Kansas Federal Court Applies Prejudice Requirement to Pollution Buy-Back Endorsement

In its recent decision in PetroSantander (USA), Inc. v. HDI Global Ins. Co., 2018 U.S. Dist. LEXIS 59696 (D. Kan. Apr. 9, 2018), the United States District Court for the District of Kansas, applying Texas law, had occasion to consider whether an insurer need be prejudiced based on an insured’s untimely reporting under a pollution buy-back endorsement.

HDI insured PetroSantander under a general liability policy with a limited pollution liability buy-back endorsement, affording coverage for pollution incidents of a limited temporal duration and only then when reported to HDI within 120 days after the incident first becomes known to the insured.  PetroSantander sought coverage for a pollution incident that it reported to its broker within forty days of its happening, but which was not reported to HDI until 141 days of the event.   At issue in the subsequent litigation was whether HDI needed to demonstrate prejudice as a result receiving first notice three weeks after the expiration of the reporting period.

In analyzing this question, the court observed that Texas courts have long recognized that prejudice is a consideration for late notice under occurrence based policies as well as for reporting within the policy period of a claims made and reported policy.  HDI nevertheless cited to two decisions from the United States Court of Appeals for the Fifth Circuit, both of which predicted Texas law on the very issue: Matador Petroleum Corp. v. St. Paul Surplus Lines Inc. Co., 174 F.3d 653 (5th Cir. 1999) and Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 719 F.3d 700 (5th Cir. 2013). In both cases, the Fifth Circuit held that given the limited coverage afforded under a pollution buy-back endorsement, prejudice is not a relevant consideration.

Notwithstanding these two cases, the PetroSantander court predicted that the Texas Supreme Court would not follow their holdings.  In particular, the court reasoned that both Fifth Circuit cases did not properly analyze Texas law on prejudice, and in particular Order 23080 issued by the Texas Department of Insurance, which establishes a prejudice requirement for policies issued or delivered in Texas.  As the court explained:

Neither Matador nor Starr provide any analysis of Order 23080, explain why the Order did not apply under the circumstances presented, or even mention the Order. The Court has no convincing evidence before it that the Fifth Circuit silently considered and rejected the application of Order 23080 to Matador and Starr, and Defendant’s arguments fail to persuade the Court otherwise. Rather, a review of Fifth Circuit opinions specifically citing Order 23080 demonstrates that the Fifth Circuit has recognized not only that the Order applies to CGL policies, but also that the Order is “mandatory” and effectuated a “change in Texas insurance law.”

Thus, breaking with Matador and Starr, the court held that prejudice would be required under Texas law for failure to comply with the 120 reporting period, and that as such, and given HDI’s failure to demonstrate any prejudice as a result of the receiving notice 141 days after the insured’s discovery of the pollution incident, the court held that the insured was entitled to coverage for the incident.


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Illinois Appellate Court Finds Breach of Duty to Defend When Insurer Reserved Rights to Challenge Insured’s Decision to Settle Without The Insurer’s Consent

Rogers Cartage Co. v. Travelers Indem. Co.¸ 2018 IL App. 160098 (5th Dist. 2018), arose from underlying litigation involving environmental contamination and cleanup at two United States Environmental Protection Agency (EPA) Superfund sites. Pharmacia Corporation (Pharmacia) and Solutia, Inc. (Solutia) brought a third-party claim against Rogers Cartage Company (Rogers) alleging that Rogers handling of toxic materials, disposal of cleanup waste, and deposit of those wastes in pools was the cause of the environmental contamination at the Superfund sites.

Beginning in 1960 and for the next several years, Travelers issued policies of insurance to Rogers. The policies issued by Travelers required that, in the event of litigation against Rogers, Travelers would defend and indemnify Rogers. When Rogers was sued in the underlying litigation in 2009, Travelers sent Rogers a reservation of rights letter, including language agreeing to contribute to the payment of reasonable and necessary fees for defense-related work performed by counsel of Rogers’ choice.

On September 9, 2010, Rogers informed Travelers of the trial date and advised Travelers that it was planning an informal settlement meeting with Pharmacia and Solutia and would advise Travelers of any settlement demand

On October 8, 2010, Pharmacia and Solutia sent Rogers a demand for settlement. The claimants proposed settling the case for $4 million if Travelers would participate and resolve the claims for cash, but in the event that Travelers refused, they proposed settling with Rogers in the amount of $7.5 million, with Rogers paying $50,000.00 and pursuing insurance proceeds for the remainder, using claimants’ counsel.

On November 2, 2010, claimants renewed their demand of $4 million to be paid by Travelers, with no mention of the alternative proposal. The renewed demand was forwarded to Travelers. Rogers’ counsel told Travelers that claimants’ demand was reasonable in light of the facts but that he believed the case could be settled between $2 and $3 million. Additionally, he advised Travelers that he did not believe that he could win at the trial level but thought there was an 85% chance of prevailing on appeal; however, Rogers could neither afford to go to trial nor afford to lose at trial.  Rogers’ counsel concluded that there were only two reasonable options: negotiate and settle or indemnify Rogers and post the bond on appeal.

On November 19, 2010, Travelers disputed coverage and claimed that Rogers had less than $300,000.00 in applicable coverage. Travelers made a counteroffer of $275,000.00 to claimants’ demand, and claimants countered with $3.75 million. Travelers refused to make any other counteroffers.

On December 30, 2010, Travelers sent Rogers a letter advising them that Travelers did not consent to any unilateral settlement negotiations, and that if negotiations were taking place or a settlement had been reached, Rogers would be in breach of the cooperation and anti-assignment clauses in its policies, negating coverage. Travelers then filed suit against Rogers disputing coverage under the policies.

Ultimately, Rogers, without the consent of Travelers, entered into a settlement with Pharmacia and Solutia for $7.5 million, out of which it agreed to pay $50,000.00 and promised to seek indemnification from Travelers. After entering into the settlement agreement, Rogers, Pharmacia and Solutia, brought suit against Travelers seeking a declaration of coverage.

Rogers filed a motion for partial summary judgment seeking a finding that it did not breach any terms of the Travelers policies by settling without Travelers consent. On May 3, 2012, the trial court granted partial summary judgment in favor of Rogers, finding that Travelers breached its duty of good faith to settle.

Additionally, Rogers filed a motion for partial summary judgment seeking rulings that Travelers breached its duty to defend and therefore should be estopped from asserting defenses to coverage. On December 12, 2014, the trial court granted Rogers’ motion and found that Travelers breached its duty to defend and must indemnify Rogers in the underlying suit. The trial court also awarded Rogers $2,665,384.90 in attorney’s fees and costs and an additional $60,000.00 penalty pursuant to the Insurance Code. Travelers appealed.

On appeal, the Court affirmed the trial court on the basis that Travelers’ conduct breached its duty to defend, when the insurer refused to settle within the policy limits and attempted to intimidate Rogers into stopping negotiations and settlement. The court reasoned that Travelers’ threat of negating coverage in an attempt to keep Rogers from settling was contrary to Illinois law and constituted a breach of its duty to defend. The court stated that “while Travelers initially agreed to defend Rogers in the underlying action under a reservation of rights, Travelers attempted to take over the defense of the matter by refusing to allow Rogers to settle at a crucial time during negotiations.” The court found Travelers actions to be offensive and contrary to standard industry practice, putting its interests ahead of its insured. Furthermore, the court found Travelers actions to amount to evidence of “bad faith,” also breaching its duty to settle.

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Seventh Circuit Finds Policy Limits Cap Insurer’s Exposure On An Excess Verdict Despite Improperly Denying A Duty To Defend

In Hyland v. Liberty Mut. Fire Ins. Co., 2018 U.S. App. LEXIS 6460 (7th Cir. March 15, 2018), the United States Court of Appeals for the Seventh Circuit considered whether a liability insurer could be saddled with the full amount of an excess verdict against its insured when it improperly failed to defend the insured in an underlying suit.  Liberty Mutual issued an automobile policy that covered a vehicle driven by Michiah Risby as well as anyone driving the vehicle with Risby’s permission.  The vehicle was involved in an accident while Miquasha Smith was driving and passenger Monteil Hyland was injured.  Smith asserted that Risby gave her permission to drive the vehicle and therefore claimed insured status under the Liberty Mutual policy, but Risby denied giving her permission to drive. 

Hyland sued Smith, but Liberty refused to provide a defense or indemnify Smith because she was not driving the car with permission and therefore did not qualify as an insured.  Smith defaulted and a judgment was entered for $4.6 million, which was assigned to Hyland to pursue against Liberty Mutual.  Hyland then filed suit against Liberty Mutual in the U.S. District Court for the Central District of Illinois to collect the full judgment.  The district court concluded that Liberty Mutual’s failure to either defend Smith or file a declaratory judgment action violated Illinois law and made it liable for the entire $4.6 million judgment, even though the policy limits were $25,000 per person.  Liberty Mutual appealed.

The Seventh Circuit reversed.  The court first acknowledged that the estoppel theory cited by the district court could not be the basis to impose the excess judgment on Liberty Mutual, as no Illinois court endorsed that result through estoppel.  This was true even though Liberty Mutual conceded that it should have provided a defense to Smith.

The court then evaluated Hyland’s alternative argument that her $4.6 million in damages were approximately caused by Liberty Mutual’s neglect in failing to defend its insured, Smith.  Liberty Mutual argued that such a theory would only be viable if there was a finding of bad faith, as Illinois law is clear that an insurer’s exposure is limited to the policy limits plus $60,000 under Illinois’ bad faith statute (215 ILCS 5/155).  Hyland argued that bad faith was not required, and it could recover from Liberty Mutual simply by showing the underlying judgment was caused by the failure to defend.

The Seventh Circuit recognized that no Illinois court had squarely addressed whether bad faith was a necessary element of the claim for recovery in excess of policy limits, but ruled that it did not need to answer that question as Liberty Mutual’s neglect could not have caused the judgment.  The court found that the facts of the underlying suit made clear that Smith was liable for the accident, and a defense attorney could not have avoided that result.  With respect to the damages awarded in the underlying suit, Hyland did not argue that a defense attorney assigned to Smith could have achieved a result for less than $4.6 million, and in fact argued that was the correct judgment for her injuries.  The court therefore held that because Smith did not have a plausible defense to liability or damages, the $4.6 million judgment was not caused by Liberty Mutual’s failure to defend and the maximum loss caused by the failure to defend was the policy’s $25,000 limit.  The district court’s decision was vacated and remanded.

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New York Court Addresses Coverage for School District’s Alleged Civil Rights Violations

In its recent decision in Graphic Arts Mut. Ins. Co. v. Pine Bush Central School District, 2018 N.Y. App. Div. LEXIS 1553 (N.Y. 2d Dep’t Mar. 9, 2018), the Second Department of the New York Appellate Division had occasion to consider a general liability insurer’s indemnity obligations with respect to a lawsuit alleging that the insured school district failed to adequately address anti-Semitic acts committed against students.

The Pine Bush Central School District and several individual administrators were named as  defendants in a suit brought by five students alleging that their civil rights had been violated as a result of defendants having been “deliberately indifferent to anti-Semitic harassment and discrimination perpetrated by other students.”  The District’s general liability insurer, Graphic Arts, provided a defense to the suit under a reservation of rights and ultimately disclaimed an indemnity obligation.  The suit later settled for approximately $4.5 million, none of which was paid by Graphic Arts.

Graphic Arts later commenced a declaratory judgment action, seeking a declaration of non-coverage on several grounds.  Among the arguments raised by Graphic Arts was that the underlying suit alleged that defendants had acted in an intentionally discriminatory manner, and that as such, coverage was precluded as a result of an exclusion for intentional discrimination and that in any event, the relief sought by the students did not qualify as loss resulting from an occurrence. The District moved to dismiss the complaint based on failure to state a claim.

While the lower court dismissed Graphic Arts’ causes of action pertaining to a duty to indemnify, leaving only a cause of action pertaining to the reasonableness of the underlying settlement, the appellate court reversed.  Of note to the court were several specific allegations in the underlying suit alleging that the acts of anti-Semitism were reported to the defendants and that defendants failed to take any action, thus allowing for the inference that defendants intended for the harassment to occur.  The appellate court agreed that while coverage can be afforded for the unintentional results of intentional acts, it could not rule out the possibility that the District and the various administrators intended these harms, at least on a duty to dismiss standard.  As the court explained:

While “it is not legally impossible to find accidental results flowing from intentional causes, i.e., that the resulting damage was unintended although the original act or acts leading to the damage were intentional” … the insurance policies do not conclusively establish that the plaintiff is obligated to indemnify the defendants in the underlying action, and the other evidence submitted by the defendants did not utterly refute the factual allegations set forth in the plaintiff’s complaint. Whether the incidents set forth in the amended complaint in the underlying action were accidents present questions of fact which cannot be determined on a motion to dismiss pursuant to CPLR 3211(a)(1) and (7).





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New York Court Enforces Construction Management Exclusion

In its recent decision in Houston Cas. Co. v. Cavan Corp. of NY, Inc., 2018 N.Y. App. Div. LEXIS 1138 (N.Y. 1st Dep’t Feb. 20, 2018), a New York appellate court had occasion to consider the application of a construction management exclusion in a general liability policy.

Houston Casualty’s insured, Cavan, was a contracted construction manager for a building project in New York City.  Cavan later sought coverage in connection with an underlying worksite personal injury action in which Cavan was identified as “the general contractor and/or construction manager” for the project.

Houston Casualty denied coverage on the basis of a policy exclusion titled “Exclusion – Construction Management for a Fee” that precluded coverage for any loss “arising out of ‘construction management,’ regardless of whether such operations are conducted by you or on your behalf.”  The policy defined the term “construction management” as “the planning coordinating, supervising or controlling of construction activities while being compensated on a fee basis by an owner or developer.”

Although the trial court held that there were questions of fact as to whether Cavan was acting as a construction manager, the appellate court disagreed.  It concluded that while the complaint alleged that Cavan may have been the project’s general contractor, and while this may ultimately be the case under New York statutory law governing worksite injuries, the policy’s definition of “construction management” was broad enough to encompass work ordinarily coming within the scope of a general contractor so long as Cavan was being compensated on a fee basis.  The court found this requirement satisfied since Cavan received a flat fee for its services instead of progress payments more typically associated with payment to general contractors.

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Colorado Court Holds No Coverage for Breach of Contract Claim

In its recent decision in Ctr. For Excellence in Higher Ed., Inc. v. Travelers Prop. Cas. Co. of Am., 2018 U.S. Dist. LEXIS 25424 (D. Col. Feb. 16, 2018), the United States District Court for the District of Colorado had occasion to consider whether a breach of contract claim could qualify for coverage under a general liability policy.

Travelers’ insured, the Center for Excellence in Higher Education, was the lessee of a commercial property.  The lease required it to maintain the property in good order and specifically required it to maintain, repair, and if necessary replace, the building’s roof and HVAC system.  During the Center’s tenancy, the roof and HVAC system were damaged in a hailstorm.  The Center, however, did not undertake any efforts to repair or replace the damaged property.

The Center later sued the landlord for breaches of the lease wholly unrelated to the damaged property.  The landlord, however, counterclaimed against the Center for breach of contract based on the Center’s failure to have repaired the damage to the roof and HVAC system.  The Center sought coverage for the counterclaim under its general liability policy with Travelers and Travelers denied coverage on the basis that the counterclaim sought breach of contract damages only, and thus did not trigger its policy’s coverage.

In the ensuing coverage litigation, the Center conceded that breach of contract claims generally are not insured under general liability policies.  It nevertheless argued that the landlord’s allegations could have supported a tort claim based on accidental conduct and that as such, Travelers at least had a defense obligation.  The court disagreed, observing that to state a claim for negligence, the landlord would have needed to allege facts demonstrating that the Center had a duty to maintain and repair the roof that existed independent of the contract.  The court could find no such common law duty that would support a negligence claim, nor was any such duty alleged in the landlord’s pleading.  As such, the court agreed that Travelers had no defense or indemnity obligations for the counterclaim.

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Oklahoma Supreme Court Allows Recovery of Declaratory Judgment Fees

In its recent decision in JP Energy Mktg., LLC v. Commerce & Industry Ins. Co., 2018 OK 11 (Ok. Feb. 5, 2018), the Supreme Court of Oklahoma had occasion to address an insured’s right to recovery legal fees and expenses associated with prosecuting a declaratory judgment action against an insurer.

Having prevailed in its declaratory judgment action against its insurers, JP Energy sought recovery of its fees and costs pursuant to 36 O.S.2011 §3629, which states:

A.  An insurer shall furnish, upon written request of any insured claiming to have a loss under an insurance contract issued by such insurer, forms of proof of loss for completion by such person, but such insurer shall not, by reason of the requirement so to furnish forms, have any responsibility for or with reference to the completion of such proof or the manner of any such completion or attempted completion.


B.  It shall be the duty of the insurer, receiving a proof of loss, to submit a written offer of settlement or rejection of the claim to the insured within ninety (90) days of receipt of that proof of loss. Upon a judgment rendered to either party, costs and attorney fees shall be allowable to the prevailing party. For purposes of this section, the prevailing party is the insurer in those cases where judgment does not exceed written offer of settlement. In all other judgments the insured shall be the prevailing party. If the insured is the prevailing party, the court in rendering judgment shall add interest on the verdict at the rate of fifteen percent (15%) per year from the date the loss was payable pursuant to the provisions of the contract to the date of the verdict. This provision shall not apply to uninsured motorist coverage.

The Court acknowledged that an insured’s right to recovery of pursuit costs per this statute was a matter of first impression.  It nevertheless found persuasive cases from the United States Court of Appeals for the Tenth Circuit holding §3629(B) applicable to declaratory judgment actions, in particular the court’s reasoning that recovery of fees under such circumstances make the insured whole.


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New York Court Holds No Coverage for Criminal Proceeding

In its recent decision in Certified Environmental Services, Inc. v. Endurance Am. Ins. Co., 2018 N.Y. App. Div. 704 (4th Dep’t Feb. 2, 2018), the Supreme Court of New York, Appellate Division, Fourth Department, had occasion to consider whether a liability insurer had coverage obligations with respect to an underlying criminal proceeding.

Certified Environmental Services sought coverage under a series of packaged liability policies affording coverage for professional liability, contractors pollution liability, and general liability matters.  Specifically, it sought reimbursement of defense costs and indemnification in connection with a federal criminal proceeding brought under the Clean Air Act to which it eventually pled guilty and agreed to pay restitution.

One of the sets of policies under which Certified Environmental Services sought coverage insured against “claims,” a term defined as “any written demand, notice, request for defense, request for indemnity, or other legal or equitable proceeding against [plaintiff]” by a person or entity for, inter alia, “covered damages” arising out of plaintiff’s “negligent acts, errors, or omissions.” “Covered damages” include “all claim related costs,'” which in turn are defined as “all costs and expenses associated with the handling, defense, settlement or appeal of any claim’ or suit.'”  

The court agreed with the insurer that the federal government’s federal prosecution of Certified Environmental Services did not satisfy this definition as the federal government was not seeking damages qualifying as “covered damages.”  The court also rejected Certified Environmental Services’ argument that its own demand for a defense in the underlying proceeding constituted a “claim,” observing that a “claim” is only something that can be made against the insured, not something made by the insured.

Certified Environmental Services also sought coverage under a set of policies that limited the defense obligation to “suits,” a term defined as a “civil proceeding.”  The court agreed that because the underlying matter was a criminal rather than civil proceeding, the defense obligation under these policies was not triggered.  

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Eleventh Circuit Holds Insurer Not Liable for Defense Counsel’s Malpractice

In its recent decision in Kapral v. GEICO Indemnity Co., 2018 U.S. App. LEXIS 1937 (11th Cir. Jan. 23, 2018), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider under what circumstances an insurance carrier can be held liable for the acts or omissions of counsel it retains to defend its insured.

The underlying lawsuit giving rise to the dispute in Kapral arose out of a car accident involving GEICO’s insured, Cory Kapral.  Upon receiving notice that Mr. Kapral had been sued, GEICO advised that it would be providing Mr. Kapral with a defense by a salaried GEICO litigation attorney.  The suit later resulted in a verdict against Mr. Kapral for an amount in excess of policy limits.

Mr. Kapral subsequently sued GEICO, claiming that it failed to properly defend him in the underlying lawsuit by having appointed an attorney not capable to “provide competent legal services with a degree of knowledge and ordinary skill of which similarly situated Florida lawyers would exercise.”   In particular, he claimed that defense counsel failed to take certain actions required to properly defend the suit and that these omissions informed plaintiff’s decision to take the matter through trial rather than to settle.

In considering this dispute, the Eleventh Circuit noted that under Florida law, an insurer is not vicariously liable for the negligence of the attorney it retains, so long as the attorney is competent and qualified to handle the type of suit involved.  The court reasoned that these criteria were satisfied in that counsel appointed by GEICO had eighteen years of litigation experience and had run his own personal injury law firm for eight years prior to joining GIECO.  As such, the court concluded that Mr. Kapral could not successfully state a claim that GEICO provided an inadequate defense.

While Mr. Kapral presented evidence suggesting that counsel may have been negligent in providing the defense, this negligence, held the court, could not be imputed to GEICO.  The court specifically rejected the assertion that GEICO could be vicariously liable for counsel’s negligence solely on the basis that he was salaried staff rather than outside defense counsel.  The basis for the court’s reasoning was that the GEICO claims handler did not exercise control over counsel’s conduct and judgment.



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Second Circuit Holds §3420(d) Inapplicable to Denial of Coverage

In its recent decision in Citizens Ins. Co. of Am. v. Risen Foods, LLC, 2018 U.S. App. LEXIS 1371 (2d Cir. Jan. 22, 2018), the United States Court of Appeals for the Second Circuit had occasion to consider the scope of New York Insurance Law §3420(d).

§3420 is one of New York’s primary insurance statutes, governing topics ranging from disclaimers of coverage based on late notice to direct actions by claimants. §3420(d) governs the manner in which insurers are required to disclaim coverage for matters involving bodily injury. In particular, for disclaimers based on policy exclusions or conditions, involving insurance policies issued or delivered in New York and accidents that happened in New York, an insurer is required to provide prompt notice of the disclaimer and is also required to provide a copy of the disclaimer to the claimant and to any other interested parties.

At issue in Citizens was whether the statute applied to an endorsement to a business owners policy, and a following form umbrella policy, extending coverage to accidents involving hired or non-owned autos.  Both policies contained auto exclusions, but as a result of the endorsement extended coverage to certain auto-related liabilities.  Citizens’ insured, Risen, sought coverage under both policies for an auto accident.  Citizens misunderstood the nature of Risen’s tender – believing it to only seek coverage under the umbrella policy as having afforded coverage excess over Risen’s auto liability policy.  As a consequence, Citizens did not address coverage under its primary policy.  Its denial of coverage under its umbrella policy stated only that Citizens did not afford excess umbrella coverage over Risen’s auto policy.  Thus, Citizens’ initial coverage correspondence did not address the auto exclusion, or the hired and non-owned auto endorsement, under either of its policies.

In an ensuing coverage action, the district court concluded that Risen had, in fact, sought coverage under its primary business owners policy.  The court reasoned that while the accident did not come within the extension of coverage afforded under the hired and non-owned auto endorsement, it was still necessary for Citizens to have disclaimed coverage under its policies on the basis of the auto exclusions and that Citizens failure to have done so violated the requirements of §3420(d), thereby estopping Citizens from disclaiming coverage under the two policies.

On appeal, the Second Circuit reversed the lower court, relying on its 2010 decision in NGM Insurance Co. v. Blakely Pumping, Inc., 593 F.3d 150 (2d Cir. 2010), a case involving a nearly identical set of facts.  In Blakely, the court held that a denial of coverage under a hired and non-owned auto endorsement need not comply with §3420 since there is no coverage based on “lack of inclusion” rather than an exclusion.  Applying Blakely to the facts before it, the court reasoned that Citizens was not required to have disclaimed coverage on the basis of its auto exclusion since the exclusion was redundant in light of the limited grant of coverage for hired and non-owned autos.  The court concluded that as a result, Citizens was not estopped by §3420(d) from denying coverage under both of its policies for the underlying matter.


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