In This Issue:

Home Base - General Principles of Insurance Policy Interpretation

Trends in the case law tend to catch our attention, but often practitioners and clients become sidetracked and miss the connection to the insurance staple - general principles of insurance policy interpretation. It is essential that we are clever and creative when seeking coverage. However, it is imperative that we never stray from these general principles that, by definition, benefit policyholders.

General principles - some of which are evidenced in the cases in this week's newsletter - are a policyholder's home base and should neither be omitted from a case pressed against a recalcitrant carrier nor fall prey to an insurer's attempt to degrade their importance. 

For example, when faced with two reasonable interpretations of a policy provision of how an insured acquires new property, the 8th Circuit relied upon the general principle that ambiguity should be construed in favor of the policyholder.

Similarly, a Texas appellate court struggled when two different sections of a policy could not be reconciled. In that decision the court fell back on the general principle that when a policy cannot be harmonized by giving effect to all of the clauses, it will adopt the interpretation that most favors coverage for the insured. Both cases, discussed in more detail below, are good reminders of the power of general principles of interpretation.

The surest way to simplify a coverage dispute is to demonstrate that, try as they might, a carrier's inability to reconcile rejection of coverage with general principles is in and of itself dispositive.

Pony Up, Texas Court Tells Insurers

Underlying lawsuits involving a "mare leasing" scheme must be defended by two insurance carriers, according a recent opinion from the Texas Court of Appeals.

Gastar Exploration was a defendant in multiple securities investment lawsuits. According to the plaintiffs, they were offered a deal to lease thoroughbred mares and sell the foals as a tax shelter. Gastar and its parent company, GeoStar Corp., promised guaranteed rates of return on the investment and gave investors the right to convert the mare leases into other securities and investments, including Gastar stock.

According to the plaintiff, the scheme was inadequately funded and oversold, and Gastar refused to convert the mare leases upon demand. Approximately 30 lawsuits were filed over the mare leasing, with 10 naming Gastar as a defendant. Seven of those 10 were filed during the 2008-2009 period when the company had purchased primary insurance from U.S. Specialty Insurance Company and excess coverage from Axis Insurance Co.

Both carriers denied coverage for the seven lawsuits, pointing to a Condition C, an "Interrelationship of Claims" provision in the policies that read: "All Claims, alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions or events or to a series of related facts, circumstances, situations, transactions or events will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made."

The carriers then referred to three suits filed prior to the inception of their respective policies as the basis to deny coverage. A trial court agreed, granting summary judgment for the carriers.

The appellate court reversed, finding that Condition C conflicted with another provision, a "Prior & Pending Litigation Exclusion" ("Endorsement 10") that excluded loss in connection with a claim "arising out of, based upon or attributable to any pending or prior litigation as of 5/31/2000, or alleging or derived from the same or essentially the same facts or circumstances as alleged in such pending or prior litigation."

Condition C if applied would render Endorsement 10 meaningless, because the three prior pending claims occurred after May 31, 2000, even though they also occurred before the inception of the two policies:

"The insurers argue the Seven Gastar Suits are related to Claims first made in 2006 and are therefore deemed to be a single Claim made at the time the earliest was made, which was well before the Policy Period," the panel wrote. "Condition C would thus exclude coverage for the Seven Gastar Suits, while Endorsement 10 would place them in the covered window for Claims related to litigation filed about May 31, 2000, but before the effective date of the policy. Under these facts, we conclude Condition C and Endorsement 10 conflict or at best, when read together, create an ambiguity. When provisions in an insurance contract conflict, a court must adopt the interpretation that most favors coverage for the insured . . ."

Applying general principles, the court held that the conflict created an ambiguity that would be interpreted in favor of finding coverage.

To read the decision in Gastar Exploration Ltd. v. U.S. Specialty Insurance Co., click here.

Why it matters: As a general principle, courts examine insurance policies as a whole and seek to harmonize and give effect to all provisions of the policy so that none will be rendered meaningless, useless, or inexplicable. If a court cannot harmonize two conflicting provisions – and discerns more than one reasonable interpretation - then the court will adopt the policyholder's interpretation, demonstrating that general principles remain home base.

Multiplied Attorneys' Fees Not Excluded By Policy, Says 7th Circuit

The Seventh Circuit held that a policy covering attorneys' fees included the multiplied amount awarded by a trial refusing to apply a policy exclusion for "the multiplied portion of multiplied damages."

The underlying suit involved a merger transaction. Shareholders of Amicas, Inc. objected to a third-party purchase at $5.35 per share. A Massachusetts state court granted a preliminary injunction against the sale. Merge Healthcare, Inc. then made a tender offer of $6.05 per share, which was accepted by Amicas' board. The alleged stall tactics yielded Amicas shareholders a gain of $26 million.

As part of the derivatives claim against the company, the shareholders' lawyers sought attorneys' fees based on the difference between the two bids. Amicas paid the fees and sought coverage from Carolina Casualty Insurance.

In the underlying proceeding the state court awarded plaintiff's counsel a total of $3.15 million. The amount was calculated using a lodestar of $630,000 (or 1,400 hours at $450 per hour) multiplied by five. According to the court, the multiplier represented the risk of nonpayment and the "exceptionally favorable result" achieved by the attorneys for the shareholders.

Carolina Casualty filed suit in Illinois federal court arguing that under the terms of its coverage it was required to pay only the $630,000 lodestar. The insurer relied on an exclusion stating that "Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed."

Carolina Casualty argued, therefore, that the phrase "multiplied portion of multiplied damages" meant the remaining $2.52 million portion of the award that resulted from the multiplier was not covered.

The 7th Circuit held that attorneys' fees did not constitute "damages" unless defined otherwise in the policy.

Finding no definition, the court looked to the likely intent behind the provision, which it determined was an attempt to exclude damages for moral hazards. The list of excluded damages "includes punitive damages and criminal penalties [and] covers a category of losses that insurers regularly exclude to curtail moral hazard – the fact that insurance induces the insured to take extra risks."

The court held that "[a]dversaries' attorney fees in commercial litigation are not remotely like punitive damages, trebled damages, or criminal fines and penalties," and were not otherwise a moral hazard.

The court interpreted the clause in favor of the policyholder, finding that the case law supported the carrier's overly broad definition of damages. In essence, the court found the insurers' interpretation of the exclusion was a sleight of hand because the lodestar was merely a different way of applying an equation to calculate attorney fees to achieve the same result. Since that method was clearly not excluded, it made no sense to ratify the carrier's interpretation. The rule that exclusions are narrowly construed demonstrated again the power of general principles of policy interpretation.

To read the decision in Carolina Casualty Insurance Co. v. Merge Healthcare Solutions, Inc., click here.

Why it matters: This case demonstrates one example in which an insurance policy seeks to limit coverage for "loss" or "damages" but fails to define the terms. The effort by the carrier to expand the limitation on "damages" to attorney fees ran counter to all of the basic general principles of insurance policy interpretation. Coverage is broadly defined and, in contrast, exclusions are narrowly applied. Failing to define the term the carrier sought to limit allowed the insured to succeed as long as its proffered interpretation was itself reasonable.

"Acquired" Property Provision Ambiguous, Yields Coverage For Policyholder

Despite never taking physical possession of a vertical lathe, an insured was entitled to coverage for its destruction because a policy provision for "Newly Acquired or Constructed Property" was ambiguous, the 8th U.S. Circuit Court of Appeals recently decided.

Amera-Seiki imports computerized industrial equipment for United States customers. The company purchased a vertical lathe from a manufacturer in Taiwan and arranged to have it shipped to the U.S. The lathe arrived by ship at the Port of Los Angeles on June 29, 2010. Amera-Seiki paid $1,950 to store the lathe before it was transported to Iowa. However, on July 13 a longshoreman moving the lathe for delivery dropped it, destroying the lathe.

Amera-Seiki turned to its insurer, The Cincinnati Insurance Co., seeking coverage for the total loss of the lathe. Cincinnati paid $10,000 for transportation coverage and denied the loss claim, pointing to a provision in the policy for "Newly Acquired or Constructed Property." The provision provided coverage for a loss to business personal property "including such property that you newly acquire, at any location you acquire other than at fairs, trade shows or exhibitions." Significantly, the policy did not include a definition of the term "acquire."

Cincinnati sought a narrow interpretation of the term, arguing that the temporary storage of the lathe was too passive and transient to qualify the terminal as a location where Amera-Seiki had acquired it, because the company did not own, lease, possess, or exercise any element of control, authority, or decision-making ability for the terminal.

For its part, Amera-Seiki embraced a broad reading of the term "acquire" and argued that it obtained, possessed, and controlled the lathe at the terminal because it had to pay for the right to store it there.

Confronted with the unique circumstances that both the insured's and insurer's respective interpretations were reasonable, the Court was left with no recourse but to rule in the policyholder's favor. In essence, a tie goes to the policyholder.

To read the decision in Amera-Seiki Corp. v. The Cincinnati Insurance Co., click here.

Why it matters: In the Amera-Seiki decision, the 8th Circuit recognized the general principle that an ambiguous policy provision must be construed in favor of the policyholder. Significantly, ambiguity is found when the language is susceptible to two reasonable interpretations, one favoring the policyholder and one favoring the insured. If the insured presents a reasonable interpretation, it should prevail regardless of the alternative interpretations relied on by the insurer. The power of general principles could not be clearer.

Maryland Ruling In An Underlying Asbestos-Injury Case May Have Insurance Implications

In a decision allowing expert testimony that each and every exposure to asbestos is a substantial contributing factor to mesothelioma, Maryland's highest court provided a foundation for policyholders that could eliminate the carrier's regular attempt to relitigate "medicals" in the follow-on coverage litigation. Despite arising in the underlying case, the expert testimony supports a continuous trigger for insurance purposes.

The Maryland case involved allegations of "take home" asbestos. At least two evenings per week for ten months each year over a 13-year period, Bernard Dixon worked at a garage owned by a friend. Performing brake maintenance, repair, and replacement work, Dixon handled an estimated 1,000 brake jobs on Ford products from the 1960s until 1976 – all of which contained chrysotile asbestos.

Before washing the clothes Bernard wore to work, his wife Joan would shake them out, releasing the asbestos-laden dust that clung to them. She died of mesothelioma in 2009. At trial against Ford, Dr. Laura Welch testified on behalf of Joan's estate that every exposure to asbestos increased the likelihood of contracting mesothelioma and thus constituted a substantial contributing cause of that disease.

Dr. Welch told the jury that the asbestos fibers shaken off of clothing remain on the floor and in the air for a considerable period of time. One day's worth of fibers can produce ongoing exposure for days, even months, she testified, as the fibers do not dissolve or evaporate.

In that underlying case, the insured company, Ford, sought to limit its potential liability and argued against the credibility of the expert's testimony.

The court concluded that the hypotheses supplied to her "formed a part of Dr. Welch's opinion and were supported by substantial evidence, took account not only of the frequency of Ms. Dixon's exposure to asbestos-laden dust from Ford brakes but why that repeated exposure was of high, not low, intensity."

For purposes of insurance coverage, despite its objection to the validity of the plaintiff's expert testimony, Ford or any other policyholder faced with a similar dilemma should be allowed to pursue coverage on the plaintiffs' expert theory without relitigating the issue in the coverage case.

To read the decision in Dixon v. Ford Motor Company, click here.

Why it matters: Insureds seeking coverage for a continuous injury can point to the testimony by the expert in the underlying case. In the coverage context the insured should not have to adopt the expert's conclusion or otherwise prove the underlying case against itself in order to prove coverage. It should be enough that the alleged injured plaintiff relied on expert evidence and either a trial adopted that evidence or the insured settled when confronted with such evidence. Similarly, the insurance companies should not be allowed to relitigate the medicals in the coverage case in order to re-argue the nature of the alleged injury so they can attempt to restrict coverage.