Articles Posted in Insurance

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In deciding Westfield Insurance Company v. Custom Agri Systems, Inc., 2012 Ohio 4712, the Ohio Supreme Court recently held that defective construction or workmanship is not a covered “occurrence” under a commercial general liability (“CGL”) insurance policy, even if the defective work was performed by a subcontractor of the insured contractor. In that case, a contractor sought defense and indemnity from its insurer related to allegations of damages arising from a steel grain bin which had been defectively constructed by a subcontractor. The insurer argued that the claims against the contractor were not for “property damage” caused by an “occurrence,” or, alternatively, that the claims were removed from coverage by the policy’s contractual liability exclusion.

In rendering its opinion, the court stated that faulty workmanship was not fortuitous and therefore not an accident or occurrence under a CGL policy. Because it held that defective construction was not an occurrence, the court did not address question of whether such claims were excluded by the contractual liability exclusion. The dissent, however, noted a “strong recent trend in the case law” which interprets the term occurrence to include unanticipated or unintentional damage to non-defective property resulting from faulty work. The dissent went on to criticize the majority opinion as being too broad because it foreclosed the possibility of defective workmanship constituting an occurrence under any circumstance.

Courts throughout the country are split on whether defective workmanship is an occurrence under a CGL policy. Ohio is simply latest state to weigh in on the debate. The Westfield decision will not be well-received by contractors but is likely to be celebrated by insurance companies who may rely on it in refusing to defend claims.

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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.

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It is the rule in many jurisdictions that an insurer which assumes defense of its insured without issuing a reservation of rights can be estopped from later denying coverage based on rights or defenses in the insurance contract. This general rule was rejected by the Supreme Court of Wisconsin in Maxwell v. Hartford Union High School District, 814 N.W.2d 484 (Wis. 2012). The court in Maxwell held that an insurer which defends without reserving the right to deny coverage has not waived its ability to rely on coverage clauses in the policy allowing for such a denial.

In Maxwell, the policyholder – a school district facing a wrongful termination suit from an ex-employee – tendered a claim to its liability insurer which defended the school district in the ensuing litigation without issuing a reservation of rights letter. It was not until a judgment in excess of $100,000 was awarded against the school district that the insurer denied coverage based on language in the policy excluding liability for damages due under the employment agreement and for lost benefits or lost wages. That the policy indeed excluded coverage for the damages at issue was not in dispute. The issue presented to the court was whether, because the insurer failed to issue a reservation of rights, it had waived or could be estopped from asserting its defense of no coverage. In rendering its decision, the court held that waiver or estopped could not supply coverage to an insured that was not provided in the policy itself. Ruling otherwise, the court stated, would force an insured to pay for a loss for which it had not received a premium.

The court clarified that waiver or estoppel did not apply to the present case because it involved a coverage clause, as opposed to a forfeiture clause (such as a notice or cooperation clause). It noted that an insurer must act timely on a forfeiture defense and stated that providing a defense may be grounds for establishing waiver or estoppel regarding a forfeiture clause where the insurer fails to issue a reservation of rights. The court also made clear that its decision did not limit the damages applicable to an insurer which breaches its duty of good faith toward its insured. Such an insurer is liable for all damages resulting from its breach, and is not limited to damages contemplated by the contract.

The Maxwell court emphasized the importance of communication between insurers and insureds. Indeed, after Maxwell, policyholders should have increased motivation to engage in clear, detailed communications with their insurer regarding the insurer’s coverage position prior to entrusting the insurer with defense of a claim. If a policyholder cannot rely on a reservation of rights letter to explain the scope and limits of an insurer’s coverage position, it must seek such information through other means.

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The First Circuit has endorsed key principles that favor policyholders in insurance coverage disputes — principles that can frequently be used to help insureds in construction cases. So, this new case is worth a look. In Oxford Aviation, Inc. v. Global Aero., Inc., 2012 U.S. App. LEXIS 10101 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit vacated the district court’s decision which found that a carrier had no duty to defend claims involving alleged faulty workmanship. Relying on Maine law, the court held strong to the concept that even the remotest possibility of coverage triggers an insurer’s duty to defend.

The details, after the jump.

Airlarr hired Oxford to perform repairs and installations on its airplane. After picking up its restored plane, Airlarr sued Oxford for breach of contract, breach of express and implied warranties and various state-law claims. Airlarr alleged that, due to Oxford’s “negligence and faulty performance,” one of the plane’s side windows cracked on Airlarr’s flight home from Oxford’s Maine facility. Airlarr also listed a number of “defects and other substandard work,” including uncomfortable seats, leaking fuel injectors, a cracked turbocharger, and an improperly installed carpet. But the cracked window was central to the Court’s decision to overturn the district court’s ruling.

Oxford tendered the complaint to its CGL insurer, Global Aerospace, and requested that the insurer provide a defense. But Global disclaimed both coverage and its duty to defend Oxford in the Airlarr lawsuit. Oxford then sued Global in a Maine state court, and Global removed the case to federal district court. The district court granted summary judgment in favor of Global, holding that Global had no duty to defend because Airlarr’s claims fell within the CGL policy’s exclusions. The First Circuit disagreed and held that the district court should have considered the issue of initial coverage instead of relying solely on the policy’s exclusions.

Recognizing that Maine interprets coverage terms like “accident” and “occurrence” broadly – as opposed to courts that rely on these terms to exclude coverage for faulty workmanship – the First Circuit concluded that the damage to the plane’s side window should be considered an “accident” and an “occurrence” and be covered under Coverage A of the policy. The court, therefore, did not interpret these terms narrowly to exclude coverage for faulty workmanship.

The court reiterated the basic principle that an insurer’s duty to defend is generally broader than its duty to indemnify. The court insisted that an insurer has a duty to defend even if the possibility of coverage is highly unlikely. After discussing the exclusions that Global relied on, the court concluded that, because the policy covers at least one of Airlarr’s claims, Global has a duty to defend the entire lawsuit: “Here, at least one scenario relating to the cracked window, occurring in flight and away from Oxford’s facilities, does fall within coverage and could plausibly avoid all cited exclusions.”

To determine whether any exclusion could negate the policy’s coverage of the damaged window, the court analyzed possible exclusions. The court held that exclusion (j)(4), which excludes from coverage “[p]roperty damage to … [p]ersonal property in the care, custody or control of the insured,” did not exclude the damaged window because the damage occurred after Oxford returned the plane to Airlarr. Additionally, in discussing exclusion (j)(6) (the “your-work” exclusion), which excludes a “particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it,” the court noted that this exclusion could conceivably apply to the damaged window. However, by its terms, the your-work exclusion does not apply to “property damage occurring away from premises you own or rent and arising out of your product or your work.” Because the damage to the window occurred in-flight and in Airlarr’s possession, the court concluded that the your-work exclusion did not exclude coverage of the cracked window.

The court quickly dismissed exclusion k (the “your-product” exclusion), which excludes “[p]roperty damage to your product arising out of it or any part of it,” since the cracked window was never alleged to be Oxford’s product.

The court also discussed exclusion l (the “products-completed operations hazard” exclusion), which excludes “[p]roperty damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” The court noted, however, that the damaged window was not alleged to be, nor was there any indication that it was included in, Oxford’s work. Therefore, this exclusion also could not apply to the damaged window.

In concluding that the policy’s exclusions could not exclude coverage for the damaged window, the court held that Global had a duty to defend even though Global would likely be on the hook for little, if any, indemnification if Airlarr prevailed in the lawsuit: “If Airlarr proves its case, it seems unlikely that there will be much, if any, indemnification since most of the claimed injuries appear likely to be covered by exclusions. But the duty to defend is triggered by any realistic possibility of any damage that might be within coverage and outside the exclusions and the damaged window creates that prospect.” Notwithstanding the exclusions, therefore, the court held that Global had a duty to defend.

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Under the Texas code, the workers’ compensation exclusive remedy bar applies up and down: barring injured employees of subcontractors from bringing common law tort suits against a general contractor which provided workers compensation insurance, and also in reverse, barring injured employees of the general contractor from bringing suit against a subcontractor, even when the employees are covered under separate workers’ comp policies. So says the Texas Court of Appeals in Garza v. Zachry Construction Corp., 2012 WL 1864350 (Tex. Ct. App. May 23, 2012).

In Garza, an employee at DuPont’s Ingleside, Texas plant was injured when the railcar mover he operated came loose. He received workers’ compensation benefits through a policy provided by DuPont, and later brought common law tort claims against a subcontractor and two of its employees for negligence in causing the accident. The subcontractor, whose employees were covered by a separate workers compensation insurance procured by DuPont, successfully argued that DuPont was their deemed employer and the injured worker and subcontractor employees were deemed fellow employees. In this way, the subcontractor was shielded from such actions by the workers’ compensation exclusive remedy bar contained in Texas Labor Code section 408.001 as made applicable to subcontractors by Labor Code section 406.123. On appeal, the Court of Appeals agreed.

Garza, the injured employee, argued that the exclusive remedy bar could not apply where the subcontract specified that the subcontractor’s employees were not employees of DuPont, Garza’s employer. But even if they were deemed employees for purposes of statutory workers compensation benefits, the bar could not apply where the subcontractors were covered under a separate workers’ compensation policy than that covering DuPont’s employees. Lastly, if the statute does immunize the subcontractor, then it violates the open courts guarantee (assuring that a person bringing a well-established common-law cause of action will not suffer unreasonable or arbitrary denial of access to the court) in the Texas constitution.

In rejecting these arguments, the appellate court first ruled that the subcontract at issue required DuPont to procure workers’ compensation coverage for Zachry’s employees, “thereby, creating the legal fiction of DuPont as the ‘deemed employer’ and Zachry and its employees as ‘deemed employees'” under Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 438 (Tex.2009) and HCBeck, Ltd. v. Rice, 284 S.W.3d 349, 352 (Tex.2009). The subcontract, however, did not provide these same “deemed employees” with the other more traditional employee benefits enjoyed by DuPont’s actual employees. Secondly, the court ruled that nothing in the workers compensation statute, section 406.123, “specifies that when a general contractor purchases a workers’ compensation policy for its own employees and also purchases a second policy for its subcontractors, then its own employees and its “deemed” employees may freely sue each other simply because they receive their coverage under different policies, albeit from the same “employer” for work performed at the same job site.” According to the court, such an interpretation would be contrary to the purpose of the legislation – which is to encourage coverage of employees. Finally, the court concluded that Garza’s rights under the open courts provision are not violated because “[t]he workers’ compensation benefits he receives from his employer, which also provides those same benefits to its subcontractors, is an adequate substitute for his right to bring his tort claims against those subcontractors.”

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It’s standard fare for contractors and subs to be required to provide certificates of insurance (COI) verifying that the insurance requirements specified in their contracts, e.g., the type of coverage, the coverage policy limits, have been met prior to starting work. According to an April 21, 2011 Administrative Letter issued by Virginia’s State Corporation Commission Bureau of Insurance, in Virginia there’s a “widespread misunderstanding regarding the proper use of [COIs], as well as intentional misuse of such certificates.” In particular, the letter states that “some private and public entitles are requesting insurers and producers to issue certificates of insurance that are inconsistent with the underlying insurance policy or contract.” Examples include “indicating that a person is an additional insured contrary to the terms of the policy” and “that a party will be notified if the underlying policy is cancelled if that party is not entitled to notice under the terms of the policy.” The Administrative Letter can be found here. Legislation passed in March is designed to address these issues.

The new legislation amends the Unfair Trade Practices chapter in Title 38. Insurance of the Code of Virginia and adds a new section on certificates of insurance, § 38.2-518. Specifically, the new section prohibits a person from (1) issuing or delivering a COI that attempts to confer any rights upon a third party beyond what the referenced policy of insurance expressly provides; 2) issuing or delivering a COI (except when the COI is required by a state or federal agency) unless it contains a statement substantially similar to this: “This certificate of insurance is issued as a matter of information only. It confers no rights upon the third party requesting the certificate beyond what the referenced policy of insurance provides. This certificate of insurance does not extend, amend, alter the coverage, terms, exclusions, or conditions afforded by the policy referenced in this certificate of insurance.” It prohibits a person from 3.)knowingly demanding or requiring the issuance of a certificate of insurance from an insurer, producer, or policyholder that contains any false or misleading information concerning the policy; and 4.) knowingly preparing or issuing a COI that contains false or misleading information or that purports to affirmatively or negatively alter, amend, or extend the coverage provided by the policy. Further, 5.) no COI may represent an insurer’s obligation to give notice of cancellation or nonrenewal to a third party unless the giving of the notice is required by the policy. These provisions apply to all certificate holders, policy holders, insurers, insurance producers, and COI forms issued as statement or summary of insurance coverages on property, operations, or risks located in Virginia. The new legislation also authorizes the State Corporation Commission to regulate issuers and requesters of COIs for the first time. Click here for the text of the bill as passed.

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A federal court in Louisiana denied a subcontractor’s coverage action against Ace Insurance because the subcontractor did not enroll in the Contractor Controlled Insurance Program. The case is Williams v. Traylor-Massman-Weeks, LLC, et al., EDLA No. 10-2309 and you can look at the pdf of the opinion here: Williams v. Traylor-Massman-Weeks.pdf

The Corps of Engineers entered into a contract with Shaw, which had a Contractor Controlled Insurance Program (known as a “CCIP” which is a type of “wrap up” because its “wraps up” various types of insurance into one place. Shaw entered into a contract with Eustis and at the time, Shaw planned to sponsor a CCIP, but had not created it yet. So, Shaw’s subcontract directed Eustis to enroll — presumably when the CCIP was created.

The trouble was, Eustis didn’t enroll. And wouldn’t you know it, of all the projects where they forgot to enroll in the CCIP, that was the one where they had a lawsuit? Eustis came up with several creative theories for coverage, but couldn’t escape its fundamental problem: It simply didn’t enroll in the CCIP.

Aside from the obvious lesson here — if you are a potential enrollee on a wrap up, make sure you have actually enrolled — there are other less obvious lessons. If you sponsor a CCIP, do two things: (a) try to make sure your subs get their paper work in; and (b) structure your contracts so that if they don’t, the risk to you is minimized.

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Can anyone claim that they read their homeowner’s insurance policy before they had a claim to submit? That’s what I thought. I don’t know whether Larry Ward read his before he had a claim, but he’s read it now, and so have several judges and numerous lawyers. Based on a recent decision from the U.S. Court of Appeals for the Fourth Circuit, the judges and clerks of the Virginia Supreme Court will be reading it too.

Ward submitted a claim to his property insurance carrier when he discovered that his new home was suffering damage from Chinese Drywall. The carrier denied his claim and filed a declaratory judgment action in federal court for the Eastern District of Virginia (the “Rocket Docket” for those not familiar with it). The district court granted summary judgment in favor of the carrier and Ward appealed. The Fourth Circuit did not affirm or reverse. Instead, the court concluded that the case involved unsettled questions of Virginia law, and certified the question to the Virginia Supreme Court.

More, after the jump.

The policy is an all risk policy on a standard form. It covers all risk of direct physical loss to the property covered by the policy. Sounds easy, right? If your property is damaged, you’ve got coverage.

Not so fast, says the carrier. After issuing a broad coverage grant, the policy chips away at the coverage by excluding damage caused by several specific “causes of loss.” The district court agreed that the damage by Chinese drywall triggered these exclusions. The Fourth Circuit, noting Ward’s argument that they are ambiguous, concluded that Virginia law is unsettled on the point. The court accordingly asked the Virginia Supreme Court to answer this question:

1. For purposes of interpreting an “all risk” homeowners insurance policy, is any damage resulting from this drywall unambiguously excluded from coverage under the policy because it is loss caused by:
(a) “mechanical breakdown, latent defect,
inherent vice, or any quality in property that causes it to damage itself”;
(b) “faulty, inadequate, or defective materials”;
(c) “rust or other corrosion”; or (d) “pollutants,” where pollutant is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis,
chemicals and waste?

For what it’s worth, an intermediate appellate court in Louisiana found that the exclusions apply under Louisiana law. You can see that opinion here.

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“Does an insurance broker, after procuring an insurance policy for a developer on a construction project, owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company’s subsequent insolvency?”

In this issue of first impression in California, the Fourth District Court of Appeals said “no.”  Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc. — Cal.Rptr.3d —-, 2012 WL 621346 (Cal.App.4 Dist.).

A quick background: developer (Bosa) engaged insurance broker (Aon) to obtain insurance for a project in downtown San Diego.  Through Aon, BOSA created an OCIP from Legion.  Under the OCIP, Legion provided liability insurance to every contractor and subcontractor on the project.  Bosa later subcontracted with Pacific Rim (PacRim), who became an enrolled party on the OCIP.  After the project was complete, Legion became insolvent.  And apparently subcontractor PacRim was the last to find out. 

Six years after the project was completed, when the homeowner’s association filed a lawsuit for construction defects, a series of cross- and counterclaims followed.  At issue in this appeal were PacRim’s claims against Aon and Bosa begging the question:  who should have notified PacRim that the OCIP insurer became insolvent?

Insurance Broker’s Duty?

Turning first to the insurance broker, the court held that Aon had no duty to inform PacRim of Legion’s insolvency.  Under well-settled California law, insurance brokers owe a limited duty “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.”  The court declined to create and impose on the insurance broker a new legal duty of notification after the policy is procured.  According to the court, PacRim’s claims against Aon failed as a matter of law because “PacRim’s claims are based entirely on the allegation that Aon failed to satisfy a duty that California law does not recognize.”

The court rejected PacRim’s argument that public policy considerations warranted imposing such a duty on Aon.  Noting that other states have enacted statutes imposing such a duty on brokers – and California has not – the court agreed with Aon that it should remain the province of the Legislature.

The court further observed that PacRim was not merely seeking to impose a “narrow duty” on insurance brokers to notify insureds when the broker has actual knowledge of insurer’s insolvency.  Instead, PacRim asked the brokers to notify an insured of “any adverse changes in its financial condition.”  This would necessarily include a duty of monitoring insurers and would present uncertainty as to when the broker’s duty arises.  This would fundamentally change the relationship between brokers and their insureds – a step the court refused to take.

The court cited to a California Insurance statute and noted that “if anyone had a duty to inform PacRim of Legion’s insolvency, it was Legion.”  For obvious reasons, pursuing Legion for violating this statute would have likely been a dead end for PacRim.  In a brief two paragraphs, the court agreed with the lower court that Bosa breached its contractual duty to inform PacRim of Legion’s insolvency. 

California Stands its Ground

In a lengthier portion of the opinion, the court rebuffed PacRim’s assertion that the court should “join with every other state to consider the issue by recognizing an insurance broker’s duty to share its actual knowledge of the insurer’s insolvency with the insured.”  First, the court cited examples of other states that have refused to impose such a duty on a broker after it procured the insurance policy.  Further, the court distinguished the cases that PacRim cited, because in almost all of those cases, the plaintiff insured was the broker’s client.  Here, Bosa was Aon’s client – PacRim was not.  Accordingly, the court declined to follow the out-of-state authority.

Why is This Important to You?

Back to our original question: where does that leave you if you find yourself in a position of needing to rely on your insurer, only to find out your insurer is insolvent?  At the risk of stating the obvious, you will be in the best position if you have advanced notice of your insurer’s pending insolvency.  That way, you can do like PacRim alleged it would have done – procure alternate insurance.  But since you may not always (or ever) have such advance notice, you need to find another way to protect yourself.  Because – at least in California – you cannot rely on your insurance broker to notify you of adverse changes in your insurer’s financial condition.

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Often on a construction project an insurer will point to the conduct of one insured contractor to exclude coverage for a different insured contractor under the same policy. Inevitably the innocent contractor points to the Separation of Insureds provision, which is a common provision in many insurance policies, to argue that each insured must be treated as the only insured and, therefore, the conduct of one should not impact coverage for another. A fight then ensues over the scope of the provision.

A recent Seventh Circuit decision provides further support for separation of insured principles. In St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs., No. 11-2307 (Feb. 13, 2012), the court held that multiple named insureds on the same policy were not jointly and severally liable to pay the basket deductible. Rather, each insured was liable only for the deductible arising from claims specifically brought against it.

St. Paul issued insurance to Schilli Transportation, Atlantic Inland Carriers, Inc. and WVT of Texas, Inc., and several other companies involved in the freight and trucking business. The policy required St. Paul to defend any claim or suit for bodily injury or property damage made or brought against any insured, even if any of the allegations of such claim or suit were groundless or fraudulent. The limits of coverage under the policy were $1,000,000 per accident subject to a $100,000 deductible.

The payment of the deductible was addressed in the “Repayment of Expenses” provision. This provision, which was included in the policy as part of the “Basket Deductible Endorsement,” provided that although St. Paul would be responsible to pay all expenses to settle a claim or suit, the insured would be responsible for the amount of expenses within the deductible. Specifically, the policy provided that “[y]ou agree to repay us up to this deductible amount for all damages caused by any one accident, as soon as we notify you of the judgment or settlement.” “You” was defined as the “insured named here, which is a CORPORATION.” The policy then listed Schilli Transportation, along with eight more companies, including Atlantic and WVT.

Over the course of the policy period, six different claims were asserted under the policy, all of which St. Paul defended and settled. Of the six claims asserted, only two exceeded the $100,000 deductible. Three of the six claims arose from the liability of Schilli Transportation. One claim arose from the liability of Atlantic. Another arose from the liability of WVT. The sixth claim arose from the liability of both Schilli Transportation and Atlantic. After payment of the claims and related expenses, St. Paul sent Schilli Transportation invoices for the amounts, up to the $100,000 deductible, it advanced in defending and settling each case. St. Paul argued that as a named insured under the policy, Schilli Transportation was jointly and severally liable for reimbursement of the deductible for all six claims. According to St. Paul, a position with which the District Court agreed, the policy clearly defined “you” as all corporations specifically listed as named insureds. Therefore, “all of the listed corporations [were] liable under the repayment of expenses provision,” and could be held jointly and severally liable for payment of the deductible.

On appeal, the Seventh Circuit reversed. The court ruled that although it agreed that St. Paul has valid claims against one or more of the insureds for the deductible amounts St. Paul spent to settle and defend the claims in question, it did not agree that the insureds were joint and severally liable for the deductible. The court explained that the manner in which the named insureds are listed in the policy creates an ambiguity as to whether they are to be considered jointly or separately for purposes of defining “you.” One reasonable interpretation, the court found, was to interpret the definition of “you,” which was defined as “a Corporation” followed by the listing of the names of nine individual corporations, to mean each corporation will be treated individually. Another reasonable interpretation, advanced by St. Paul, was that “you” refers to all corporations listed. Therefore, an ambiguity existed and the language would be interpreted against St. Paul, as the drafter, and in favor of the insureds.

The court relied on the “Separation of Protected Persons” clause to find additional support for its holding. This clause, which provided that St. Paul would apply the insurance agreement “to each protected person named in the Introduction as if that protected person was the only named one there; and separately to each protected person,” created further ambiguity as to whether defendants were jointly and severally liable for the deductible payments. The court recognized that although separation of insured provisions are typically applied in the context of coverage, rather than in the payment of deductibles, there is nothing in the language that prohibits such an application. Therefore, at the very least, the provision creates further ambiguity as to whether all named insureds are jointly and severally liable for each other’s claims.

St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs. provides further support for separation of insured principles, applying the rule beyond the context of coverage to the payment of deductibles.

The complete opinion can be accessed here.