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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West Virginia Court Allows Rescission of Professional Liability Policy

In its recent decision in ALPS Prop. & Cas. Ins. Co. v. Turkaly, 2018 U.S. Dist. LEXIS 5026 (S.D. W.Va. Jan. 11, 2018), the United States District Court for the Southern District of West Virginia had occasion to consider the circumstances under which rescission of an insurance policy is permissible under West Virginia law.

ALPS insured Michael Turkaly under a series of claims made lawyers professional liability policies.  The first policy was in effect for the period September 1, 2015 to August 31, 2016, and the renewal policy became effective upon the expiration of the first policy.  Mr. Turkaly stated in his renewal application that he was unaware of any facts or circumstances that could give rise to a claim.  Two weeks later, he affirmed in writing that his answers in the renewal application remained true.  In fact, Mr. Turkaly had received a request in July 2016 to waive service of a legal malpractice lawsuit filed against him.  While he had not been served as of the date that he completed his renewal application, he had been served by the time he affirmed his answers in the renewal application.

In considering ALPS’ claim for rescission, the court observed that under West Virginia law, rescission is governed by W. Va. Code § 33-6-7, which states that misrepresentations shall not prevent recovery under an insurance policy unless the misrepresentations are fraudulent or material, or unless the insurer can demonstrate that it would not have issued the policy, or would have issued the policy on different terms, had it known the true facts.  To prevail based on fraud, the insurer is required to demonstrate specific intent to deceive.  By contrast, to prevail based on the two other grounds, the insurer need only demonstrate that the misrepresentation was “material.”  The standard for demonstrating materiality, as set forth by the West Virginia Supreme Court, is an objective analysis looking to “whether the insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.”

Applying these criteria, the court concluded that Mr. Turkaly made two misrepresentations to ALPS: the first in stating that it was not aware of circumstances that could give rise to a claim and the second in reaffirming this representation two weeks later.  The court concluded that these misrepresentations were material, reasoning:

… it is fair to conclude that a reasonable insurer would have taken alternative action in offering Michael Turkaly insurance coverage had it known that Michael Turkaly was being sued for mismanaging a trust as a trustee. A reasonably prudent insurer would consider a claim related to a lawyer’s actions as a trustee, whether or not that claim is covered by the policy, relevant to the risk and therefore material to the insurance contract providing professional liability coverage.

The court, therefore, declared the policy to be void ab initio.  As a result, ALPS had no coverage obligations to Mr. Turkaly for the underlying suit.  At the same time, ALPS was not entitled to return of defense costs it had incurred in defending Mr. Turkaly in the underlying matter.



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California Court Holds Insured’s Activities Not an Occurrence

In its recent decision in Henstooth Ranch LLC v. Burlington Ins. Co., 2018 U.S. Dist. LEXIS 1176 (N.D. Cal. Jan. 3, 2018), the United States District Court for the Northern District of California had occasion to consider whether an insured’s land restoration activities constituted an “occurrence” for the purpose of a general liability policy.

Burlington insured Henstooth, a limited liability corporation organized for the purpose of the ownership of a parcel of property that was encumbered by a conservation easement.  The easement was for the purpose of protecting the property’s natural habitat and specifically prohibited improvements and certain environmentally harmful activities.  Henstooth was sued by the easement holder for its efforts to construct a road and a home.  These efforts, claimed the underlying plaintiff, not only violated the easement, but also resulted into damage to the property requiring restorative efforts.  Prior to suit, and over the other side’s objections, Henstooth attempted to performed its own land restoration efforts.  These efforts not only failed, but allegedly resulted in further damage to the land.

Burlington argued that it had no coverage obligations in connection with the underlying suit because Henstooth’s conduct, as outlined in the underlying complaint, was intentional and thus did not come within the policy’s definition of “occurrence.”  Henstooth countered that at the very least, a defense obligation was triggered by its attempt at restoration efforts, which while performed intentionally, negligently failed, thus resulting in damage it did not intend.

The court sided with Burlington, observing that in undertaking the restoration efforts, Henstooth allegedly ignored the easement holder’s request that Henstooth hire a consultant and prepare a restoration plan for approval prior to implementation.  Henstooth’s failure to do so, and its unilateral actions in performing the restoration efforts, explained the court, was intentional in nature, regardless of whether Henstooth intended to cause additional harm to the property.  As the court reasoned, the term “accident” in the policy definition of “occurrence” refers to the nature of the insured’s conduct, not to its unintended consequences.



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Alabama Court Holds Professional Liability Exclusion Applicable to Negligent Inspection

In its recent decision in AIX Specialty Ins. Co. v. H&W Tank Testing, Inc., 2017 U.S. Dist. LEXIS 169787 (M.D. Ala. Oct. 12, 2017), the United States District Court for the Middle District of Alabama had occasion to consider the scope and permissibility of a professional liability exclusion contained in a general liability policy.

H&W, a tanker truck inspection company, was sued in connection with its alleged negligence in inspecting a tanker truck carrying a load of propane gas.  The truck later was involved in a crash, which resulted in the propane leaking and ultimately exploding, causing severe injuries to the driver.  The driver sued H&W on the basis that it negligently failed to test and inspect the propane tank.

H&W sought coverage for the suit under its general liability policy issued by AIX.  The policy contained an endorsement titled Testing or Consulting Exclusion, applicable to an error, omission, defect or deficiency in any test performed or an evaluation, consultation or advice given by or on behalf of any insured.   AIX denied coverage for the underlying suit on the basis of the exclusion.  H&W nevertheless contended that the exclusion was void as against Alabama public policy and that in any event, it did not apply to the allegation that it had failed to properly inspect plaintiff’s tank.

Considering first the scope of the exclusion, the court rejected H&W’s argument that the exclusion did not apply to allegations of negligent inspection.  H&W argued that the literal terms of the exclusion applied only to testing, and did not include inspection, and that a distinction could be drawn between negligent testing and negligent inspection.  The court concluded that there was no meaningful distinction between a test and an inspection, nor would a reasonable person understand these words to have different meanings.

Turning to the issue of public policy, H&W argued that because it was required under Alabama statutory law to maintain general liability insurance for its inspection services, it was improper for AIX to issue a policy with an inspection exclusion.  The court rejected this argument, noting that the statutory requirement for insurance applied only to companies such as H&W, not to their insurers.  The court concluded that the burden was on H&W to secure the proper coverage and that this burden could not be shifted on AIX to assume responsibility for H&W’s mistake.



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New Jersey Court Holds No Coverage for Sexual Harassment Claim Under E&O Policy

In its recent decision in Aaron Ambulance Med. Transp., Inc. v. Certain Underwriters at Lloyd’s, 2017 U.S. Dist. LEXIS 149409 (D.N.J. Sept. 14, 2017), the United States District Court for the District of New Jersey had occasion to consider the scope of coverage afforded under a professional liability policy for allegations of sexual harassment against an employee.

Underwriters issued to Aaron Ambulance a professional liability policy insuring its ambulance-related services.  The policy’s main form contained an exclusion for sexual misconduct, sexual abuse and/or child abuse.  It also contained exclusions for claims brought by one insured (defined to include employees) against another and for unlawful discrimination.  Aaron Ambulance purchased an extension of coverage to the policy, set forth in an endorsement, affording coverage for claims arising out of sexual misconduct, sexual abuse, and/or child abuse.  This extension of coverage was subject to a separate sublimit of coverage and the express condition that the endorsement did not change any other terms or conditions of the policy.

Aaron Ambulance sought coverage under the policy for a suit brought against it by an individual alleging that she was subject to hostile sexual harassment and abuse during the time of her employment with Aaron Ambulance.  Underwriters took the position that the extension of coverage for sexual misconduct only extended to sexual misconduct committed in the context of rendering professional services and that the policy did not insure workplace-related claims.  Aaron Ambulance countered that the extension of coverage for sexual misconduct claims was not limited to claims asserted by patients, and that at the very least, it had a reasonable expectation that the extension of coverage would include employment-related sexual harassment claims.

Siding with Underwriters, the court agreed that the plain reading of the endorsement in conjunction with the various exclusions in the policy made clear that the endorsement did not negate the exclusions for allegations of unlawful discrimination or for claims brought by insureds, a term defined to include employees.  In so concluding, the court accepted Underwriters’ argument that the policy only provides professional liability as opposed to employment practices liability insurance.  As the court explained:

Absent express reference to other provisions of the Policy, the Court is disinclined to construe the Policy as expansively as Plaintiffs suggest. It would be a generous interpretation indeed to read Endorsement 7 to expand coverage beyond professional services and into the realm of sexual harassment and discrimination—all without using or defining such terms or referring to related definitions, declarations, or exclusions. A plain reading, rather, recognizes that the Policy says what it means through well-defined and consistently-employed terms. Such a reading also supports the conclusion that, as Defendant persuasively argues, sexual misconduct is insured against not in the sense of sexual harassment or in the context of an office environment, but simply in rendering professional ambulatory services—a situation not raised by the allegations of the underlying complaint. Without further guidance from the express terms of the Policy, therefore, there is no reasonable basis to find ambiguity or an expectation of coverage.

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New Jersey Court Holds Pollution Exclusion Inapplicable to Unintentional Contamination

In its recent decision in Benjamin v. State Farm Ins. Co., 2017 U.S. Dist. LEXIS 131078 (D.N.J. Aug. 17, 2017), the United States District Court for the District of New Jersey had occasion to consider the scope of the pollution exclusion under New Jersey law.

At issue in the Benjamin case was a policyholder’s right to coverage under his homeowner’s insurance for liabilities associated with a leaking underground storage tank located under his property.  Notably, the insured was unaware of the tank when it purchased the property.  It was only after the insured learned of the tank’s existence, and undertook efforts to have it excavated and removed, that he determined that the tank had leaked several years prior to his purchase of the property, resulting in soil and groundwater contamination.  The policyholder then sought coverage under several of his homeowner’s insurance policies for remedial efforts required by the New Jersey Department of Environmental Protection.

The Benjamin court addressed a number of coverage issues, including whether the insured’s liability resulted from an occurrence, the scope of the owned property exclusion, and how loss should be allocated under New Jersey law.  The court also addressed the application of the pollution exclusion, and in particular under what circumstances the exclusion applies to unintentionally created pollution.

In considering the scope of the exclusion, the court observed that New Jersey state and federal case law construing the pollution exclusion – both the qualified and absolute exclusion – have read an intentionality requirement into the exclusion.  Thus, not only is the exclusion limited to traditional environmental harm, as reflected in the Supreme Court’s decision in Nav-Its, Inc. v. Selective Ins. Co. of America, 869 A.2d 929 (N.J. 2005), but application of the exclusion has been limited to intentional industrial pollution even for exclusions not containing the “sudden and accidental” exception.  The court referred to its own prior decision in Castoro v. Hartford Accident and Indemnity Co., Inc., 2016 U.S. Dist. LEXIS 134686 (D.N.J. Sept. 29, 2016), in which it held that as a matter of public policy the exclusion did not apply to unintentional pollution caused by a “mom and pop” contracting business where the contamination was not expected or intended from the standpoint of the insured, even if the event giving rise to the contamination was expected.

Relying on this case law, the court denied the carriers’ motions for summary judgment on the basis of the exclusion, observing that the insurers failed to allege, or even attempt to demonstrate, that the insured policyholder expected or intended the pollution, particularly since he had no part in causing the release and was not even aware of the underground storage tank until long after the leak had happened.


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