In Allied Prop. & Cas. Ins. Co. v. Metro North Condo. Ass’n, No. 16-1868, 2017 U.S. App. LEXIS 4107 (7th Cir. Mar. 8, 2017), the Seventh Circuit had occasion to consider whether claims of faulty workmanship could constitute “property damage” caused by an “occurrence” as required by the insuring agreement of a CGL policy. Metro North Condominium Association (“Metro North”) hired a developer to build a condominium in Chicago. The developer hired a subcontractor, CSC, to install the building’s windows, and CSC allegedly installed the windows defectively. As a result, common elements of the building purportedly suffered significant water damage and individual condominium owners allegedly suffered damage to their personal property. Metro North sued the developer, which was insolvent. Metro North then amended its complaint and added a claim against CSC for the breach of the implied warranty of habitability. Metro North also brought a negligence claim, which was untimely and subsequently dismissed with prejudice. The suit proceeded with only the implied warranty claim pending against CSC. CSC tendered the suit to its CGL carrier, Allied Property & Casualty Insurance Company (“Allied”), but Allied denied coverage. In 2015, CSC and Metro North reached a settlement agreement. The agreement required Metro North to dismiss its pending lawsuit against CSC. In return, CSC assigned to Metro North all of its rights to payment of insurance coverage from Allied. The language of the agreement specified that the right to payment had to “arise out of the claims asserted against CSC” in the underlying suit. At the time of the settlement, the only count pending against CSC was a claim for breach of implied warranty of habitability. Upon learning of the settlement agreement, Allied brought a declaratory judgment action against Metro North seeking a judgment that it was not liable for the damages claimed in the settlement agreement. The U.S District Court for the Northern District of Illinois granted judgment in favor of Allied, and Metro North appealed to the U.S. Circuit Court of Appeals for the Seventh Circuit. In its opinion, the Seventh Circuit stated that Allied would only be liable if the legally recoverable damages stemming from Metro North’s claim were covered by the policy. The court, in affirming the District Court’s decision, found that the measure of damages for a breach of implied warranty of habitability claim is the cost of repairing the “defective conditions.” Under Illinois law, CGL policies do not cover the cost of repairing the insured’s defectively completed work. As such, the insuring agreement of the policies was not satisfied. Additionally, the Seventh Circuit held that Metro North did not have standing to assert a right on behalf of unit owners for the loss of their personal property. The court held that the Illinois Condominium Property Act only allows a condominium association to act on behalf of its unit owners when the claim involves common elements or more than one unit – not personal property. Thus, the court held, Metro North did not have standing to seek recovery for its unit owners’ loss of personal property. Add to Flipboard Magazine.
In Pekin Ins. Co. v. Centex Homes, 2017 IL App (1st) 153601, the Illinois Appellate Court Circuit had occasion to consider whether an insurer had an obligation to defend two putative additional insureds when its named insured was not a defendant in the suit and the policy only conferred additional insured coverage where the additional insureds were vicariously liable for the acts or omissions of the named insured. In June 2009, Centex Homes, the owner of a construction project, entered into a contract with McGreal as the contractor. The contract required McGreal to maintain insurance for Centex Homes and Centex Real Estate Corporation. Pekin issued a CGL policy to McGreal, which contained an additional insured endorsement that provided that an additional insured was “any person or organization for whom you are performing operations, when you and such person or organization have agreed in a written contract effective during the policy period … that you must add that person or organization as an additional insured on a policy of liability insurance.” The endorsement stated that coverage was available to such entities “only with respect to vicarious liability for ‘bodily injury’ … imputed from [the named insured] to the Additional Insured.” The endorsement further stated that coverage was excluded for liability “arising out of or in any way attributable to the claimed negligence or statutory violation of the Additional Insured, other than vicarious liability which is imputed to the Additional Insured solely by virtue of the acts or omissions of the Named Insured.” During the effective period of the Pekin policy, an employee of McGreal, Scott Nowak, was injured while working on the construction of the building. He filed suit against Centex Homes and Centex Real Estate Corporation, the owners of the building. Both entities tendered the suit to Pekin, but Pekin denied coverage and filed a declaratory judgment action. Pekin argued that McGreal did not have a written contract with Centex Real Estate, and so it owed no coverage to that entity. Pekin also argued that McGreal was not performing work pursuant to its contract with Centex Homes, and so it owed no duty to defend that entity. Finally, Pekin argued in the alternative that neither entity qualified for coverage as they were sued for their own direct negligence, as opposed to vicarious liability for the acts or omissions of McGreal. The trial court found that Centex Real Estate was not an additional insured pursuant to the policy. The trial court also held that Centex Homes was not entitled to a defense because the underlying suit alleged only direct, and not vicarious, liability against that entity. The appellate court affirmed the trial court’s ruling as to Centex Real Estate. The court held that although Centex Real Estate signed the contract, it only did so as the managing partner of Centex Homes. As it did not sign the contract on its own behalf, Centex Real Estate and McGreal were not parties to a contract that required McGreal to procure insurance for that entity. Turning to Centex Homes, the court found that the contract between the parties did encompass the work being performed by McGreal at the time of Nowak’s injury. The contract recognized that Centex Homes would issue a purchase order to McGreal if it elected to authorize McGreal to perform work under the contract. Although Centex Homes did not issue a purchase order for the project at issue, the court found that fact to be irrelevant to the validity of the contract and its insurance requirement. This was especially true given the fact that the parties performed the work called for in the contract. Pekin nevertheless insisted that Centex Homes was not entitled to coverage as it was not being sued for vicarious liability for the acts of McGreal. The court rejected that argument and overturned the trial court’s ruling in that regard. The court recognized that Illinois law prohibits an employee, like Nowak, from suing its employer, McGreal, in these circumstances. Thus, the insurer’s duty to defend in this scenario hinged on two factors: (1) a potential for finding that the named insured was negligent; and (2) a potential for holding the additional insured vicariously liable for that negligence. As to the first issue, the court examined prior decisions which focused on whether the underlying complaint contained allegations suggesting potential negligence by the named insured. In the absence of such allegations, a duty to defend was not owed. In examining Nowak’s complaint, the court found that it alleged that McGreal was charged with erecting the subject wall that fell and struck him. Even though there could be additional facts that support a theory of liability against Centex Homes, the allegations within the complaint were sufficient to create the potential for a finding of negligence against McGreal. The court then held that the second component of the test was satisfied for a number of reasons. Initially, the court recognized that vicarious liability could exist where a general contractor exercises sufficient control over the operative detail of the work performed by a subcontractor. Applying that standard, the court first found that it was not necessary to parse the underlying complaint for specific allegations of control as all that was required was the potential that such control existed, which can be satisfied by mere general allegations that do not eliminate the possibility of vicarious liability. Second, the court did not desire to rule on issues that would overlap with liability issues to be addressed in the underlying suit, and those issues were likely to be addressed in Nowak’s claims against Centex Homes. Third, the court found that the underlying complaint would not contain sufficient detail to differentiate between a general contractor’s direct negligence as opposed to its vicarious liability, as both concepts depended on the extent of its control over the subcontractor. Fourth, the complaint against Centex Homes contained allegations that were broad enough to impose vicarious liability on it for McGreal’s acts or omissions. Finally, given the fact that Nowak likely lacked knowledge concerning the degree of control exercised by Centex over McGreal, it was unlikely that he would include allegations that would establish vicarious liability against Centex Homes. As the complaint alleged that Centex Homes had control of operations and was liable for the acts of its agents, there was a potential basis asserted for vicarious liability, and Pekin owed a duty to defend Centex Homes. Add to Flipboard Magazine.
In its recent decision in Siloam Springs Hotel v. Century Sur. Co., 2017 Okla. LEXIS 15 (Okl. Feb. 22, 2017), the Supreme Court of Oklahoma, on certified question from the United States District Court for the Western District of Oklahoma, had occasion to consider the enforceability of an indoor air exclusion in a general liability policy. Century insured Siloam Springs Hotel under a general liability policy with an exclusion applicable to: “Bodily injury”, “property damage”, or “personal and advertising injury” arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause. Siloam sought coverage under its policy for with claims brought by hotel guests claiming to have suffered injury as a result of carbon monoxide poisoning. Century denied coverage for the suit on the basis of the indoor air exclusion. In the ensuing coverage litigation, the United States Western District for the District of Oklahoma granted summary judgment in Century’s favor, holding that the exclusion unambiguously applied. On appeal, the Tenth Circuit remanded the case based on a potential jurisdictional defect, but in doing so concluded that the lower court should consider whether the indoor air exclusion ran afoul of Oklahoma public policy. The district court subsequently certified the following question to the Supreme Court of Oklahoma: Does the public policy of the State of Oklahoma prohibit enforcement of the Indoor Air Exclusion, which provides that the insurance afforded by the policy does not apply to “‘Bodily injury’, ‘property damage’, or ‘personal and advertising injury’ arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause”? In considering this question, the Supreme Court of Oklahoma observed that the freedom of contract is not absolute and is limited by the public policy of the State of Oklahoma, which can only be articulated by the Oklahoma legislature. The Court also observed that Oklahoma statutory law evidences that “a contract violations public policy only if it clearly tends to injure public health, morals or confidence in the administration of law, or if it undermines the security of individual rights with respect to either personal liability or private property.” An example of this in the insurance context, noted the Court, was a loaned vehicle exclusion contained in an auto policy, which the Court previously had found violative of Oklahoma’s statutory compulsory liability insurance law. Siloam argued that the indoor air exclusion violated Oklahoma public policy, at least in the context of a carbon monoxide claim, by negating compensation to victims for loss that a reasonable person would expect to be insured under a general liability policy. The Court rejected this argument, finding no public policy articulated by Oklahoma’s legislature that would preclude such an exclusion in the context of a general liability policy, unlike the case with auto insurance where the legislature expressed a public policy in favor of extremely broad coverage. In the absence of such a public policy, explained the Court, it would be improper to disallow the exclusion, regardless of Siloam’s reasonable expectations of coverage. As the Court explained: Siloam would have us greatly circumscribe the freedom of contract principles articulated above by finding a coverage exclusion violates public policy if there is no public policy justification for its existence, and if it excludes coverage under circumstances where a responsible person would expect that liability insurance would be available to compensate for an injury. There is no precedent for such an encroachment into parties’ freedom to contract for liability coverage … The Court, therefore, held that Siloam and Century were free to have negotiated the contract “as they saw fit,” and that Century, therefore, could apply the exclusion without running afoul of Oklahoma public policy. Add to Flipboard Magazine.
In its recent decision in Jones, Foster, Johnston & Stubbs, P.A. v. Prosight-Syndicate 1110 at Lloyd’s, 2017 U.S. App. LEXIS 2550 (11th Cir. Feb. 14, 2017), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether a legal professional liability insurer had a coverage obligation with respect to an underlying contempt proceeding. Prosight insured the Jones Foster law firm under a professional liability policy insuring “all sums which the Insured shall become legally obligated to pay as damages for claims … arising out of any act, error, [or] omission … in the rendering of or failure to render Professional Services by any Insured covered under this policy.” The policy required Prosight to defend “any suit seeking damages to which the policy applied.” The policy defined the term “damages” as “compensatory judgments, settlements or awards [not including] punitive or exemplary damages, sanctions, fines or penalties assessed directly against any insured.” The policy also contained an exclusion for claims “[a]rising out of any dishonest, fraudulent, criminal or malicious act or omission, or deliberate misrepresentations,” although the exclusion required that Prosight provide a defense until an adjudication of such conduct. In connection with its representation of a client prosecuting a defamation suit, Jones Foster was alleged to have misused confidential information and to have filed a client affidavit containing knowingly false information. The defendant filed a motion to show cause against Jones Foster as to why it should not be held in contempt and punished for its misconduct. Among other things, the motion sought sanctions in the form of having the claim filed by Jones Fosters’ client stricken, with prejudice, as well as an award of attorneys’ fees and costs. Prosight denied coverage for the contempt proceeding on the basis that it did not seek relief coming within its policy’s coverage. The United States District Court for the Southern District of Florida agreed, granting summary judgment in Prosight’s favor. On appeal, the Eleventh Circuit agreed that Prosight had no duty under its policy to defend against proceedings seeking sanctions or non-pecuniary relief, explaining: There is simply no suggestion that the Contempt Motion underlying this action involved anything other than an attempt to sanction lawyers employed by Jones Foster for “their contumacious and outrageous conduct.” And, the Policy makes crystal clear that only suits seeking “compensatory judgments, settlements, or awards” trigger a duty to defend on the part of Prosight. In the words of the District Court below, “[b]ecause the contempt motion sought sanctions . . . [rather than compensatory damages], [Prosight] did not have a duty to defend [Jones Foster].” In reaching this conclusion, the court acknowledged that while monetary awards in a civil contempt proceeding can serve a compensatory purpose, they primarily serve the purpose of punishing the wrongdoer for “contemptuous behavior.” Thus, the court rejected Jones Foster’s argument that the award of fees and sanctions qualified as damages in the form of compensatory judgments. The court also rejected Jones Foster’s argument that the “defense until adjudication” language in the dishonest acts exclusion required Prosight to provide a defense in the contempt proceedings, finding that Prosight had no duty to defend a claim not seeking damages. In reaching this conclusion, the court reasoned that the exclusion “does not fashion new obligations,” on Prosight, i.e., it does not require a defense to “proceedings that allege dishonest or fraudulent acts … when those proceedings would not otherwise be covered by the Policy.” Add to Flipboard Magazine.
In its recent decision in Great American Alliance Ins. Co. v. Anderson, 2017 U.S. App. LEXIS 2277 (11th Cir. Feb. 8, 2017), the United States Court of Appeals for the Eleventh Circuit, applying Georgia law, had occasion to consider whether an employee’s violation of company policy regarding operation of a vehicle while impaired eliminated his status as an insured permissive user under the employer’s commercial auto policy. Great American’s insured, Looper Cabinet Co. (“LLC”), allowed its employee, Brian Hensley, to drive a pickup truck for work and personal reasons, including transportation to and from a lake house owned by Mr. Hensley’s father. At issue was Mr. Hensley’s right to insured status for an accident that happened while he was driving from the lake house while under the influence. LLC had a company policy in effect stating that an impaired employee was not allowed to drive. Great American denied coverage to Mr. Hensley for the underlying suit on the basis that he had exceeded the scope of the permissive use granted by LLC by driving while under the influence. The United States District Court for the Southern District of Georgia granted summary judgment in favor of Great American, concluding that the decision by a Georgia state appellate court in Barfield v. Royal Ins. Co. of Am., 492 S.E.2d 688 (Ga. Ct. App. 1997) stood for the proposition that by violating LLC’s internal policies, Hensley exceeded the scope of his permitted use of the vehicle, and thus negating his right to insured status. On appeal, the Eleventh Circuit observed that the decision in Barfield conflicted with a 1968 decision by the Georgia Supreme Court in Strickland v. Georgia Cas.& Sur. Co., 162 S.E.2d 421 (Ga. 1968), in which the Court held that a finding of permissive use under an auto policy “only required permission for the purpose served by the vehicle and that the operational aspects were unimportant.” In other words, an employee’s violation of express company rules is not a relevant coverage consideration so long as the individual was operating the vehicle for the original use or purpose intended. The Eleventh Circuit observed that the Barfield decision did not reference Strickland and could not be reconciled with it either. Concluding that Strickland had not been overruled, the Eleventh Circuit held that Strickland, not Barfield, represented Georgia controlling law on the issue and that as such, the lower court erred in holding in Great American’s favor. Citing to evidence in the record that Brian Hensley was operating the vehicle for a permitted use at the time of the accident, even if in violation of the company alcohol, the court held that Hensley was an insured for the purpose of the underlying action. Add to Flipboard Magazine.
In its recent decision in Saarman Construction, Ltd. v. Ironshore Specialty Ins. Co., 2017 U.S. Dist. LEXIS 13633 (N.D. Cal. Jan 31, 2017), the United States District Court for the Northern District of California had occasion to consider the application of a continuous and progressive injury exclusion in the context of a construction defect claim. The underlying suit arose out of Saarman’s work as a general contractor at a condominium complex performed in 2006 and 2007 to address pre-existing water intrusion problems. In 2011, a lessee of one of the units sued the unit owner, claiming that her unit suffered from several defects, including mold, plumbing leaks and water intrusion. The unit owner, in turn, sued several parties, including Saarman based on the theory that it failed to remedy the defects, which contributed to the mold growth. Ironshore insured Saarman under a general liability policy issued for the period June 30, 2010 to June 30, 2011. The policy contained an exclusion applicable to any claim alleging bodily injury or property damage “arising out of, in whole or in part, the actual, alleged or threatened discharge … of any mold, mildew, bacteria or fungus.” The policy also contained an exclusion applicable to any bodily injury or property damage: which first existed, or is alleged to have first existed, prior to the inception of this policy. “Property damage” from “your work,” or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such “property damage” is sudden and accidental and takes place within the policy period [sic]; or which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if such “bodily injury” or “property damage” continued during this policy period; or which is, or is alleged to be of the same general nature or type as a condition, circumstance or construction defect which resulted in “”bodily injury” or “property damage” prior to the inception date of this policy. Ironshore relied on both exclusions to deny coverage. On motion for summary judgment, Saarman argued that the mold exclusion did not apply, at least for duty to defend purposes, because the claim against it alleged harms other than mold, such as water intrusion and water damage. Ironshore countered that the exclusion, on its face, applied to any claim alleging any mold damage, even if that suit includes other damages attributable to other causes. In considering the issue, the court reasoned that Ironshore’s broad interpretation of the exclusion clashed with California law requiring an insurer to defend a lawsuit that includes covered and uncovered claims, and that California does not permit an insurer to contract around this obligation: As the California Supreme Court explained in Buss, “in a ‘mixed’ action, the insurer has a duty to defend the action in its entirety.” … Here, Ironshore has attempted to circumvent that principle by hinging its duty to defend on the presence of any allegations of non-covered damage in the “suit”—no matter how small or inconsequential those allegations may be. However, the court in Buss suggested that insurers could not contract around their duty to defend mixed actions in this way. …. In short, Ironshore cannot contract around California law that requires insurers to defend the entire action if there is any potentially covered claim. Because the language in the mold exclusion barring coverage for “any claim, demand, or ‘suit’ alleging [damage] arising out of, in whole or in part, the . . . alleged . . . existence of any mold” tries to do precisely that, it is unenforceable. Thus, finding that the underlying suit alleged damages that were independent of mold, i.e. water intrusion and water damage, the court concluded that the mold exclusion did not apply to the entirety of the underlying claim and thus did not operate to preclude a duty to defend. Turning to the policy’s continuous or progressive injury exclusion, referred to by the court as the CP exclusion, Saarman agreed that it finished its work prior to the policy’s issuance, and thus fell within the first paragraph of the exclusion. Saarman nevertheless argued that the damage at issue in the underlying was not continuous but instead intermittent based on rainfall events. The court rejected this argument, noting that the exclusion only requires the completion of work prior to the policy’s issuance for the exclusion to apply and does not focus on when or under what circumstances the property damage occurs. In so concluding, the court considered but rejected Saarman’s argument that the exclusion rendered the policy’s completed operations coverage illusory, finding that the policy still provided coverage for operations completed during the policy period, just not operations completed prior to the policy period. Add to Flipboard Magazine.
In its recent decision in BancorpSouth, Inc. v. Fed. Ins. Co., 2017 U.S. Dist. LEXIS 10817 (S.D. Ind. Jan. 26, 2017), the United States District Court for the Southern District of Indiana, applying Mississippi law, had occasion to consider the application of a fees or charges exclusion in a bankers’ professional liability policy. Bancorp sought coverage an underlying class action lawsuit seeking monetary damages, restitution and declaratory relief arising from its practice of charging allegedly excessive overdraft fees imposed on its customers. The suit claimed that Bancorp engaged in various schemes in an effort to ensure that such fees would be maximized. Bancorp sought coverage for the underlying suit, but Federal denied coverage on the basis of an exclusion in its policy applicable to loss arising from any claim “based upon, arising from, or in consequence of any fees or charges.” In the ensuing coverage litigation, Bancorp contended that Federal applied the exclusion in too broad a fashion. Specifically, Bancorp argued that because the underlying lawsuit alleged that its policies and procedures caused the harms alleged by the class, one of which was the imposition overdraft fees. In other words, Bancorp claimed that was at stake in the suit was its policies that resulted in overdraft fees, not the imposition of the fees itself. Bancorp also argued that the exclusion was ambiguous since it was not clear whether the exclusion applied to fees payable by Bancorp or fees paid to Bancorp. In considering the exclusion, the court noted two unpublished and diverging opinions: one from the Third Circuit, applying Texas law, in PNC Fin. Servs. Group, Inc., 647 Fed. Appx. 112 (3d Cir. 2016) and another by the Fifth Circuit, ironically applying Pennsylvania law, in First Comm. Bancshares v. St. Paul Mercury Ins. Co., 593 Fed. Appx. 286 (5th Cir. 2014). In First Community, the court held that the class action complaint alleged overdraft fees, but that “the primary harm stemming from these allegations is that customers could not ascertain their account balances and could not plan spending, withdrawals, and deposits.” The BancorpSouth court noted, however, that the facts and policy before it were factually distinguishable from First Community. Whereas the class action in First Community sought damages as a result of the bank customers only having access inaccurate balances, the suit against Bancorp was targeted at specific practices allegedly in furtherance of Bancorp’s scheme to impose and maximize overdraft fees. The court further noted, by contrast, that the class action at issue in PNC was factually similar to that filed against Bancorp. There the Third Circuit rejected arguments similar to those raised by Bancorp; namely, that the underlying suit sought damages for PNC’s allegedly improper practices, not for the fees themselves. The BancorpSouth court found this reasoning persuasive, concluding “there is no other way for us to construe [the exclusion] than to encompass the claims here.” The court also considered Bancorp’s argument that the failure to distinguish between payments to or by Bancorp rendered the exclusion ambiguous. The court rejected this argument, observing that the exclusion applied to both types of payments, but that its breadth should not be equated with ambiguity. Add to Flipboard Magazine.
In EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., No. 14-10616, 2017 U.S. App. LEXIS 368 (11th Cir. Jan. 9, 2017), the Eleventh Circuit had occasion to consider whether an insurer had an obligation to reimburse its insured for pre-tender defense costs that were voluntarily assumed by the insured, and whether the insurer’s disclaimer of such costs is governed by Florida Claims Administration Statute, Fla. Stat. § 627.426(2). Travelers insured EmbroidMe.com under a general liability policy that covered, among other things, web-site injuries. The underlying copyright litigation triggered Travelers indemnification and defense obligations, but EmbroidMe.com failed to notify Travelers of the suit and EmbroidMe.com assumed a defense on its own behalf. EmbroidMe.com retained counsel and from June 2010 until October 2011 EmbroidMe.com paid all of its own legal defense costs with no notice to Travelers that the litigation was ongoing. However, 18 months after the suit had been filed against EmbroidMe.com, EmbroidMe.com notified Travelers of the claim against it. In November 2011, Travelers sent EmbroidMe.com a letter that contained a “coverage analysis” making clear that Travelers would only pay post-tender defense costs. EmbroidMe.com refused to accept Traveler’s denial of pre-tender costs, which totaled upwards of $400,000. The Eleventh Circuit noted that EmbroidMe.com “repeatedly sought to change Travelers’ mind as to the decision it had set out in its November 2011 letter.” Shortly after settlement of the underlying action, Travelers sent EmbroidMe.com a letter reiterating its position that it was not required to pay the pre-tender defense costs. Months later, EmbroidMe.com filed suit against Travelers, challenging Travelers’ disclaimer of the pre-tender defense costs on the basis that the policy did not expressly bar coverage for pre-tender costs and that Travelers’ disclaimer of coverage for such amounts 39 days after tender was untimely and thus in violation of the Florida Claims Administration Statute, § 627.426(2). The Statute states, in relevant part, that an insurer is estopped from denying coverage unless “(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery.” Both parties filed motions for summary judgment. EmbroidMe.com contended Travelers was estopped from denying its duty to pay pre-tender defense costs because it violated § 627.426(2). Travelers argued the Statute only applies to “coverage defenses” and its denial of pre-tender costs was predicated upon a “coverage exclusion,” such that the Statute was inapplicable and it was not estopped from denying pre-tender costs. The District Court agreed with Travelers, granting their motion for summary judgment and ruling that Travelers was not required to pay EmbroidMe.com’s pre-tender legal expenses. The District Court’s decision was the topic of a previous post on the TLSS Insurance Law Blog. EmbroidMe.com appealed. In its recent decision, the Eleventh Circuit affirmed the District Court’s conclusion that Travelers’ refusal to reimburse EmbroidMe.com for pre-tender costs did not constitute a “coverage defense,” meaning that the statutory time period for an insurer to notify its insured of its defense to coverage did not apply. The Eleventh Circuit reasoned that the plain language of the policy indicated Travelers’ refusal to reimburse was an exclusion, not a defense. Specifically, the policy provided that “no insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” The Eleventh Circuit found this language to be clear, “if not common sense.” Because the pre-tender costs are specifically excluded from the policy, the provision addressing Travelers refusal to pay for those costs is not a coverage defense pursuant to the Statute, rather it is an exclusion. Travelers therefore properly denied coverage for the pre-tender defense costs. Add to Flipboard Magazine.
In its recent decision in Pizter College v. Indian Harbor Ins. Co., 2017 U.S. App. LEXIS 668 (9th Cir. Jan. 13, 2017), the United States Court of Appeals for the Ninth Circuit had occasion to consider the applicability of a New York choice of law provision in the context of late notice disclaimer of coverage. Indian Harbor insured Pitzer College under a pollution liability policy containing a choice of law provision stating that “all matters … related to the validity, interpretation, performance and enforcement of this Policy shall be determined in accordance with the law and practice of the State of New York … .” At issue was Pitzer’s right to coverage for a pollution condition it discovered and remediated several months before giving first notice to Indian Harbor. The Indian Harbor policy contained a condition stating that except for actions undertaken on an emergency basis, Indian Harbor’s prior consent was required before Pitzer could undertake any remedial efforts. Indian Harbor subsequently denied coverage to Pitzer on the basis that it failed to give timely notice of the pollution condition and also that it failed to obtain consent prior to undertaking remedial efforts. On motion for summary judgment, the United States District Court for the Central District of California held in Indian Harbor’s favor, concluding that as a result of the policy’s choice of law provision, New York law governed the coverage dispute and that under New York law, Pitzer’s untimely notice and its failure to have obtained Indian Harbor’s consent before undertaking remedial efforts vitiated its right to coverage under the policy. Central to the court’s ruling was that California did not have a fundamental public policy interest in applying its own notice-prejudice law to the coverage dispute that would require the court to reject the policy’s New York choice of law provision. On appeal, the Ninth Circuit observed that under California law, a contractual choice of law provision should be enforced unless it conflicts with a fundamental public policy of the state. Thus, reasoned the court, application of the New York choice of law provision in the Indian Harbor provision should be enforced unless California’s notice-prejudice rule qualifies as a fundamental public policy. The court acknowledged that this was a crucial question to the underlying dispute, since under California law, Indian Harbor likely would not be able to establish that it was prejudiced as a result of Pitzer’s late notice. Given the uncertainty as to whether California’s notice-prejudice rule constitutes a fundamental public policy, the Ninth Circuit certified the following questions to the California Supreme Court: Is California’s common law notice-prejudice rule a fundamental public policy for the purpose of choice-of-law analysis? May common law rules other than unconscionability not enshrined in statute, regulation, or the constitution, be fundamental public policies for the purpose of choice-of-law analysis? If the notice-prejudice rule is a fundamental public policy for the purpose of choice-of-law analysis, can a consent provision in a first-party claim insurance policy be interpreted as a notice provision such that the notice-prejudice rule applies? Add to Flipboard Magazine.
In its recent decision in FDIC v. BancIsure, Inc., 2017 U.S. App. LEXIS 452 (Jan. 10, 2017), the United States Court of Appeals had occasion to consider the scope of an insured vs. insured exclusion in the context of malfeasance claims brought by the FDIC in its capacity as a receiver. BancInsure insured Security Pacific Bank under a D&O policy containing an exclusion applicable to: 11. a Claim by, or on behalf, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company except for: (a) a shareholder’s derivative action brought on behalf of the Company by one or more shareholders who are not Insured Persons and make a Claim without the cooperation or solicitation of any Insured Person or the Company. . . . Security Pacific ceased operations and FDIC was appointed by the State of California as the bank’s receiver. FDIC subsequently asserted claims against the former directors and officers of the bank for the alleged losses they caused to the bank. These individuals sought coverage for the FDIC claims under the BancInsure policy. BancInsure, in turn, denied coverage on the basis of the policy’s insured vs. insured exclusion. FDIC acknowledged that on its face, the exclusion applied to the claims it brought in its capacity as a received of the bank. It nevertheless contended that the exception for shareholder derivative actions should apply since its claims were similar to those asserted in shareholder derivative suits, and because the FDIC in addition to succeeding to the interests of the bank also succeeded to the interests of Security Pacific’s shareholders. The Ninth Circuit disagreed, noting that malfeasance claims such as those brought by FDIC against Security Pacific’s directors and officers “belong to the corporation – not to the shareholders – and the board of directors is primarily responsible for enforcing the corporation’s rights.” The court distinguished such a claim from a shareholder derivative suit, which it explained is a suit that can be brought only when a board of directors fails or refuses to enforce a corporation’s rights. The court reasoned that the insured vs. insured exclusion is not rendered ambiguous merely because the FDIC, in addition to succeeding to the rights of Security Pacific’s board also succeeds to the rights of its shareholders. The court found such a conclusion contrary to the plain language of the exclusion: Interpreting the shareholder-derivative-suit exception to provide coverage to the FDIC’s claims may very well read the term ‘receiver’ out of the insured-versus-insured exclusion. We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific. Add to Flipboard Magazine.