Welcome! We've designed this resource to provide you with abstracts of and links to current articles from Coverage, the official, journal-quality publication of the ABA Committee of Insurance Coverage, Section of Litigation. Coverage contains articles about important and cutting-edge issues and decisions concerning insurance coverage litigation, as well as information about Committee meetings and activities.
TABLE OF CONTENTS
Kenneth Anspach on “the Illinois Pro Rata Myth”
In his article appearing in the September/October 2009 issue of Coverage, solo practitioner Kenneth Anspach disputes the proposition that in Illinois the accepted method of allocation of indemnity and defense costs at the primary level of insurance for continuously triggered occurrences is pro rata. Insurers often contend that where coverage for a single occurrence is triggered among primary insurers, obligations of indemnification and defense must be allocated on a pro rata basis in Illinois. The article asserts that instead, in such instances, Illinois courts uniformly follow the holding of the Illinois Supreme Court in Zurich Ins. Co. v. Raymark Industries (“Zurich”), 118 Ill. 2d 23 (1987), that the “all sums” provision in typical commercial general liability policies precludes the use of pro rata allocation. The court there held that each primary insurer whose policy was triggered by bodily harm from asbestos exposure was “jointly and severally liable for the total indemnity and defense costs of a claim without proration.”
The article distinguishes Illinois Appellate Court decisions where pro rata allocation has been granted. Some of those cases involved allocation disputes between primary and excess insurers. The doctrine of horizontal exhaustion established and followed in those cases is inapplicable to allocations of coverage solely at the primary level. In another case, an Illinois Appellate Court found the primary insurer liable on a pro rata basis but that case involved separate and distinct occurrences over several years and unusual limiting language in the definition of advertising injury. The article notes that the court “specifically distinguished” the holding in Zurich on those grounds.
In contrast, the article cites cases that have followed Zurich in requiring primary insurers to pay “all sums” rather than allocating their liability on a pro rata basis.
Thus, the article concludes that pro rata allocations of liability for defense and indemnity costs have only been applied in Illinois in limited situations involving either the doctrine of horizontal exhaustion or where unusual policy language limits “all sums” application and where the subject of the claim consisted of multiple occurrences, rather than a continuous occurrence.
ALLOCATION
Vance A. Woodward of Carroll, Burdick & McDonough LLP on “Scope of Coverage Is a Matter of Contract Interpretation”
In an article appearing in the May/June 2009 issue of Coverage, Vance A. Woodward of Carroll, Burdick & McDonough LLP contends that the language of the typical CGL occurrence-based policy itself resolves the allocation of damages issues as to long-tail claims. He maintains that courts thus need not and should not resort to extra–contractual doctrines such as “reasonable expectations of the insured” to resolve the issue of whether the policy provides pro-rata or all-sums coverage. The author finds after surveying the leading scope-of-coverage cases that “many courts simply fail to mention the key policy language, let alone analyze it” and that those do provide a superficial analysis.
This issue arises with respect to “long-tail” claims, i.e., where exposure to harm occurs in one or more policy periods but the manifestation of the injury occurs in a later period or periods. Can the insured choose any one triggered policy to pay the entire claim where more than one policy is triggered (all-sums coverage) or does each policy cover only an allocable share of the insured’s liability (pro-rata coverage)? The article provides a painstaking analysis of the occurrence-based 1966 CGL form issued by the National Bureau of Casualty Underwriters. It considers the positions of the all-sums advocates and the pro-rata advocates in interpreting the policy. The article concludes that the policy period provision yields coverage only for injury and damage that actually occurs during the policy period and thus only pro-rata coverage is available. A chart supplements the article providing a multi-state survey of cases that have considered the issue in terms of all-sums or pro-rata coverage under the duty to indemnity and the duty to defend.
Keala C. Ede of Robins, Kaplan, Miller & Ciresi L.L.P. on “Protecting Your Neutral: The Confidentiality of Ex Parte Communications with Party-Appointed Arbitrators”
This article, appearing in the November/December issue of Coverage, the periodical of the Committee on Insurance Coverage Litigation of the ABA’s Section of Litigation, explores issues of confidentiality and privilege presented by ex parte communication between parties and their appointed arbitrators. The article first considers confidentiality of ex parte communications with party-appointed arbitrators prior to and during the arbitration proceedings, examining applicable provisions of the American Arbitration Association Code of Ethics for Arbitrators in Commercial Disputes, the ARIAS·U.S. Practical Guide and the ARIAS·U.S. Code of Conduct (also called “Guidelines for Arbitrator Conduct”). The article then discusses the confidentiality of ex parte communications with party-appointed arbitrators during court proceedings, reviewing apposite federal jurisprudence and noting the purposes for which parties may and may not depose arbitrators. The article concludes by cautioning practitioners as to the limits of the attorney-client privilege and the work product doctrine in protecting against discovery of communications between a party and its appointed arbitrators after the conclusion of the arbitration proceeding.
H. Richard Chattman and Gregory D. Miller of Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C. on “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?”
In their article appearing in the July/August 2009 issue of Coverage, “Measuring Business Interruption Loss in Wide-Impact Catastrophes: Insurance Against Catastrophes or Only Against Insured Damage from Catastrophes?” H. Richard Chattman and Gregory D. Miller initially note that unlike an ordinary loss causing damage to a single location, a wide-impact catastrophe (e.g., hurricane, earthquake, 9/11 attack) can cause substantial, lasting economic changes, so that pre-catastrophe business levels are often unreliable indicators of probable post-catastrophe earnings. Yet the courts are split on whether these extraordinary economic changes should be considered in measuring the compensable loss under a business interruption insurance policy or whether they should be excluded from the calculation and instead loss should be measured strictly against pre-catastrophe earnings.
This article analyzes the developing case law measuring business interruption loss in wide-impact catastrophes, and critiques the divergent rationales for the different measurements the courts have applied. Some business interruption measurement provisions provide that “due consideration shall be given to experience of the business before the loss and the probable experience thereafter had no loss occurred.” The article evaluates whether some courts have been correct in equating “had no loss occurred “with “had no catastrophe occurred.” Other business interruption measurement provisions instead use the phrase “had no interruption of production or suspension of business operations or services occurred.” The article opines that different measurement approaches for those differently phrased provisions are not justified. The authors state, “[T]he most appropriate principle ─ the one that considers the actual impact of the post-catastrophe economy on the insured’s business ─ flows logically from the basic business interruption coverage provided for earnings lost as a direct result of insured or other trigger damage.”
The article further identifies evidentiary issues that have arisen from the controversy as to how to measure a business interruption loss caused by a wide-impact catastrophe.
Josephine H. Hicks and Terry L. Wallace of Parker Poe Adams & Bernstein LLP on “Insurance 101: Choice of Law in Insurance Coverage Disputes”
An article appearing in the May/June 2009 issue of Coverage by Josephine H. Hicks and Terry L. Wallace of Parker Poe Adams & Bernstein LLP provides an overview of the various choice of law rules that are applied in insurance coverage litigation. The authors point out that the threshold issue of which jurisdiction’s substantive law governs the dispute can be outcome determinative. “The bottom line is that a court interpreting the exact same policy language under two different sets of substantive law could reach entirely different results depending on which state’s law applies.” Insurance coverage issues in which a choice of law analysis can be outcome determinative include:
Whether insurer prejudice as a result of late notice by the policyholder is a prerequisite to denial of coverage;
A state’s position on interpreting the “sudden and accidental” pollution exclusion;
Trigger of coverage;
Bad faith;
Tender of defense costs;
The scope of the duty to cooperate;
How damages are determined; and
Whether a party qualifies as an additional insured.
The article surveys the major methods of resolving choice of law issues in insurance coverage disputes:
The traditional Lex Loci Contractus rule enunciated by the Restatement (First ) Conflict of Laws;
The modern Most Significant Contacts analysis called for by the Restatement (Second) Conflict of Laws; and
State statutes that dictate how choice of law issues are to be resolved, specifically those of North Carolina, South Carolina, Texas, and Virginia.
Each of these approaches is analyzed, variations within the approaches are noted, and instructive court decisions are examined. There is an appendix to the article identifying the approach taken by each state and the District of Columbia as well as citations to illustrative court decisions within each of the jurisdictions.
Werner A. Powers and Charles C. Keeble, Jr. of Haynes and Boone, LLP on “Notifying Your Claims-Made Liability Carrier of a Claim: Better Late than Never”
In their article appearing in the September/October 2009 issue of Coverage, the authors address the issue of whether an insurer should be required to show it was prejudiced by the insured’s late notice of a claim under a claims-made policy in order to be entitled to deny coverage on the basis of that late notice.
By way of background, there are three distinct types of insurance policies. An occurrence policy provides coverage for injuries or damages that occur during the policy period even if the claim is not made until after the policy period has terminated. A claims-made policy (a “pure” claims-made policy) provides coverage for a claim first made against the policyholder during the policy period for injuries or damages that occurred either during or prior to the policy period. A claims-made-and-reported policy provides coverage only if the claim against the policyholder was made during the policy period and the insured reported the claim during the policy period (or a specified period thereafter).
Occurrence policies typically require the policyholder to provide notice of a claim “as soon as practicable.” This allows an insurer to investigate the facts of the claim and participate in the policyholder’s defense of the claim. But the authors note that given the long length of time involved in litigation, insurers are often not adversely affected by a policyholder’s late notice. Thus, most jurisdictions require insurers of occurrence policies to show they have been prejudiced by late notice before their denial of coverage on that basis will be upheld. This “notice-prejudice” rule does not properly apply to a late notice of claim that is provided after the reporting period of a claims-made-and-reported policy. Otherwise the policyholder would obtain more coverage than for which it bargained.
“Pure” claims-made policies, like occurrence policies, typically require the policyholder to provide notice of a claim “as soon as practicable.” Should the notice-prejudice rule apply to such policies? The authors report that many courts have previously said no, failing to distinguish between “pure” claims-made policies and claims-made-and-reported policies. But this was not the case in the 2009 Texas Supreme Court decision in Financial Indus. Corp. v. XL Specialty Ins. Co., 2009 Tex. LEXIS 109. In that case, the policyholder did not provide notice of a suit filed against it to its insurer until seven months after the suit was filed. The notice was, however, given prior to the expiration of the insured’s “pure” claims-made policy. The court held that, in the absence of prejudice to the insurer, the “late” notice of claim did not bar coverage. The authors analyze that decision in their article and concur with its holding, showing why the analysis of the applicability of the notice-prejudice rule [to “pure” claims-made policies] is logically no different from the analysis under an occurrence policy. There is no requirement that the claim must be reported to the insurer during the policy period or within a specified time thereafter. The notice-prejudice rule thus properly applies to a “pure” claims-made policy
Another 2009 Texas Supreme Court decision addressed the applicability of the notice-prejudice rule in Texas as to a “late” notice under a claims-made-and-reported-policy. In Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 2009 Tex. LEXIS 111, although the notice given by the policyholder could reasonably be seen as tardy, it was given prior to the deadline for giving notice specified in the policy.The court again applied the notice-prejudice rule, holding that coverage could not properly be denied on the basis of late notice in the absence of the insurer demonstrating that it was prejudiced by such notice.
The authors state that Financial and Prodigy teach that “the effect of a late notice of claim on a [policyholder’s] coverage properly turns on the type of claims-made policy at issue and/or whether excusing a [policyholder’s] late notice of a claim would in effect, rewrite the parties’ insurance contract by affording insurance coverage to the [policyholder]” for risks the insurer did not assume. The authors reason that the only time the notice-prejudice rule should be inapplicable to a late notice of a claim under a claims-made policy is with respect to a notice given outside the reporting period of a claims-made-and-reported policy. The authors note that whether such reasoning will be followed by the Texas Supreme Court and courts elsewhere remains to be seen.
Robert D. Chesler and Syrion Anthony Jack of Lowenstein Sandler, PC on “Interrelated Acts, Unrelated Case Law”
In their article appearing in the March/April 2009 issue of Coverage, Robert D. Chesler and Syrion Anthony Jack of Lowenstein Sandler, PC, submit that the case law as to whether a current claim against the policyholder of a claims-made policy relates back to a prior claim is so divergent as to provide little guidance. Yet this issue is often key to determining coverage because claims-made policies operate under the concept that a single claim will only trigger a single policy. Thus, subsequent claims that relate back to the original claim are deemed to have been made in the year of the original claim. The authors point out that this issue often arises either “where a policyholder wants a claim to relate back in order to gain coverage in a prior policy period as opposed to its current one” or “where the insurer disclaims coverage by asserting that a new claim relates back to an earlier policy.”
The authors find that the case law on this issue is “hopelessly irreconcilable” in part because of the fact-intensive analysis that courts tend to use in deciding this issue. For example, in both Ace Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789 (D. Md. 2008) and Allamerica Fin. Corp. v. Certain Underwriters at Lloyd’s London, 449 Mass. 621 (2007), the courts found the claims at issue were not interrelated. Yet the converse result was reached on similar facts in WFS Fin., Inc. v. Progressive Cas. Ins Co., Inc., 232 Fed. App’x 624 (9th Cir. 2007) and Capital Growth Fin. LLC v. Quanta Specialty Lines Inc. Co., No. 07-80908-CIV, 2008 U.S. Dist. LEXIS 65814 (S.D. Fla. July 30, 2008). For instance, the authors note that both ACE and WFS involved claims brought by different plaintiffs in different jurisdictions and both courts applied the “common nexus test” and yet reached different results. The author’s survey of both recent and older case law reveals similarly uneven outcomes. They conclude that both insurers and policyholders need to be aware of the unpredictable state of the law where interrelatedness is at issue.
James W. Bryan of Nexsen Pruet, L.L.C. on “Right to Independent Counsel?”
In his article appearing in the May/June 2009 issue of Coverage, James W. Bryan of Nexsen Pruet, L.L.C. explores the question of whether ─ and under what circumstances ─ an insurer’s reservation of rights to contest coverage creates a conflict of interest for which the insured has a right to retain its own counsel ─ independent of the insurer ─ to defend a liability claim at the insurer’s expense. The answer may depend on the jurisdiction of the forum and the state’s law that governs the issue.
In some jurisdictions, there is a “per se” disqualification rule under which the insurer’s issuance of a reservation of rights letter automatically disqualifies the insurer’s defense counsel and entitles the insured to retain independent counsel at the insurer’s expense. The article explains the reasoning of the courts that apply this per se rule. In short, they reason that an insurer’s reservation of rights triggers a conflict of interest as a result of the underlying lawsuit against the insured alleging both covered and uncovered conduct by the insured. They note that the insurer would lack incentive to “vigorously” defend its insured on a portion of the claims that that appear not to be covered by the policy.
In many other jurisdictions, the courts undergo a case-by-case analysis in a reservation of rights situation to determine if the insurer is required to honor the insured’s selection of independent counsel at the insurer’s expense. Such court decisions are examined. They set forth criteria under which counsel retained by the insurer must act in such situations.
The article proceeds to discuss pertinent conflict of interest ethics rules and the cases that interpreted and applied them. As the article notes, “The problem is governed at its core by the Rules of Professional Conduct that address conflicts of interest where an attorney has multiple clients or where a third party is paying the attorney to represent a client (such as the insured).
The article further imparts practice tips from (1) the standpoint of the insured in deciding whether to assert a right to independent counsel and in choosing what to do if the insurer declines to consent to it; (2) the standpoint of the insurer in deciding whether to issue a reservation of rights letter, and how to respond to a demand for independent counsel, such as filing a declaratory judgment action; and (3) from the standpoint of insurance defense counsel, such as in terms of what communications to have and not to have with the insured and the insurer.
CONFLICT OF INTEREST
Dale Hausman on “Uncertainty as to Extra-Contractual Liability for an Insurer’s Failure to Advise the Policyholder of Conflict of Interest and Option to Retain Independent Counsel for Defense under Reservation of Rights”
When a liability insurer provides its policyholder with a defense subject to a reservation of rights, a conflict of interest could arise between the insurer and the policyholder entitling the policyholder to retain independent counsel at the insurer’s expense. This article, appearing in the January/February 2009 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, notes that jurisdictions differ as to the insurer’s disclosure obligations under such circumstances. In a minority of jurisdictions, an insurer’s failure to advise its policyholder of the conflict of interest and of the policyholder’s potential right to independent counsel could subject the insurer to extra-contractual liability, including penalties and additional damages or to “coverage-by-estoppel.” The article focuses on two decisions issued in 2008 that reached starkly different conclusions as to this issue: Stoneridge Dev. Co. v. Essex Ins. Co., 290 Ill. 2d 660 (2008) and Elacqua v. Physician’s Reciprocal Insurers, 52 A.D.3d 886 (2008). “As a result,” the author concludes, “the law concerning what an insurer must advise the policyholder when it defends under a reservation of rights, and the prospective relief available to the policyholder if the insurer fails to provide such advice, remains particularly unclear and inconsistent among various jurisdictions….”
CONFLICTS OF INTEREST
John S. Vishneski, Noel C. Paul and Jessica E. Brown of Reed Smith LLP on “With Reservations: Why Conflicts of Interest Arise when Insurers Reserve Their Rights, and What Insurers Must Do in Response”
In an article focusing on Illinois law appearing in the Spring issue of Coverage, John S. Vishneski, Noel C. Paul and Jessica E. Brown of Reed Smith LLP submit that an insurer that improperly responds to a conflict of interest after reserving its rights should be entirely estopped from contesting coverage. Their article, “With Reservations: Why Conflicts of Interest Arise when Insurers Reserve Their Rights, and What Insurers Must Do in Response,” first illustrates why an insurer frequently faces a conflict of interest after reserving its right not to indemnify its policyholder if it is later determined that the policyholder is not entitled to coverage under the policy. The conflict arises from the fact that the attorney hired by the insurance company to defend in an action against the policyholder owes fiduciary duties to two clients: the insurer and the policyholder. There is a conflict of interest where the insurer’s appointed counsel cannot avoid advancing the interests of one of the clients to the detriment of the other. Under Illinois law, an insurer who either fails to explain the conflict of interest to the policyholder or fails to observe the policyholder’s rights may be estopped from denying coverage. The policyholder’s rights include:
The right to independent counsel;
The right to reimbursement of reasonable defense costs;
The right to reimbursement of defense costs as they are incurred; and
The right to reimbursement of all defense costs prior to a determination of noncoverage.
The article discusses each of these rights as interpreted by Illinois’ courts.
An insurer whose reservation of rights letter fails to fully and clearly advise the policyholder of the conflict of interest will be estopped from disclaiming coverage pursuant to Illinois court precedents. However, a few Illinois court decisions have held that a policyholder must prove that it was prejudiced by the insurer’s failure to disclose a conflict of interest for the insurer to be estopped. The authors submit “The better rule … find[s] de facto prejudice, and a breach of the duty to defend, where the insurer fails to disclose its conflict of interest when it first provides its defense” that “may and should lead to the insurer being estopped from contesting coverage.”
F. Lane Finch on “When Disaster Strikes Someone Else: Protection Through Contingent Business Interruption Coverage”
Early on, this article sets forth the importance of contingent business interruption coverage today: “The interdependency of companies within the vertical supply chain, the growth of outsourcing, and reliance on just-in-time inventories all increase the risk of loss if one company in the modern web of commerce falters.” The article, which appears in Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, first explains the difference between business interruption (BI) coverage and contingent business interruption (CBI) coverage and notes that while CBI coverage is included in most sizable commercial property policies, typically it will have a small sub-limit. In order to obtain higher limits and broader terms, the policyholder must identify the specific supplier, recipient and leader properties that are crucial to its business. If there are sub-suppliers or other indirect properties that a policyholder deems crucial to its business model, the policyholder needs to negotiate specific coverage for them as well.
Acknowledging that CBI coverage language differs among contracts, the article describes typical terms and then key issues in interpreting CBI coverage, as revealed by case law:
Identifying suppliers or “contributing parties;”
Determining what constitutes “physical loss or damage;”
Determining whether or not a total cessation of business is required to trigger coverage; and
Calculating the appropriate “restoration period” to which coverage will extend.
The article analyzes each of these issues by examining pertinent and instructive court decisions.
Richard D. Milone and Elizabeth C. Scanlan on “Tensions Between the Duty to Cooperate and the Attorney-Client Privilege”
In the tripartite relationship between insurer, policyholder and defense counsel hired by the insurer to represent the policyholder, there is a tension between the policyholder’s duty to cooperate with the insurer in the defense of the liability claim (as required by most CGL policies) and the possibility that the information the policyholder discloses may be used against it in a subsequent coverage action. The Jan/Feb 2009 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, features an article that first explores the history and purposes of the duty to cooperate clause, finding that most courts hold the primary purpose is to aid the insurer in the defense of a liability suit and not in a coverage action.
The article next examines the applicability of the cooperation clause and finds that the courts hold it only applies when the insurer is providing a defense. Moreover, there is a split in authority as to whether the policyholder has a duty to cooperate if the insurer is providing the defense under a reservation of rights. The article then considers the extent of cooperation required of the policyholder when the clause is applicable and what the insurer can and cannot do with privileged attorney-client information it obtains. The article concludes with recommendations for policyholders seeking to comply with policy language while protecting their own interests.
Access the full article on Lexis.com
Jarrett A. Williams of Covington & Burling LLP on “The Duty to Defend Implicit Claims”
In an article appearing in the March/April issue of Coverage, entitled “The Duty to Defend Implicit Claims,” Jarrett A. Williams of Covington & Burling LLP first notes that the duty to defend generally requires a liability insurer to defend any lawsuit that could result in entry of a judgment against the insured that would be covered by the insurance policy. A typical duty to defend provision in an insurance policy triggers that duty even if the claim is groundless, false or fraudulent, as long as the claim would be covered if the plaintiff prevailed.
Under modern notice pleading rules, a complaint can set forth a claim for relief that creates the risk of a judgment that would be covered by the insurance policy even if that claim is merely implicit in the complaint’s allegations. In the article, the author argues that these “implicit claims” trigger an insurer’s duty to defend to the same extent as explicit claims.
Implicit claims are allegations that the plaintiff does not expressly label as claims but which nevertheless set forth a claim or claims that entitle the plaintiff to relief. An implicit claim can be established by combining allegations appearing anywhere in the complaint. It can also constitute what the author calls a “lesser –included claim,” e.g., an explicit allegation of an intentional tort can conceal an implicit claim for the unintentional version of the same tort. Mr. Williams maintains: “Just as there is no distinction between explicit claims and implicit claims when determining whether a complaint states a claim entitling the plaintiff to relief, there should be no distinction between explicit and implicit claims when determining whether a complaint triggers the duty to defend.”
George B. Flanagan, Professor of Insurance, at Illinois State University, on “New Evidence on Why Casualty Insurers are Obligated to Continue to Pay Defense Costs After the Exhaustion of CGL Indemnity Limits”
This article, appearing in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation examines the issue of whether a casualty insurer has a duty to pay defense costs after the limits of a pre-1966 CGL policy have been exhausted. The issue exists today in long-tail product claims and many insurers contend that there is no such duty. However, the author asserts, “Many such policies, reflecting the modest limits of the era have long paid out their limits while millions of dollars of defense costs remain and should be paid.” The article first addresses the contention that in the mid-20th century there was no duty to defend after the indemnity limits had been exhausted and focuses on the New Hampshire Supreme Court decision of Lumberman’s Mutual Casualty Co. v. McCarthy. The article next analyzes the literature of the era with respect to the contention that the casualty insurance custom and practice in the middle third of the century was to continue to defend after the policy limits had been exhausted. Lastly, the article examines the insurers’contention that the fourth edition of the CGL introduced in 1955 established that an insurance policy limitation applied to the duty to defend.
Access the full article on Lexis.com
David M. Halbreich, Ann V. Kramer, and Bridget C. Byrnes of Reed Smith LLP on “Put Your Money where Your Mouth Is: Insurance Coverage Issues Arising from Food Contamination Claims”
In their article appearing in the July/August issue of Coverage, “Put Your Money where Your Mouth Is: Insurance Coverage Issues Arising from Food Contamination Claims,” David M. Halbreich, Ann V. Kramer and Bridget C. Byrnes observe that contaminated food can travel through many hands before it is consumed, potentially implicating many parties and a number of insurance policies. The article addresses the following insurance coverage issues that food contamination claims can elicit:
Are the kinds of damages that are insurable limited by applicable insurance policies?
If the claims are covered, and more than one insurer has issued policies triggered by the loss, which insurer must first respond to the claims?
If there is an indemnification and hold harmless agreement between a supplier and a distributor how does it affect their obligations to each other?
If there is such an agreement, how does it affect the various insurers’ obligation to provide insurance to the parties?
What consequences follow if a supplier is named as an additional insured on a distributor’s policy or vice-versa.
The article deals with these issues by anticipating assertions that insurers will make in order to deny or limit coverage and how insureds can successfully reply under existing law.
Part I of the article examines the “other insurance” clause and insurers’ arguments for horizontal exhaustion of available insurance.
Part II explores whether a typical “cross suits” exclusion works to prevent coverage for an action between the parties to an indemnification agreement.
Part III sets forth the types of losses that a retailer might incur─including lost profits, medical screening costs, disinfection costs, and consulting costs─and the contentions its insurer may make that those types of losses do not come under the “bodily injury” or “property damage” coverage provisions of CGL policies.
Part IV considers whether standard exclusions for liability arising from the dispersal of pollutants and exposure to mold, spores or fungi.
Pertinent case law is discussed throughout.
Max H. Stern and Jessica E. La Londe of Duane Morris LLP on “Keep it Cool: Potential Coverage Defenses to ‘Global Warming’ Lawsuits”
In their article Keep it Cool: Potential Coverage Defenses to “Global Warming” Lawsuits, appearing in the July/August 2009 issue of Coverage, Max H. Stern and Jessica E. La Londe discuss several potential coverage defenses to global warming liability claims. Specifically these are claims by corporate insureds that their insurance policies provide coverage for their alleged liability for contributing to global warming. The authors acknowledge that specific defenses will vary from case to case and “there is no predicting the creative arguments both sides of this dispute will undoubtedly assert as climate change lawsuits develop.” Nevertheless, the authors believe common defenses will involve the fortuity requirement, the loss in progress rule, and the pollution exclusion.
In terms of the fortuity requirement, some jurisdictions require that the occurrence ─ the act of releasing climate changing substances into the environment ─ be accidental for there to be coverage. Other jurisdictions uphold the denial of coverage where the insured intended or expected (or should have expected) harm to the environment to result from its actions. The article describes what arguments insurer’s and insured’s counsel can make to address these thresholds.
In terms of the loss in progress rule─embodied in the “Montrose endorsement” added to CGL policies in the late 1990s─coverage is precluded for property damage that was known by the insured to have occurred prior to the inception of the policy. The authors expect insurers to make that argument with respect to damage to the environment.
The article also examines the applicability of the pollution exclusion to coverage defenses for liability claims for global warming. It does so by first addressing the threshold issue of whether the underlying claim involves a pollutant. If the allegedly offending substance is deemed a pollutant, the article then turns to the analysis of whether the pollution exclusion of the policy applies. It examines the various forms the pollution exclusion has taken over the years including the “sudden and accidental” pollution exclusion, the “absolute” (or “total”) pollution exclusion and the pollution exclusion with a clause that it will apply unless the pollution incident is discovered by the insured within 72 hours among other requirements. In each instance, the article analyzes the pollution exclusion at issue and assesses its applicability to climate change claims.
The article further explores trigger of coverage issues. The trigger of coverage determines which policies must respond to a claim by examining when the injury or damage is deemed to have taken place. The article next examines allocation issues as once a court determines which insurance policies are triggered by a claim that spans multiple policy periods, the court must then address the issue of how to allocate the total loss among the triggered policies. Lastly, the article points out that underlying lawsuits alleging climate change may also allege punitive damages. If coverage issues arise as to the insurability of such punitive damages, the article notes that which states’ law will apply to the issue may be the determinative factor for coverage.
The article concludes that “the best strategy for insurers and their policyholders alike is to ensure the best possible liability defense to new forms of mass tort claims, like climate change lawsuits, in the first place.”
David A. Gauntlett of Gauntlett & Associates on “Insurance 101─Insight for Young Lawyers: No Discovery is Appropriate in Addressing Coverage for Intellectual Property Disputes”
In his article, “Insurance 101─Insight for Young Lawyers: No Discovery is Appropriate in Addressing Coverage for Intellectual Property Disputes” appearing in the July/August 2009 issue of Coverage, David A. Gauntlett states that while many insurance coverage disputes may warrant discovery, it is rarely appropriate in analyzing “offense” based coverage typically implicated in intellectual property/unfair competition/antitrust coverage litigation disputes. This is especially the case where the insurer has denied a defense based on a cursory review of the pleadings in the underlying action. Facts not labels govern determination of coverage issues. All facts essential to analyzing coverage may not be set forth in the pleadings. Coverage should not be evaluated after the fact. An insurer cannot use discovery to conduct the investigation it should have performed upon receipt of notice from its insured.
How individual courts approach this issue depends upon what the facts are for coverage purposes. There are three rules. The first limits analysis to the allegations of the complaint; the second, to facts known to the insurer; the third, to facts available to the insurer. Discovery about what role particular fact allegations played in theories of recovery and/or damages in the underlying action are irrelevant to this determination.
Insurers should be wary about denying a defense in a “facts available” forum. Facts first brought to the insurer’s attention after the underlying action concluded (that could have been anticipated based on allegations in the pleadings) may trigger a defense.
John Mumford and Kathryn E. Kransdorf on “Insurance 101–Insights for Young Lawyers: Still No Certainty–Determining the Number of Occurrences in the Context of Multiple Injuries Caused by a Single Perpetrator”
The question of how many “occurrences,” as that term is used in commercial general liability (“CGL”) policies, transpired when one perpetrator has caused multiple injuries is quite significant in more than one respect. In an article, appearing in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, the authors explain, “This is because the term is operative in both the coverage language of the policy and in the language addressing the calculation of limits of insurance (as well as deductibles).” Yet the courts have not come up with a uniform answer in over 50 years of litigation. The article describes the two tests the courts have used in interpreting CGL policies to arrive at the number of “occurrences” that transpired in the cases before them: the “effect approach” and the “cause approach.” Although the courts now have largely settled upon the latter test, this is not dispositive of the issue, because the courts have differed in how they have applied the cause approach. This article analyzes pertinent court decision illustrating these differences in two genres of cases: those involving shootings of multiple individuals and those involving alleged child molestation claims. The article concludes with a discussion of the consequences and opportunities for practitioners in having this critical issue still unsettled in the law.
Kay Brady and Jeffrey Meagher of K&L Gates on “Occupational Disease Coverage for Work-Related Illness Claims in the Tort System”
In their article appearing in the September/October 2009 issue of Coverage, Kay M. Brady and Jeffrey J. Meagher point out that with manufacturers of asbestos-containing products heavily involved in asbestos-related litigation, plaintiffs’ lawyers are filing lawsuits against new targets—their clients’ employers who have used asbestos and other harmful products in their premises. Previously, employers were thought to be protected against the massive damages associated with such lawsuits as injured current and former employees were confined to the limited remedies provided under workers’ compensation and occupational disease statutes. However, plaintiffs’ lawyers are evading these exclusivity provisions by asserting their clients were injured due to the employers’ intentional conduct and/or negligence. Some courts have held that such tort actions can be maintained. And when the employers turn to their insurers for coverage they are finding that many of their general liability policies have provisions that limit coverage for “occupational disease” claims. The article states, “The multimillion dollar question for employers and their insurers is whether the term ‘occupational disease’ includes work-related illness claims filed in the tort system or whether it is limited to claims filed under a statutory scheme like workers’ compensation.”
Insurance coverage litigation over the issue has generated two competing interpretations of “occupational disease”: (1) it is a disease developed by employees during the course of their employment; or (2) it is a term of art that is limited to claims for benefits under workers’ compensation or occupational disease statutes. The article explores the history of how courts have defined “occupational disease” and finds that to the extent that the term had any meaning prior to passage of these statutes, it was used to differentiate between diseases caused by an employer’s negligence and diseases associated with a particular occupation, but not caused by an employer’s negligence, for which there was no common law cause of action. Now that all 50 states have created a statutory scheme to compensate workers suffering from certain work-related illnesses, the article asserts that term “occupational disease” has acquired a new meaning. While once it was used solely to differentiate between diseases for which there was a common law cause of action and diseases for which there was not, now the term “occupational disease” also refers to diseases for which there is a statutory remedy.
The article concludes that employers confronting claims in the tort system might seek to circumvent occupational disease coverage limitations that their insurers may invoke. Barring policy language to the contrary, the history of the usage of the term “occupational disease” and the statutes that now provide compensation for “occupational disease” support the contention that it is a term of art referring solely to claims for statutory benefits.
Sherilyn Pastor and Jerry P. Sattin of McCarter & English LLP on What Does “Physical Damage” Mean When It Doesn’t Work? “Physical Damage” as Loss of Function, Value, or Use in Liability and First Party Coverage
In their article appearing in the September/October 2009 issue of Coverage, Sherilyn Pastor and Jerry P. Sattin examine the meaning of the term “physical damage,” a term that is undefined in most insurance policies, yet central to insurance coverage under liability and all-risk policies. They explain that “physical damage” means more than visible material damage (e.g., a burned down building). It includes loss of property’s use, value or function, “even if only temporarily and even in the absence of any visible material change to the property.”
The article focuses on Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524 (2009), a New Jersey Superior Court, Appellate Division decision (left undisturbed by the Supreme Court) that explores the meaning of “physical damage.” There, a supermarket chain’s food spoilage losses (due to the largest power failure in North American history) constituted “physical damage” on the basis of loss of use or function. The authors explain that the “Wakefern decision does not stand in isolation,” and review other court’s decisions finding insurance coverage for physical damage involving:
· Buildings with no visible material damage but that are rendered uninhabitable or otherwise unable to function as intended;
· Foods or beverages that are fit for human consumption but are rendered unmerchantable; and
· Power outages that temporarily prevent machinery from functioning.
The authors conclude “Policyholders and insurers therefore should regard the term [physical damage] broadly and flexibly as commonsense and the law of various jurisdictions require.”
J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP on “Property Damage Appraisals: Process, Law, and Strategies”
In their article appearing in the May/June issue of Coverage, J. Randolph Evans and J. Stephen Berry of McKenna, Long & Aldridge, LLP observe that the appraisal process to determine the amount of loss in property damage claims increasingly is seen as a predicate to litigation. For instance, delays have resulted in allegations that the insured failed to cooperate and/or the insurer committed bad faith. Appraisal awards too low in the insured’s estimation have led to wrongful refusal to pay claims while excessive awards from the insurer’s perspective have led to fraudulent claim allegations. To return to the alternative claims dispute resolution process contemplated by the insurance contract, the authors note the emergence of a focus on court orders and memoranda of understanding that “(a) vest jurisdiction in the appraisal panel (specifically the umpire); (b) channel disputes about the progress of the appraisal (specifically including the speed of the process) back into the appraisal itself; and (c) specify the award form in order to eliminate disputes regarding what the panel decided and what it did not.” The object is to create better opportunities to resolve all the claims issues within the appraisal process. The article reviews each phase of an appraisal and imparts warnings, recommendations and opportunities along the way. The authors note that while the amount of loss awarded is binding on the parties, other issues may remain, including the application of exclusions, sub-limits and ― notably, issues of causation.
The article points out that if the parties failed to provide for the appraisal to resolve issues as to damages as for example where the loss is the result of multiple causes, some excluded by the policy, this could be grounds for litigation. The article proceeds to discuss cases ruling on the proper scope of appraisals and notes that the majority of states do not allow appraisals to determine causation. In contrast, assertions of bad faith claims handling can ― and the authors state “should” ― be addressed within an appraisal process. The article examines court decisions addressing the interaction between appraisal clauses and bad faith claims by focusing on pre-appraisal bad faith claims, allegations of bad faith during the appraisal process, and post-appraisal bad faith claims.
The article presents an outline of steps that can facilitate a dispute resolution process that maximizes accuracy and minimizes litigation. The authors state that the objectives are “parity and clarity.” The steps include orders of referrals that transfer jurisdiction from a court to an arbitration panel and empower the umpire in an appraisal panel to make decisions needed for the orderly and timely progress of the appraisal and appraisal documents designed to ensure a fair process. Appendices to the article present samples of such appraisal documents ― a memorandum of appraisal and an appraisal award.
Tobias J. Cushing of Saxe Doernberger & Vita, P.C. on “Regulatory Estoppel 15 Years After Morton: A Fifty State Survey & Discussion of Arguments Regarding Regulatory Estoppel”
An article appearing in the March/April issue of Coverage, “Regulatory Estoppel 15 Years After Morton: A Fifty State Survey & Discussion of Arguments Regarding Regulatory Estoppel” is by Tobias J. Cushing of Saxe Doernberger & Vita, P.C. He points out that courts are increasingly estopping insurance companies from interpreting policies and adjusting claims in ways that differ from what they told insurance regulators. Currently, the state courts are divided as to the extent such “regulatory estoppel” will be applied or limited.
The seminal insurance coverage case on regulatory estoppel is Morton Int’l, Inc. v. Gen. Accident Ins. Co. of Am., 629 A.2d 831 (N.J. 1993). In that case, the court held that the insurance industry’s representations to regulators that a pollution exclusion would not apply to unintentional and gradual pollution estopped insurers from taking a contrary position as to the plaintiff’s claims for insurance coverage. The article analyzes that court decision as well as others that adopted regulatory estoppel. It also analyzes selected cases rejecting regulatory estoppel. It further provides a 50-state survey of court decisions on the issue. The author notes that thus far regulatory estoppel has only been applied to the pollution exclusion in CGL policies. Questions as to the future include:
· Will the doctrine be applied to other policy provisions?
· Will the doctrine be applied to other types of insurance?
· Whether there are arguments that can be made to limit or defeat its application?
The article explores each of these questions.
Gerald V. Weigel, Jr. of Dinsmore & Shohl, LLP on “A Random Walk Through the Corporate Succession Thicket─Recent Cases Involving Transfers of Coverage”
The lead article in the November/December 2008 issue of Coverage, the publication of the Committee on Insurance Coverage Litigation (ICLC) of the ABA’s Section of Litigation, addresses the question of whether insurance policies purchased by a company whose assets have been sold or transferred to a successor company provide coverage to that successor company. Given the regularity with which corporations purchase and sell one another, in whole or in part, this issue is frequently litigated. Moreover, the issue has been complicated by mass tort claims that have generated disputes concerning liability insurance policies issued years, even decades, ago.
The author emphasizes that the cases in this area are too numerous to review here and so he has chosen ones he find especially provocative. He focuses upon cases which have particularly troubled the courts: “those where an insured corporation sells or transfers assets to another corporation, which thereafter is sued as a result of a loss at least arguably attributable to events that had occurred─that is, in the parlance of most occurrence policies, bodily injury or property damage that occurred─before the sale.”
Consequently, the article analyzes the decisions of:
The article concludes by evaluating the current state of the law and enumerating points of interest for business lawyers working on future transactions.