Insurance Policyholder Observer - June 2012


The Settlement Dilemma: When a Policyholder and Insurer Disagree on Settlement

[author: Celia M. Jackson]

Your company is sued in a lawsuit for which you believe it has valid defenses, but which nevertheless has the potential to embarrass the company and result in a significant award of damages.  You tender the defense of the lawsuit to the company’s liability insurer, which agrees to defend.  Early in the case, the plaintiff in the lawsuit makes a settlement demand.  You tell the insurer that the company wishes to minimize the negative publicity and wants to accept the settlement.  The insurer, however, believes that the lawsuit can be successfully defended and claims the settlement demand is too high.  It therefore refuses to agree to the settlement.

Has the insurer acted properly?  And, if not, what remedies are available to you as the policyholder?  The answers depend on a number of factors. Please click here to read the entire article.

Orrick Lawyers Gain Key Trial Victory for CITGO Petroleum on Rights to Coverage

CITGO Petroleum Corporation last week overcame the claims of Century Indemnity Company and Certain Underwriters at Lloyd’s of London and Certain London Companies that CITGO has no “right of action” under more than 150 insurance policies.  With this victory CITGO removed a major obstacle on its way towards recovering insurance proceeds for environmental investigation and cleanup costs at the fifth largest oil refinery in the United States.  Please click here to read the entire article.

Virginia Supreme Court Reaffirms Greenhouse Gas Coverage Ruling on Rehearing

The Virginia Supreme Court in its anticipated rehearing of its decision regarding coverage for greenhouse-gas liabilities once again ruled that coverage was barred.  AES Corp. v. Steadfast Ins. Co., No. 100764 (Va. S. Ct., April 20, 2012) (on rehearing).

The Court chose a slightly different path to its outcome from how it trod in its original ruling, which we previously addressed in an earlier issue of this publication.  See Marc Mayerson, No, Virginia, There Is No Greenhouse-Gas Clause (Dec. 12, 2011).  While acknowledging that the policyholder’s conduct might reasonably be described as “negligent [in that it] did not intend to cause the damage that occurred,” the Court nonetheless found that the policyholder’s historical actions did not constitute an “occurrence” that was “unexpected and unintended” and therefore might be covered.  The court derived this result from prior Virginia cases that the concurring opinion said led “inexorably” to this outcome.  The principal opinion reasoned there was no coverage where “objectively, the result was a natural or probable consequence of the intentional act.”  The court seemingly took judicial notice of what it viewed as the “objective” and “natural” consequences of the policyholder’s business activities.  To the extent this ruling was one of fact rather than a legal conclusion, it holds open some space for the court to adopt a different outcome in future cases. 

The court’s opinion on rehearing was joined in a separate opinion by Justice Mims, who described the holding as “a day of reckoning that may surprise many policyholders,” but who stated that “[o]ur precedents may have painted us into a jurisprudential corner.” 

Our colleague, Marc Mayerson, critiqued the opinion on rehearing in a recent issue of Law360, which can be found here:  A Failure of Logic in Va. Supreme Court GHG Case (Law 360, April 23, 2012).

Third Circuit Holds Bankruptcy Code Permits Policyholder to Transfer Policy Rights to Asbestos Trust, Notwithstanding Non-Assignment Clause

The U.S. Court of Appeals for the Third Circuit ruled on May 1, 2012 that a provision of the U.S. Bankruptcy Code allowing the assignment of insurance policies as part of a bankruptcy reorganization overrides the anti-assignment clause of an insurance policy.  In re: Federal-Mogul Global Inc., No. 09-2230 (3rd Cir., May 1, 2012).  Federal-Mogul, a major auto parts manufacturer proceeding under Chapter 11 in the U.S. Bankruptcy Court in Delaware, requested an injunction under Section 524(g) of the Bankruptcy Code to channel present and future asbestos personal injury claims to a separate trust established for that purpose, and proposed to assign various assets to the trust, including Federal-Mogul’s rights to coverage under applicable liability insurance policies.  Federal-Mogul’s proposal purported to preserve the insurers’ defenses to coverage under the plan, but would have barred the insurers from claiming that the plan violated policy provisions prohibiting assignment of the policies without the insurers’ permission.  Affirming lower court decisions, the Third Circuit agreed that Section 1123(a)(5)(B) of the Bankruptcy Code, which allows the proponent of a plan of reorganization to provide adequate means for its implementation “notwithstanding otherwise applicable nonbankruptcy law,” preempted conflicting provisions of the insurance policies.  The court held that Section 1123(a)(5)(B) showed “clear congressional intent that the phrase ‘nonbankruptcy law’ [would] encompass private contracts.” 

Diminution of Property Value May Be Covered Loss Under Property Policy, Georgia Supreme Court Holds

On May 29, 2012, answering a question certified to it by the Eleventh Circuit, the Georgia Supreme Court held that in addition to the costs of repair, a first-party property policy also may cover the diminution in property value.  Royal Capital Dev. LLC v. Maryland Cas. Co., S12Q0209, (Ga. May 29, 2012).  The Court held that its prior ruling that an automobile insurance policy required the insurer to pay for any loss in value of the repaired vehicle can be applied to other types of property insurance.  In the case before the court, the policyholder’s commercial building was damaged by construction to an adjacent building.  The property insurer paid $1.1 million for the estimated cost of repair, but refused to compensate the policyholder for the alleged diminution in value of the property resulting from the stigma of past physical damage.  The Georgia Supreme Court held that, depending on the specific language of the policy at issue, the loss in value may be covered in addition to the cost of repair.

Statute of Limitations Does Not Begin to Run on Breach of Duty to Defend Claim Until Underlying Litigation Ends, Pennsylvania Federal Court Rules

A Pennsylvania federal judge denied TIG Insurance Co.’s motion to dismiss a $26 million CERCLA coverage action, holding that the statute of limitations on an action for breach of the duty to defend begins to run at the conclusion of the underlying litigation, not when the policyholder tenders a claim to the insurer.  Wiseman Oil Co., Inc., v. TIG Ins. Co. F/K/A Transamerica Ins. Co., No. 011-1011, (W.D. Pa. May 22, 2012).  Consistent with a majority of courts, the court held that this claim does not accrue until the underlying litigation ends because the insurer’s duty to defend is a continuing one, which may be performed so long as the litigation continues.  The court also held that the policyholder’s claim for breach of the duty of good faith was not time-barred.

Indiana Supreme Court Rules Absolute Pollution Exclusion Is Ambiguous, Finds Coverage

By a 3-2 majority, the Indiana Supreme Court ruled on March 22 that the absolute pollution exclusion in a commercial general liability policy did not bar coverage of the costs of cleaning up a release of trichloroethylene (TCE), an industrial solvent.  State Automobile Mutual Insurance Co. v. Flexdar Inc., No. 49S02-1104-PL-199 (Ind. Sup. Ct., Mar. 22, 2012).  Policyholder Flexdar Inc. submitted the claim for defense and indemnification to State Automobile Mutual Insurance Company after Indiana regulators ordered it to investigate the TCE release from its manufacturing plant, allegedly contaminating soil and groundwater.  After receiving the claim, the insurer commenced an action against Flexdar in state court, seeking a declaration that it had no duty to defend the claim or indemnify Flexdar because its absolute pollution exclusion barred coverage.  Affirming the trial court, the Supreme Court found the pollution exclusion is ambiguous because its litany of contaminants, pollutants and irritants, if read literally, would negate virtually all coverage, as “practically every substance would qualify as a ‘pollutant’ under this definition.”  The two dissenting justices warned that the ruling would negate all pollution exclusions and inevitably drive up premiums.

Crate & Barrel Settles Coverage Action and ZIP Code Consumer Class Actions

Crate & Barrel announced a settlement of seven consumer class actions regarding its collection of consumers’ zip codes and a related coverage action with Hartford Fire Insurance Company.  The class actions alleged that the retailer recorded consumers’ ZIP codes in violation of California’s Song-Beverly Act.  Hartford filed an action seeking a declaration that it did not have to defend and indemnify Crate & Barrel in these actions, relying in part on an exclusion in its commercial general liability policy for personal and advertising injury arising out of a violation of a statutorily created right of privacy.  On May 16, the Illinois federal judge handling the coverage suit stayed proceedings, including Crate & Barrel’s pending summary judgment motion, pending the execution of the settlement.  Hartford Fire Ins. Co. v. Euromarket Designs, Inc., No. 1:11-CV-03008 (N.D. Ill. May 16, 2011).

Sixth Circuit Holds that Non-Settling Excess Insurer May Not Seek Contribution From Settling Primary Insurer

On May 17, the Sixth Circuit held that settlement of a primary policy exhausts the policy for purposes of equitable contribution claims brought by other insurers.  OneBeacon Am. Ins. Co. v. Am. Motorists Ins. Co., __ F.3d __,  2012 WL 1728757 (6th Cir. 2012).  The case involved a dispute between an excess insurer and a primary insurer of B.F. Goodrich Corporation (“Goodrich”) related to the environmental cleanup of a Goodrich facility.  In 1995, Goodrich settled with American Motorists Insurance Company (“AIMCO”), which issued a $55 million primary policy.  In 1999, Goodrich brought a coverage action against other insurers, including a predecessor of OneBeacon American Insurance Company (“OneBeacon”), which was excess of the AIMCO policy.  The jury returned a verdict against OneBeacon in the coverage action, and it sought a settlement credit for the coverage Goodrich had received from the settling insurers, including AIMCO.  The trial court denied OneBeacon’s request.  OneBeacon then brought the instant contribution action against AIMCO.  The Sixth Circuit rejected OneBeacon’s claim, recognizing that Ohio has adopted the “all sums” approach for allocating loss among multiple defendants, and that allowing non-settling insurers to seek contribution from settling insurers would discourage insurers from settling with the policyholder.

Ambac to Start Paying Claims Under Mortgage-Backed Securities Financial Guaranty Policies

On June 4, a Wisconsin state court approved the Wisconsin Commissioner of Insurance’s motion to begin making interim payments on claims under financial guaranty insurance policies held in the Segregated Account of Ambac Assurance Corporation.  In re Segregated Account of Ambac Assurance Corp., No. 10-CV-1576 (Wis. Cir. Ct., Dane County June 4, 2012).  In March 2010, the commissioner took control of this Segregated Account, which holds financial guaranty policies written by Assured, and ordered the suspension of all claim payments under these policies.  Approximately $3.2 billion of claims are outstanding.  Ambac will begin paying 25% of each claim that has been submitted since March 2010, and will pay 25% of each future claim, beginning in the third quarter of 2012.  The court also approved the commissioner’s request to exercise call options to purchase approximately $939 million of surplus notes previously issued by Assured.

Securities Fraud Case Against Former AIG CEO Greenberg Moves Forward

On May 8, a New York state appellate court held that the New York Attorney General’s securities fraud suit against Maurice “Hank” Greenberg and AIG’s former CFO, Howard Smith, is not preempted by federal law.  The court affirmed the trial court’s rejection of Greenberg and Smith’s argument that the Securities Litigation Uniform Standards Act of 1998 barred the suit, which was brought under New York’s Martin Act and Executive Law.  The court held that nothing in the federal statute preempted the civil enforcement action under New York’s laws.  The suit alleges that Greenberg and Smith misled investors and regulators about AIG’s financial health by engaging in fraudulent transactions that falsely portrayed AIG’s loss reserves and underwriting performance.  People v. Greenberg, No. 401720/05 (N.Y. App. Div., 1st Dept., May 8, 2012).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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