she also purchased the Restorationist policy on the home and its contents. The policy provided for unlimited coverage for repairs, including the replacement or restoration cost of the property without deduction for depreciation.

Eight years later, a four-and-a-half ton tree fell on the house during a severe storm, breaking through the roof and causing extensive structural and other property damage. Following the insured’s submission of her claim, a dispute arose regarding the extent of the damage and the cost of repair. Kellogg invoked the appraisal provision of the policy, which provided for unrestricted arbitration in which a panel of three arbitrators—one appointed by each party, and a referee appointed by the two other arbitrators—had the power to decide issues of law and fact not subject to judicial review. The arbitration proceedings resulted in a combined award of $539,901.84 for both replacement/restoration cost and actual cash value loss to personal property contained within the house.

Kellogg, who had argued for restoration costs exceeding $1.5 million, filed an application in the Connecticut Superior Court to vacate the arbitration award, which Middlesex attempted to dismiss as untimely. Though the trial court stated it would only rule on the motion to dismiss, it went on to hold eight days of trial, which ultimately resulted in a finding that the award violated Connecticut General Statutes Section 52–418(a) because: (1) the trial court disagreed with the amount of the award, and (2) the decision of the appraisal panel “evidenced a manifest disregard of the nature and terms and conditions of the Restorationist insurance policy” in violation of the statute. The trial court vacated the arbitration award and denied Middlesex’s Motion to Dismiss.

In overturning this decision on Middlesex’s appeal, the Connecticut Supreme Court held that the trial court had improperly substituted its own judgment for that of the arbitration panel and failed to follow the proper standard for evaluating a claim of “manifest disregard of the law.” In doing so, the Court recognized the high level of deference paid to arbitrators in unrestricted arbitration proceedings, such that “a court may vacate an unrestricted arbitration award only under certain limited conditions: (1) the award rules on the constitutionality of a statute, (2) the award violates clear public policy, or (3) the award contravenes one or more of the statutory proscriptions of § 52–418.” (Internal citations removed). Further, the award resulting from unrestricted arbitration is not subject to de novo review even for errors of law.

Under this standard, the Supreme Court held, the trial court overstepped the scope of its judicial review, erroneously substituting its judgment for that of the arbitrators by essentially re-trying all of the facts found by the arbitrators regarding an appropriate award to the insured. To permit a party to object to an award simply because the party dislikes the outcome, the Court said, “would completely destroy the deference our law affords to the arbitration process by allowing the trial court to substitute its own judgment on the merits of the question submitted to arbitration.” In the absence of a claim that “the arbitrators refused to postpone a hearing, refused to hear any of the plaintiff’s evidence, or otherwise committed a procedural error,” the trial court should not have vacated the arbitration award, which was “final and binding.” The trial court further erred by construing policy language, when it should not have engaged in de novo review of the policy language at all. However, disagreeing with the trial court’s construction of policy language, the Supreme Court also declined to vacate the arbitration award on the premise that the panel had “manifestly disregard[ed]” the law in violation of Connecticut General Statutes Section 52-418(a)(4) “when it permitted the defendant to withhold depreciation costs until the plaintiff had incurred a debt for the repair or replacement of the property.”

Despite this good news for Middlesex, the company is still saddled with the defense of the second lawsuit. Stemming from the same property loss and claim, this subsequent lawsuit asserts both contractual and extra-contractual claims of bad faith, negligent adjustment of the claim, violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act, negligent infliction of emotional distress, and estoppel. Middlesex moved to dismiss the complaint for lack of ripeness as well as under the “prior pending action” doctrine on the basis that all of the causes of action complained of arose from Middlesex’s allegedly improper conduct in the adjustment and appraisal of the claim.

Nonetheless, the Superior Court sided with Kellogg, categorically denying Middlesex’s motion to dismiss. In doing so, it held that the new action is separate and distinct from the insured’s application to vacate the award, and that her current claims are (or were) not contingent on the outcome of the arbitration appeal. The Court thus allowed the underlying action to proceed, notwithstanding that Kellogg’s claims directly related to the disputed adjustment and appraisal of the loss. For the same reasons, the Superior Court also denied Middlesex’s subsequent motion to stay the proceedings pending the outcome of the appeal.

Insurers should thus take note: a win in connection with issues of coverage and appraisal does not always avoid other potential liabilities arising from the adjustment of claims.

A link to the Connecticut Supreme Court’s decision is available on the judicial branch website: (p. 100).

Insurance Coverage for Malicious Prosecution Claims in Georgia

Until recently, Georgia has had no case law addressing insurance coverage trigger for a malicious prosecution claim. But in 2016, the Georgia Court of Appeals finally rendered an opinion addressing this specific issue, with a twist in that the claimant was arrested during the policy period but was charged and prosecuted after the policy expired.

In Zook v. Arch Specialty Ins. Co., 784 S.E.2d 119 (2016), the claimant was arrested on May 21, 2009 after an incident at the insured’s nightclub. The claimant was charged with simple battery on March 1, 2010 and was prosecuted thereafter. After the jury found the claimant not guilty of simple battery, he commenced a lawsuit against the nightclub and its employees for false imprisonment, battery, negligence, malicious prosecution and malicious arrest. While that action was pending, the claimant filed a declaratory judgment action against the same defendants and Arch Specialty Insurance Company (“Arch”), which issued a CGL policy (“Policy”) to the nightclub from June 27, 2008 to June 27, 2009. The policy provided coverage for injury arising out of malicious prosecution if the offense was committed during the policy period. Arch took the position that the “offense” took place on March 1, 2010, when the claimant was charged with the crime for which he was prosecuted (simple battery). Because the Policy expired on June 27, 2009, Arch argued that no offense took place during the policy period.  The trial court agreed and granted summary judgment to Arch.

The Georgia Court of Appeals, however, disagreed. The Court noted that Georgia appellate courts had not yet addressed the issue of when a malicious prosecution claim arises for purposes of triggering insurance coverage. The Court of Appeals acknowledged that the majority of other jurisdictions have held that “coverage is triggered when the insured sets in motion the legal machinery of the state.” Id. at 674. However, the Court disagreed with Arch’s interpretation of the majority holding because Arch focused on when the claimant was charged and relied on case law that dealt with a scenario in which the claimant was arrested and charged on the same date.

The Georgia Court of Appeals held that in this case, the arrest is the “bad act” of the insured that set the legal machinery of the state in action.  Id. at 675. In other words, the arrest was the “offense” that invoked the judicial process against the claimant, and the arrest took place during the Arch policy period. The Court held,

From the standpoint of a reasonable person in the position of the insured, policy coverage for injury arising from a malicious prosecution occurring during the policy period exists if the insured’s conduct in instituting such a prosecution took place during the covered period. For the foregoing reasons, we adopt the majority rule that when the contract does not specify, insurance coverage is triggered on a potential claim for malicious prosecution when the insured sets in motion the legal machinery of the state.

Id. at 675-6.

The analysis pertaining to the trigger of coverage for wrongful incarceration and malicious prosecution cases are becoming more intricate and detail-oriented as the courts throughout the country are exposed to different fact patterns. To the extent that the claimant is arrested and charged during different policy periods, it appears that the first event of the arrest will be considered as the event that triggers coverage.

The next installment will review the law in Ohio. In the meantime, if there are any questions about other jurisdictions or jurisdictions already discussed, please contact us ( or and we can address your questions directly.

Washington Supreme Court Denies Reconsideration of Its Decision to Apply the Efficient Proximate Cause Rule to a Third-Party Liability Policy

We previously reported the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., 188 Wn.2d 171, 393 P.3d 748 (2017), in which the Court applied the efficient proximate cause rule to a third-party liability policy to find a duty to defend.

To recap, Washington law requires insurers to assess and investigate coverage under first-party insurance policies by applying the efficient proximate cause analysis. Until Xia, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But the Washington Supreme Court’s decision in Xia changed that by holding that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy.

The issue in Xia was whether the pollution exclusion applied to relieve ProBuilders of its duty to defend a claim against the insured alleging that carbon monoxide was released into the claimant’s house through a defectively installed vent. ProBuilders denied coverage to the insured contractor, in part, under the pollution exclusion. The Washington Supreme Court held that while ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

Soon after the Washington Supreme Court’s decision, ProBuilders filed a motion asking the Court to reconsider its decision. However, on August 17, 2017, the Washington Supreme Court denied the motion, leaving in place the holding that insurers must take the efficient proximate cause rule when analyzing coverage under third-party policies.

As discussed in our earlier post, the efficient proximate cause rule applies “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012). “If the initial event, the ‘efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless of whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994).

Insurers must be extremely cautious when assessing the duty to defend and an exclusion that could potentially preclude coverage. Under Xia, liability insurers must examine the underlying complaint very carefully to determine whether there could potentially be multiple causes of a loss, and if so, which cause is the initiating cause. If the initiating cause is potentially a covered event, then there may be coverage and the insurer must provide a defense under reservation of rights in order to minimize bad faith exposure.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim ( or 206-695-5147) or Stephanie Ries ( or 206-695-5123).

The Ninth Circuit Resolves Split in Authority, Holds that Only Insureds Under First-Party Policies Can Bring Claims Under Washington’s IFCA

Washington’s Insurance Fair Conduct Act (“IFCA”) provides insureds with a statutory cause of action against their insurers for wrongful denials of coverage, in addition to a traditional bad faith cause of action. Unlike a bad faith cause of action, the IFCA allows for enhanced damages under certain circumstances. Under the language of the statute, “any first party claimant to a policy of insurance” may bring a claim under IFCA against its insurer for the unreasonable denial of a claim for coverage or payment of benefits. There has been a split of authority in Washington among both the state appellate courts and federal district courts regarding whether the term “first-party claimant” refers only to first-party policies (i.e., a homeowner’s policy or commercial property policy) or whether it refers to insureds under both first-party and liability policies (e.g., CGL policies which cover the insured’s liability to others). The IFCA expressly defines the phrase “first-party claimant” as “an individual, … or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.”

The Washington Court of Appeals, Division One, held that a “first-party claimant” means an insured under both first-party and liability policies (Trinity Universal Ins. Co. of Kansas v. Ohio Casualty Ins. Co., 176 Wn.App. 185 (2013)), but Division Three held that the IFCA applies exclusively to first-party insurance contracts (Tarasyuk v. Mutual of Enumclaw Insurance Co., 2015 Wash. App. LEXIS 2124 (2015)).

In the federal courts, the majority of decisions from the Western District of Washington have held that an insured with third-party coverage or first-party coverage can be a “first-party claimant” under IFCA. Navigators Specialty Ins. Co. v. Christensen, Inc., 140 F. Supp. 3d 11097 (W.D. Wash. Aug. 3, 2015 ) (Judge Coughenour); City of Bothell v. Berkley Regional Specialty Ins. Co., 2014 U. S. Dist. LEXIS 145644 (W.D. Wash. Oct. 10, 2014) (Judge Lasnik); Cedar Grove Composting, Inc. v. Ironshore Specialty Ins. Co., 2015 U. S. Dist. LEXIS 71256 (W.D. Wash. June 2, 2015) (Judge Jones); Workland & Witherspoon, PLLC v. Evanston Ins. Co., 141 F.Supp.3d 1148 (E.D. Wash. Oct. 29, 2015) (Judge Peterson). These decisions held that any insured who has a right to file a claim under the insurance policy is a “first-party claimant” under the IFCA regardless of whether the policy provides first-party or third-party coverage.

However, Judge Pechman of the Western District of Washington ruled that an insured with third-party coverage is not a “first-party claimant” under IFCA in Cox v. Continental Casualty Co., 2014 U. S. Dist. LEXIS 68081 (W.D. Wash. May 16, 2014) and two subsequent cases. In Cox, Judge Pechman dismissed plaintiff’s IFCA claim on the ground that the insurance policy was a “third-party policy,” i.e. a third-party liability policy, and therefore the insured (who assigned his claim to the plaintiffs) was not a “first-party claimant.” The Ninth Circuit Court of Appeals recently affirmed the Cox decision on appeal, effectively resolving the split of authority in the federal courts in favor of a more limited interpretation of the IFCA. Cox v. Continental Casualty Co., 2017 U.S. App. 11722 (9th Cir. June 30, 2017).

Those watching this issue and looking for a reasoned analysis resolving the split of authority among the federal district courts in Washington will be disappointed, as the Ninth Circuit provided no basis for its holding on the issue, not even a recognition of the split among the courts. On the issue, the Court merely stated “[t]he policy in question is not a first party policy; thus, the Plaintiffs, standing in [the insured’s] shoes, cannot be a first party claimant.” The court’s failure to provide its reasoning for this holding is surprising, given that the parties addressed the split of authority in their briefs. Nonetheless, insurers should take note of this important decision limiting the scope of the IFCA in Washington’s federal courts.

California Appeals Court Rules that Insurer Not Entitled to Rescind Policy Based on Material Misrepresentation Due to Ambiguity of Application Questions

In Duarte v. Pacific Specialty Insurance Company, a California appeals court found that an insurer was not entitled to rescind an insurance policy due to material misrepresentation and/or concealment of material facts as a matter of law. The court held that the insurer could not prove that the insured had made misrepresentations when he applied for the policy because the application questions at issue were ambiguous.

Victor Duarte bought a tenant-occupied rental property in 2001. Sometime thereafter, the daughter of the tenant moved into the rental property with her father, and continued to reside there after her father’s death in 2010. In February 2012, Duarte served the daughter with an eviction notice. The daughter did not leave the rental property and Duarte did not take any further action to remove her.

In April 2012, Duarte electronically submitted an application for a landlord insurance policy with defendant Pacific. Pacific issued a policy to Duarte covering the rental property the same day.

In June 2012, the tenant/daughter filed a lawsuit against Duarte for habitability defects at the rental property which allegedly existed since 2009. The lawsuit alleged that Duarte had been notified of these defects, and sought various damages arising from the defects. In August 2012, Duarte tendered defense of the lawsuit to Pacific which denied coverage and any duty to defend. Duarte then sued Pacific for breach of contract and other claims on the grounds that Pacific not only failed to defend the tenant lawsuit but also wrongfully cancelled his policy. In responding to the lawsuit, Pacific asserted a right to rescind the policy due to material misrepresentations on the application.

In cross-motions for summary judgment/adjudication, Pacific argued that it was entitled to rescind the policy because Duarte made material misrepresentations when he answered “no” to two questions on the application: (1) whether he knew of any disputes concerning the property; and (2) whether there were any businesses conducted on the property. In support of its position, Pacific submitted records regarding a March 2012 complaint filed by the tenant/daughter against Duarte with a public agency. Pacific also submitted a transcript of Duarte’s deposition in which he testified about his understanding about the complaint filed against him by the tenant/daughter. The trial court granted Pacific’s motion and denied Duarte’s motion. Duarte appealed, and the appeals court reversed.

The court held that Pacific did not meet its initial burden of proving that Duarte made misrepresentations on the insurance application. The court noted that the first application question at issue – “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuit?” – had “garbled syntax” and was “utterly ambiguous.” The court found that the evidence submitted by Pacific showed that Duarte knew of claims and/or disputes concerning the property. However, the court rejected Pacific’s position that the question required the answer, “yes” if there was unrepaired damage, any open or pending claims, potential defect, property disputes, or potential lawsuits. Given the question’s ambiguity, the court found that Duarte properly answered, “no” because he reasonably interpreted the question to ask whether the property had unrepaired damage associated in some way with previous or pending claims, defects, claims disputes, property disputes or potential lawsuits.

With regard to the second application question – “Is there any type of business conducted on the premises?” – the court noted that Pacific submitted evidence that showed that Duarte knew the tenant and tenant/daughter occasionally sold motorcycle parts from the rental property. Nonetheless, the court held that Duarte properly answered, “no,” because he reasonably interpreted the question as referring to “regular and ongoing business activity,” of which there was none to his knowledge.

Second Circuit Holds that TCPA Contractual Consent Cannot be Revoked

In Reyes v. Lincoln Auto. Fin. Servs., No.162104-cv, 2017 U.S. App. LEXIS 11057 (2d Cir. June 22, 2017), the Second Circuit affirmed the trial court decision and held that the Telephone Consumer Protection Act (“TCPA”) does not permit a consumer to unilaterally revoke consent to be called when that consent is given as part of a bargained-for exchange.

The facts of the case are brief.  In 2012 Reyes leased a new Lincoln MKZ luxury sedan, which was financed by Lincoln Automotive Financial Services (“Lincoln”). Reyes provided his cell phone number in the lease application and the lease itself contained a number of provisions to which Reyes assented when finalizing the agreement. Specifically, Reyes consented to receive manual or automated telephone calls from Lincoln. When Reyes defaulted on his payments, Lincoln called Reyes on several occasions in an attempt to cure his default. Reyes claimed that he mailed a letter to Lincoln, revoking his consent to be contacted by Lincoln. Nonetheless, Lincoln continued to call Reyes. Reyes subsequently filed a lawsuit in the Eastern District of New York alleging TCPA violations, seeking $720,000 in damages for Lincoln’s 530 calls to him. The trial court granted summary judgment to Lincoln, holding that (1) Reyes failed to produce sufficient evidence from which a reasonable jury could conclude that he had ever revoked his consent to be contacted by Lincoln and (2) that, in any event, the TCPA does not permit a party to a legally binding contract to unilaterally revoke a bargained-for consent to be contacted by telephone.

On appeal, the Second Circuit first addressed whether Reyes introduced sufficient evidence to create a triable issue of fact regarding Lincoln’s alleged notice of Reyes’s revocation of consent. The Court stated that summary judgment on this issue was improper. Reyes submitted his sworn deposition testimony; a copy of the letter revoking his consent; and an affidavit stating that he had revoked consent. Based on these documents, the Court found that the lower court erred in concluding that no reasonable jury could find that Reyes revoked his consent.

Next, the Court addressed the issue of whether the TCPA permits a party to revoke consent, even if that consent was given as part of a contractual agreement. The Court explained that “consent” is not always revocable, and distinguished the instant case from other cases, which held otherwise. In Gage v. Dell Fin. Servs. and Osorio v. State Farm Bank F.S.B., the Third and Eleventh Circuit Courts, respectively, found, as confirmed by a 2015 FCC ruling, that consumers can revoke consent when it is given gratuitously, and is not incorporated into a binding legal agreement. The Second Circuit agreed with that proposition. But in the present case, when consent is provided as consideration to a bargained-for bilateral contract, consent is not revocable. Indeed, the Second Circuit observed that black-letter law dictates that a party cannot alter a bilateral contract by revoking a term without the consent of the counterparty.

Reyes also argued that the TCPA permits a party to revoke consent because “consent” was not an “essential” term of the contract. The Court dismissed Reyes’s claim on the ground that a contractual term does not need to be “essential” in order for it to be enforced. Instead, the Court explained that a fundamental rule of contract law is that parties may bind themselves to terms so long as the principles of contract formation are met. And a party who has agreed to a particular contractual term in a valid contract cannot unilaterally renege at a later time.

Lastly, Reyes contended that because the TCPA is a remedial statute, enacted to protect consumers from unwanted telephone calls, any ambiguities should be construed to further its purpose. Although the Court agreed that a liberal reading of an ambiguous term in the statute might favor a right to revoke consent, the Court ultimately rejected Reyes’s contention because the statute is not ambiguous in the first place.

The Court concluded by noting it was sensitive to the argument that businesses may undermine the effectiveness of the TCPA by inserting “consent” clauses into contracts, thereby making revocation impossible in many instances. The Court properly acknowledged that this hypothetical concern, if valid, is grounded in public policy considerations; an issue for Congress, not the courts, to resolve.

Reyes is a significant decision because it addresses an emerging issue of whether consent can be unilaterally revoked by a consumer under the TCPA. The Second Circuit’s decision is a big win for financial institutions and other defendants that have consent provisions within their binding agreements. Going forward, financial institutions litigating in the Second Circuit will be shielded, or at least have a powerful defense, from TCPA claimants who claim that they revoked consent. In addition, while Reyes is only binding in Connecticut, Vermont and New York, this decision may lend itself as the hallmark to other circuit courts that have yet to address this issue. In the meantime, businesses who are faced with TCPA lawsuits should consider adding a consent provision within their contracts to limit exposure to future TCPA liability and current TCPA defendants should consider dispositive motions if the plaintiff consented to be called.

Big Victory for Debt Buying Industry: Supreme Court Holds That Debt Buyers Are Not “Debt Collectors” Under The FDCPA

The U.S. Supreme Court recently held in Henson v. Santander Consumer USA Inc., 582 U.S. ___ (2017), that a company may collect on debts that it purchased for its own account without triggering the statutory definition of “debt collector” under the Fair Debt Collection Practices Act. The unanimous decision penned by Justice Gorsuch, his first as a Supreme Court Justice, was a resounding victory for the debt buying industry, especially given ever increasing individual and putative class actions alleging violations of the FDCPA in the multibillion dollar debt collection industry.

The FDCPA authorizes private lawsuits and heavy fines to debt collectors who engage in unscrupulous collection practices. Under the Act, “debt collectors” are defined as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U.S.C. § 1692a(6). But because the practice of buying and managing consumer debt has become more commonplace, the issue of whether consumer finance firms who purchase consumer debt are included within the Act’s coverage was unclear.  While everyone agrees that the term embraced the repo man, the person hired by the creditor to collect an outstanding debt, it was unclear whether the person buying a debt and then trying to collect on it for himself made that person a debt collector. Circuit courts were divided on the issue, with some courts classifying debt buyers as creditors and other courts classifying them as debt collectors. In Henson, the Supreme Court resolved this Circuit split and held that debt buyers attempting to collect on that debt are excluded from the Act’s coverage because they do not qualify as debt collectors.

The complaint filed in the Henson case alleged that CitiFinancial Auto loaned money to the petitioners to finance the purchase of their cars. The petitioners defaulted on their loan and Santander later purchased the defaulted loans from the original lender, CitiFinancial Auto. After purchasing the defaulted loans, Santander engaged in collection practices that petitioners believed violated the FDCPA. The District Court and Fourth Circuit both ruled in favor of Santander on the ground that Santander did not qualify as a debt collector because it did not regularly seek to collect debts “owed . . . another,” but instead sought only to collect debts that it purchased and owned.

The Court explained that debt buyers are not subject to the FDCPA because the Act’s language only focuses on third-party collection agents. In its holding, the Court rejected petitioners’ argument that debt buyers are also debt collectors because of Congress’s use of the past participle of the verb “to owe.” Petitioners claimed that the statute’s definition of a debt collector includes anyone who regularly collects debts previously owed to another. Instead, the Court found that past participles are commonly used as adjectives to describe the present state of things, and that the word “owed” is used to refer to present debt relationships. As a result, the Court observed that the text of the statute indicates that one has to attempt to collect debts owed to another in order to qualify as a debt collector under the Act.

The Court also rejected petitioners’ alternative argument that the FDCPA treats defaulted debt purchasers as traditional debt collectors because doing so best furthers the spirit of the Act. Petitioners contended that if Congress had been aware of the business involving purchasing defaulted debt, then it would have included them as traditional debt collectors because they pose similar risks of abusive collection practices. The Court explained that it was not its job to rewrite a statute under the banner of speculation. Likewise, the Court found that petitioners’ policy arguments were not unassailable, because reasonable legislators could argue both ways on whether debt buyers should be treated as debt collectors under the Act. Certainly, the Court noted that these matters are for Congress to resolve, not the Supreme Court.

The Henson decision has far reaching implications on the debt collection industry and provides comfort to companies who purchase bad-debt and then go out to collect on it. Because the Henson decision reveals that debt purchasers are not defined as debt collectors under the FDCPA, Congress’s attempt to protect consumers from unfair or deceptive practices as a means to recoup money is severely weakened. The decision also clarifies that purchasers of defaulted debt now face less regulation in their collection process. Whether Congress decides to amend the FDCPA, and further regulate the debt collection industry, is something that the industry will keep a close eye on.

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f the initial event, the “efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that like any other covered peril under a general liability policy, an act of negligence may be the efficient proximate cause of a particular loss. “Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim at or (206) 695-5147.

Minnesota Bankruptcy Court Applies Injury-in-Fact Trigger to Obligate Multiple Policies to Provide Coverage for Sexual Molestation Claims

In Diocese of Duluth v. Liberty Mutual Group, et al., case no. 16-05012 (Mar. 30, 2017), the Bankruptcy Court for the District Court for Minnesota was faced with determining trigger and the number of “occurrences” related to negligence claims asserted against the Diocese of Duluth by victims of priest sexual abuse. These negligence claims drove the Diocese to file for bankruptcy, and as part of that Bankruptcy proceeding, the Diocese filed an adversary proceeding seeking coverage from five of its insurers. These insurers had issued policies covering several decades. The Court ruled in favor of the Diocese, finding that multiple years of coverage could be triggered and that multiple “occurrences” could be found in each policy year as each victim was a separate “occurrence.”

The Diocese successfully argued that each alleged act of abuse constituted a separate “occurrence” under all insurer’s policies, while conceding that the “occurrence” language in the policies (“arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence”) consolidated multiple instances of abuse of the same victim by the same priest in the same year into one “occurrence” for that year.

Most of the insurers argued for the interpretation that there was only one “occurrence” – the ongoing act of negligent supervision by the Diocese in allowing the continuous and repeated exposure of the victims to the abusive priests – regardless of the number of victims or perpetrators involved. The Continental Insurance Company also argued for one occurrence, or at most, one occurrence per priest or per bishop abuser because all the injuries arose from the Diocese’s decision to allow the abusers access to the children.

The policies provided coverage for damages for personal injury caused by an “occurrence” and included similar definitions of “occurrence.” The Court noted that “the word ‘occurrence’ in occurrence based insurance policies ‘is one of the least understood and most misunderstood word in today’s insurance language[.]”

The Court’s decision focused on Minnesota’s use of the actual injury or injury-in-fact trigger rule, which provides that an “occurrence” take place at the time the complaining party as actually injured, not when the wrongful act was committed. Minnesota courts have also held that “an injury can occur even though the injury is not ‘diagnosable,’ ‘compensable’ or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period.”

Considering these precedents, the Court noted that the underlying facts of the cases were not in dispute – numerous victims were abused by several different priests. As the sexual abuse was what caused the victims damage, “under the actual-injury rule, the occurrence is the time when the victims were sexually abused by the priests. “ The Court further determined that the number of occurrences could be both per victim and per priest – “There are separate occurrences for each separate sexual abuse for each victim and each priest. The victims each suffered separate abuse and it is this occurrence that triggers an insurance policy that is at risk at that time.” The Court also clarified if a victim was injured by two priests during one policy period, that would be two occurrences, although if injured repeatedly by the same priest during one policy period, that would be one occurrence.

It’s not evident from the decision what impact the Court’s decision had on each insurer’s coverage obligations, but certainly determining that multiple policies might be triggered and that there might be multiple occurrences in each year broadened the obligation significantly from what the insurers were arguing for.

A Pennsylvania court also recently faced this issue in connection with the Sandusky scandal at Penn State University, but came to the opposite conclusion while discussing many of the same concerns. Pennsylvania utilizes the “manifestation” trigger outside of the asbestos context, and while this trigger led to a similar conclusion as to when the bodily injury first occurred, the court did not permit Penn State to trigger multiple policy periods for subsequent acts of abuse against the same victim. In Pa. State Univ. v. Pa. Manufacturers’ Ass’n Ins. Co., 2016 Phila. Ct. Com. Pl. LEXIS 158 (Pa. Ct. Com. Pl. May 4, 2016), the court noted that:

Unlike environmental pollution or asbestos damage, which can remain hidden for many years before it manifests, the physical violation (bodily injury) arising from child sexual abuse is experienced immediately by the victim, although the harm often continues to be felt long thereafter. To the extent that PSU’s negligence enabled Sandusky to abuse his victims, such bodily injury manifested when the first abuse of each victim occurred.

The court also followed prior Pennsylvania Superior Court authority which held that each victim constitutes only one occurrence, no matter how many separate instances of sexual abuse took place. General Accident Ins. Co. v. Allen, 708 A.2d 828, 834-835 (Pa. Super. 1998) (one occurrence for each child where three children were sexually abused from 1986 to 1988). Pennsylvania does not appear to have addressed a situation with multiple abusers.

Unfortunately this will likely continue to be an area to watch as courts around the country continue to grapple with trigger and number of occurrences in these sexual abuse cases.