Articles Posted in Case Notes

What if you get sued for property damage that occurred progressively over the course of two years, and you had separate GL policies for each year? Do you get the benefit of coverage for both years, or just the first year? Well, if you’re in New Jersey, you get coverage for both years, which generally will mean twice the limits, thanks to Potomac Ins. Co. of Ill., ex rel. One Beacon Insurance Company v. Pennsylvania Manufacturers Association Insurance Company, a case the New Jersey Supreme Court handed down earlier this week.

But what if one of the carriers provides a defense to the lawsuit, but the other refuses? Under One Beacon the carrier that provides a defense can sue the carrier that doesn’t. Time will tell the effect of that. One danger might be that carriers become reluctant to settle with insureds in a continuous loss case because of the risk of later being sued for more money by a co-insurer. Alternatively, it may – as the New Jersey Supreme Court believes – promote early settlement, as an insurer that anticipates paying an allocated portion of defense costs may factor those costs into a potential resolution of the underlying claim and will be incentivized to seek earlier settlement.

In Potomac Ins. Co. of Ill. ex rel. OneBeacon Ins. Co. v. Pa. Mfrs. Ass’n Ins. Co., (A-2-12) (070756) (N.J. Sep. 16, 2013), Roland Aristone, Inc. (“Aristone”) was hired as the general contractor to construct a new middle school. The school was completed in 1993, and almost immediately began experiencing leakage and other defects, primarily related to the roof. In 2001, the school sued Aristone for negligence and breach of contract due to continuous defects and resulting damages incurred at the school over the previous eight year period and continuing thereafter. Aristone notified its current and past insurance carriers of the claim (of which there were five) and sought defense and indemnification.
For the first two years of claimed damages, July 1, 1993, through July 1, 1995, Aristone was insured by Pennsylvania Manufacturers Association (“PMA”). Between July 1, 1995, and July 1, 1996, Newark Insurance Company provided Aristone’s insurance. From July 1, 1996, through July 1, 1997, Ariston was insured by Royal Insurance Company of America. From July 1, 1997, to July 1, 1998, OneBeacon provided Aristone’s CGL coverage. Between July 1, 1998 and July 1, 2003, Aristone was insured with Selective Way Insurance Company (“Selective”).

In response to the suit, OneBeacon and Selective paid for Aristone’s defense costs on a 50/50 basis. In contrast, Royal and PMA disclaimed coverage.
Ultimately, after a declaratory judgment was filed by Aristone against PMA, PMA agreed to contribute $150,000 toward the resolution of Aristone’s underlying dispute with the school in exchange for Aristone’s release. The release was for all claims, “including, without limitation, any and all claims by Aristone concerning PMA’s obligation to pay the attorneys’ fees and costs incurred in defense” of the underlying litigation.
Just a few days later, Aristone settled its dispute with the school for a total of $700,000. In addition to the $150,000 contributed by PMA, OneBeacon paid $150,000, Selective paid $260,000 and Royal paid $140,000.

After settlement, OneBeacon informed Royal and PMA that the defense costs shared by OneBeacon and Selective totaled $528,869. Invoking the “continuous trigger” methodology adopted by the New Jersey Supreme Court in Owens-Illinois Inc. v. United Ins. Co., 138 N.J. 437, 478-79 (N.J. 1994), OneBeacon proposed that defense costs be allocated based on each insurer’s time on the risk in the following manner: fifty percent paid by Selective; ten percent paid by OneBeacon; twenty percent paid by PMA; and twenty percent paid by Royal/Newark. Royal and Newark declined to contribute to Aristone’s defense costs.

OneBeacon then sought reimbursement of a portion of the defense costs in a direct action against PMA and Royal. The New Jersey Supreme Court found in favor of OneBeacon, holding that an insurer has a direct cause of action against its co-insurer for allocation of defense costs, even where the co-insurer has obtained a release for such costs from its insured. The court explained that recognizing such an action advances principles of fairness and economy. The court explained:

First, permitting such a claim creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources of insurers, litigants and the court. . . . .

Second, recognition of a direct claim by one insurer against another promotes early settlement. An insurer that anticipates paying an allocated portion of the policyholder’s defense costs may factor those costs into a potential resolution of the underlying claim. . . . .

Third, the allocation of defense costs creates an additional incentive for individuals and businesses to purchase sufficient coverage every year. If each insurer’s obligation to contribute to a defense is apportioned in accordance with the scope of its coverage . . . the policyholder is motivated to purchase coverage that is continuous, at a level commensurate to the policyholder’s personal or business risks. . . . .

Fourth, the allocation of defense costs among all insurers that cover the risk, enforced by a right of contribution between the co-insurers of a common insured, serves the principle of fairness . . . .

Justice Anne Patterson wrote the opinion for a unanimous court.

The Florida Supreme Court gave insureds a Fourth of July present one day early — July 3 — by ruling that property policies providing replacement cost coverage include the cost of a contractor’s overhead and profit, even if the insured does not actually pay a contractor overhead and profit to replace the damaged property. We’ll explain the decision, Trinidad v. Florida Peninsula Insurance Company, in detail after the jump, but first some commentary.

We’ve often seen this issue in the “no good deed goes unpunished” situation where a contractor steps in to perform repair work on a builders risk policy and the carrier refuses to pay the contractor’s overhead and profit. If the contractor did not perform the repairs, either the owner or the carrier would have to hire a different contractor who was not already on site to mobilize to the site and perform the repair work. The carrier would obviously have to pay that contractor overhead and profit. And that contractor would be much less efficient and more expensive. But the carrier tries to take advantage of the original contractor’s willingness to step in by carving overhead and profit off the payout.

This Florida Supreme Court decision validates our position: A carrier must pay the overhead and profit whether or not the insured actually pays a contractor to do the work. Now, for the details.

In Trinidad, a homeowner filed a claim with his insurance company for fire damage. The insurer admitted coverage under the homeowner’s replacement cost policy and issued a payment for completion of repairs, even though the homeowner did not make repairs to his home or hire a contractor to do so. The insurer’s payment did not include overhead and profit, and the insurer claimed that it was not obligated to pay these amounts until the homeowner actually incurred such expenses in repairing his home.

The homeowner sued for breach of contract arguing that he was entitled to all costs of repair, including overhead and profit. The insurer responded that it was not required to pay these costs under Section 627.7011 of the 2008 Florida Statutes until such costs were actually incurred. On summary judgment, the trial court found in favor of the insurer and stated that the policy language only required the insurer to pay costs that had been “actually spent.” The Third District affirmed the trial court’s decision and refused to interpret the Florida Statutes as requiring payment for overhead and profit which had not been incurred.

The Supreme Court of Florida reversed and held that an insurer’s required payment under a replacement cost policy includes overhead and profit where the insured is “reasonably likely” to need a general contrator to perform repairs. The court noted that neither the homeowner’s policy nor the 2008 version of the Florida Statutes required an insured to actually repair his property before recovering the full replacement cost, including overhead and profit. The court stated that overhead and profit were “no different that any other costs of a repair” that an insured is reasonably likely to incur.

NOTE: The section of the Florida Statutes at issue in this case, Section 627.7011, was amended in 2011 to allow insurers in some situations to hold back certain amounts until work is performed and expenses are incurred.

A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter’s precision carrying the day most of the time, sometimes a litigator’s creativity can trump it. Well, it’s happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it’s the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it’s unpublished.

(I chuckle to myself as I write that given the difference between “published” and “unpublished”. Sure, the case won’t end up in a bound reporter on a library shelf collecting dust, but other than that and the fact that the judges who wrote it not wanting it to be precedent, what’s the difference between a published and unpublished case?) But enough of my editorializing; on to the case.

The insureds were sued by a third party and tendered the case to the carrier, who initially declined to defend. The insureds then incurred nearly $400,000 in defense costs but the carrier then picked up the defense. The insureds sued the carrier for reimbursement of the defense costs and the carrier moved to compel arbitration based on this clause in the policy: “If we and the insured do not agree whether coverage is provided under this Coverage Part for a claim made against the insured, then either party may make a written demand for arbitration.”

The word “coverage” was not defined in the policy, so the Court of Appeal looked at the duty to defend and the duty to indemnify and explained: “The duty to defend is triggered if a third party sues the insured seeking damages for a covered risk, but is not triggered if the lawsuit seeks damages for a risk ‘to which this insurance does not apply.’ Under the terms of the policy, coverage defines the risks and the duty to defend is triggered by the scope of coverage. Thus, the duty to defend and coverage are related by not synonymous.” The difference between the duty to defend and the duty to indemnify means that “there may ultimately be no coverage for a claim even though the insurer has an obligation to defend the claim.”

As a result, “[t]he arbitration clause is ambiguous as to whether it was meant to apply to a dispute over the duty to defend, and ambiguities in an arbitration agreement, like any other contract, are resolved against the party that drafted the agreement.”

I occasionally give a presentation called “That’s not what I meant!” which is subtitled “Usually the drafter’s precision carries the day, but sometimes the litigator’s creativity trumps it.” Our legal system generates seemingly endless material for this presentation and last week the Eighth Circuit gave us more in Union Electric v. AEGIS Energy Syndicate. The policy had a mandatory arbitration provision, but an endorsement specified that Missouri law governed and a Missouri statute prohibits mandatory arbitration of insurance disputes, so while the carrier wanted to compel arbitration, Judge Jean Hamilton refused and the Eighth Circuit affirmed her decision. So, the drafters may have intended that any disputes would be arbitrated, but if so, they should have done some more homework.

There are a couple of lessons here. First, read the entire policy, including the endorsements. The endorsements are like change orders to construction contracts and until you’ve read them, you don’t know what the policy provides for. Second, just because a policy (or any other contract, for that matter) says something doesn’t mean it has to be. Many common contractual clauses are rendered unenforceable by either caselaw or statutes. Third, because insurance policies are governed by state laws, and in light of the differing interpretations and statutory schemes amongst the states, there can be wide variations of the procedural and substantive effect of policies depending on what state’s law governs. So, do your homework.

The Second Circuit’s recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court’s grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured’s defense, after concluding that the district court erred when it ruled that a swimming pool contractor’s liability for cracked concrete could not be covered by its insurance. The district court relied on the “your work” exclusion, but in doing so, it read the “subcontractor exception” out of the policy. The Second Circuit put it back in.

RI Pools is a swimming pool installer that uses subcontractors to supply and shoot concrete into the ground. In 2009, nineteen different customers complained of cracking, flaking and deteriorating concrete in pools installed by RI Pools in 2006. RI Pools tendered to its CGL carrier, Scottsdale, which initially furnished a defense. Scottsdale later filed suit seeking a declaration that it had no duty to defend or indemnify and seeking reimbursement for defense costs already expended.

Relying on the Second Circuit’s 1992 decision in Jakobson Shipyard, Inc. v. Aetna Casualty & Surety Co., 961 F.2d 387 (2d Cir. 1992), the district court reasoned that the cracks in the concrete were defects in the insured’s work that could not be “accidents,” and thus the loss could not be covered and the insurer had no duty to defend or indemnify. In a subsequent ruling the district court ordered the insured to reimburse the insurer for defense costs the insured had paid.

The policy form at issue covers loss caused by “an occurrence,” defined as “an accident” and includes a “your-work exclusion” with a “subcontractor exception” to the “your-work exclusion.” The district court construed the policy form not to afford coverage for the loss from the cracked concrete. In doing so, according to the Second Circuit, the district court “essentially read the subcontractor exception out of the policies.”
In Jakobson, the court ruled that loss defective steering mechanisms in tug boats built and sold by an insured shipyard was not caused by occurrence, and thus not covered under the insured’s CGL policies. But, as the RI Pools court reports, because the policy in Jakobson did not include a subcontractor exception to the “your work” exclusion, the reasoning there does not apply here. Rather to the court, the inclusion of the subcontractor exception in the policy signals that defective work can be an occurrence and that the loss may be covered:

Whereas Jakobson held that the insured’s faulty workmanship could not be a covered occurrence under the policy, the present policies expressly provide that in some circumstances the insured’s own work is covered. As coverage is limited by the policy to “occurrences” and defects in the insured’s own work in some circumstances are covered, these policies, unlike the Jakobson policy, unmistakably include defects in the insured’s own work within the category of an “occurrence.”

Id. at *3. Ultimately, “the question whether the insured’s liability for defects in its own work is covered turns on whether the subcontractor exception applies.” Because the district court never considered this “crucial question,” the court vacated the judgment and remanded the case.

Additionally, the court determined that Scottsdale was not entitled to any reimbursement for the defense costs it previously expended. This was so because, in light of the subcontractor exception to the your-work exclusion, it was “apparent that the damage to the pools caused by the cracked concrete ‘falls…possibly within the coverage” of the policies.'” Id. The duty to defend being broader than the duty to indemnify, that possibility of coverage was enough to trigger Scottsdale’s duty to defend, which duty exists “up until the point at which it is legally determined that there is no possibility for coverage under the policies.”

For another recent decision regarding the recoupment of defense costs, see National Surety Corp. v. Immunex Corp., Case No.86535-3, March 07, 2013. In National Surety, the Supreme Court of Washington last month ruled that Washington law does not allow an insurer to recoup defense costs incurred prior to a determination of non-coverage.

An insured’s duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer’s ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.

In Staples v. Allstate Ins. Co., a van belonging to the insured John Staples that contained a large collection of tools was stolen. Staples reported the theft to the police, telling them that the van was a work truck and the tools were worth $15,000. In submitting a claim to his insurer Allstate, Staples represented that the tools were worth $20,000 – $25,000, and were for his personal use. Based on these apparent inconsistent statements, Allstate requested certain documents from Staples, including proof of ownership and a sworn statement in proof of loss, among others. Allstate took two recorded statements form Staples, neither of which was under oath.

The sworn proof of loss and other information was not provided by Staples until nearly three months after the loss. Apparently unsatisfied with the information received, Allstate requested that Staples appear for an examination under oath, which it was entitled to under the cooperation clause of the policy. After difficulties scheduling the examination through a perceived lack of cooperation by Staples, Allstate denied the claim. In a suit by Staples against Allstate for breach of contract and bad faith, the trial court ruled in favor of Allstate on summary judgment, holding that coverage was barred because Staples breached the cooperation clause by failing to appear for an examination under oath. The Court of Appeals affirmed, and the case was appealed to the Washington Supreme Court.

The Washington Supreme Court reversed, finding material issues of fact as to (1) Staples’ compliance with the cooperation clause and (2) whether any prejudice was actually incurred by Allstate as a result of Staples’ alleged lack of cooperation. As to the first issue, the court held that “[b]reach of a cooperation clause is measured by the yardstick of substantial compliance.” Staples’ appearance for two recorded interviews and production of many of the documents requested by Allstate was enough to demonstrate a genuine question of material fact as to the adequacy of Staples’ “cooperation.”

The court further held that an insurer must show prejudice before it can rely on breach of a cooperation clause to deny a claim. A showing of actual prejudice requires “affirmative proof of an advantage lost or disadvantage suffered as a result of the [breach], which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability.” Id. (quoting Dien Tran v. State Farm Fire & Cas. Co., 961 P.2d 358 (Wash. 1998)). The court explained that the burden to show prejudice is on the insurer, and is an issue of fact that will seldom be established as a matter of law. Prejudice will be presumed (as a matter of law) only in “extreme cases.”

In short, for an insurer to deny coverage based on breach of the cooperation clause, the insurer must show a substantial and material breach of the cooperation clause that results in actual prejudice.

Illinois and California appellate courts recently issued two policy-holder favorable decisions. In both cases, the trial court had granted summary judgment in favor of the insurance company and denying coverage, and in both cases the trial court decisions were reversed.

In the Illinois case, Patrick Engineering, Inc. v. Old Republic General Insurance Co. — N.E.2d —, 2012 WL 3010344, Ill.App.2 Dist, July 20, 2012 [not yet released for publication], an engineering firm entered into a consulting agreement with an electric utility. As required by the agreement, the engineer procured a CGL policy naming the utility as an additional insured. The policy’s professional services exclusion excluded coverage for property damage “arising out of the rendering or failure to render” engineering services.

While working on a project designed by the engineer, the utility damaged the sewers of a local municipality, which then sued the utility on a negligence theory. The utility tendered its defense to the insurer, which rejected the tender, denying coverage based on the policy’s professional services exclusion. In a subsequent lawsuit filed by the engineer and utility to determine coverage, the insurer argued that because the damage arose out of the engineer’s services, the professional services exclusion operated to bar coverage both for the named insured engineer and the additional insured utility–even though all parties agreed that the utility did not perform any engineering services. The trial court granted summary judgment in favor of the insurer.

On appeal, the court found coverage by analyzing the interplay of the policy’s additional insured endorsement, professional services exclusion, and separation-of-insureds clause. The additional insured endorsement provided that an “Insured” included the listed additional insured if liability arose in whole or in part out of the engineer’s work. The separation-of-insureds clause provided that the insurance applied separately to each insured. The appellate court agreed with the utility that it could rely on the “arising out of” language in the additional insured endorsement to claim status as an additional insured, and that the separation-of-insureds clause then provided coverage to the utility despite the professional services exclusion because the utility had not performed professional services. In other words, the fact that the named insured performed professional services did not trigger that exclusion for the additional insured.

In the California case, Travelers Property Casualty Co. of America v. Charlotte Russe Holdings, Inc. — Cal.Rptr.3d —, 2012 WL 2356477, 2d App. Dist., June 21, 2012 [ordered published July 13, 2012], a manufacturer of high-end apparel entered into an exclusive sales agreement with a clothing store. The manufacturer subsequently sued the store, alleging that the store’s sale of the high-end apparel at deeply discounted prices harmed the apparel brand.

The store tendered its defense to its insurer under its CGL policy, which provided coverage for both personal and advertising injury, and required defense of any suit seeking damages for those injuries. The personal injury coverage extended to offenses arising out of the business (but not advertising). The advertising injury coverage extended to offense committed in the course of advertising the business, but excluded injuries arising from breach of contract. The personal injury coverage contained no such exclusion. Both provided coverage for claims alleging injury from disparagement of goods.

The insurer declined to either indemnify or defend, on the basis that a reduction in price of a good is not disparagement of that good. The insurer filed a declaratory relief action to determine that it owed no duty to defend or indemnify. In support of its motion for summary judgment, the insurer argued that California law equated disparagement with trade libel, requiring a false statement and resulting loss of business. The trial court found for the insurer.

On appeal, the court found that the allegations of injury to the apparel brand by offering the brand at a low price could reasonably be interpreted as disparagement of that brand, and that therefore the claims were potentially covered by the personal injury coverage of the policy. The court reached this result by noting that California law permitted disparagement by implication, and that disparagement claims were not required to be expressly stated as disparagement or trade libel. The court disagreed with the insurer that a disparagement claim required the allegation of trade libel, but noted that even if it did, the selling of a high-end product at discounted prices could be construed as an implied false statement by the seller that the high-end product was not, in fact, high-end.

Because the court found coverage under personal injury, it avoided deciding whether coverage would have been available under advertising injury, and thus did not reach the potentially thornier issue of whether the breach of contract exclusion would have excluded coverage when no breach of contract was proven since the underlying litigation had settled.