In This Issue

• California Court Adopts Broad Interpretation of “Occurrence,” Finds Coverage
• Claim Made During Policy Period Despite Later Service, Court Rules
• Plaintiff’s Alternate Theories Bring Complaint Within Scope of Policy Coverage, Indiana Appellate Court Concludes
• California or Arkansas? California Appellate Court Considers Jurisdiction

California Court Adopts Broad Interpretation of “Occurrence,” Finds Coverage

Why it matters: In a victory for policyholders—and a continuation of the trend of courts adopting a broad reading of the term “occurrence” in comprehensive general liability (CGL) policies—a state court in California ordered three insurers to provide a defense in underlying product liability and faulty workmanship cases. The policyholder faced multiple suits alleging that pipes it had installed improperly became disconnected, resulting in water damage to surrounding property. The insurers argued that, under Pennsylvania law, third-party property damage based on faulty workmanship by the insured did not constitute a covered “occurrence” under the policies. But the California court disagreed, granting summary judgment for the insured. As an initial matter, the court held, the insurers failed to present “undisputed facts that eliminate any possibility of coverage,” and therefore had a duty to defend. And more generally, whether Pennsylvania or California law applies, “[t]he concept of ‘occurrence’ must be construed broadly to reflect the wide variety of circumstances which can result in property damage or bodily injury that an ordinary person would consider ‘accidental,’ even if the conduct giving rise to the insured’s liability was deliberate or intentional.”

Detailed discussion: Victaulic Company, a manufacturer of valves and piping products used in various industrial applications, purchased primary and umbrella CGL policies from various AIG-affiliated insurers. Under these policies, the insurers agreed “to pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies,” if the bodily injury or property damage is caused by an “occurrence.” The policies defined an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Victaulic was named in lawsuits filed in California, Colorado, Massachusetts, Oregon, Washington, and West Virginia alleging products liability and negligent installation of pipes that became disconnected, causing damage to construction projects. The insurers refused to defend Victaulic or indemnify it for settlements reached in certain of the cases.

Victaulic brought a declaratory judgment action in the Superior Court of California, Alameda County, and thereafter sought summary judgment that the allegedly improper installation work at issue was a covered “occurrence” in the policies. Victaulic asserted that California law addressing the meaning of “occurrence” controlled. The insurers responded that Pennsylvania law applied, and that Victaulic’s allegedly faulty workmanship did not constitute a covered “occurrence” under Pennsylvania law.

Focusing on the three cases filed in Massachusetts, Oregon, and West Virginia, the court first addressed the duty to defend. The plaintiffs in each case alleged property damage resulting from Victaulic’s allegedly faulty products and workmanship, the court explained. The West Virginia plaintiff asserted that a “catastrophic disconnection” of two water pipes released “thousands of gallons of water” at separate locations in a hospital project, resulting in damage to surrounding property. Likewise, the Oregon suit alleged property damage when several Victaulic couplings leaked.

Based on these facts, the court concluded that there was no conflict between California and Pennsylvania law on this issue, and that “the claims in the underlying cases give rise to the potential for coverage under the relevant insuring agreements because the claimants in each of the cases seek to hold Victaulic liable for ‘property damage’ caused by an ‘occurrence.’ ” Further, “[b]ecause the AIG defendants have not presented ‘undisputed facts that eliminate any possibility of coverage,’ they have the duty to defend Victaulic against those claims.”

The court then considered the meaning of “occurrence” in the policies more generally. Granting summary judgment to Victaulic, the court wrote that the “concept of ‘occurrence’ must be construed broadly to reflect the wide variety of circumstances which can result in property damage or bodily injury that an ordinary person would consider ‘accidental,’ even if the conduct giving rise to the insured’s liability was deliberate or intentional.”

Adopting the insurers’ position—that third-party property damage claims arising from faulty workmanship are not “occurrences” under the policies—would unduly limit the scope of the policies “and would effectively eliminate coverage for what may have been a central focus of the parties during the underwriting of the policies—product liability lawsuits brought against Victaulic,” the court concluded.

To read the order in Victaulic Co. v. American Home Assurance Co., click here.

Claim Made During Policy Period Despite Later Service, Court Rules

Why it matters: The nature of claims-made policies often complicate issues of coverage for claims asserted against the insured late in a policy period. In this case, which is illustrative, a Louisiana federal court denied an insurer’s motion for summary judgment seeking to preclude coverage for a late-asserted claim. The claims-made policy at issue covered the period from December 31, 2012 to December 31, 2013. The insured was named as a defendant in a class action lawsuit on December 18, 2013, but was not served with the lawsuit until January 15, 2014. The insured tendered the claim under its 2013 policy, but the insurer refused to defend it, purportedly because the insured did not have knowledge of the claim until after the expiration of the policy period. But the court rejected this argument, holding that under “the unambiguous definition of ‘claim,’ . . . a claim was made against [the insured] during the policy period.”

Detailed discussion: HealthSmart Benefit Solutions, a healthcare benefit management company, purchased a claims-made professional liability policy issued by Flectat Limited covering the period December 31, 2012 to December 31, 2013. On December 18, 2013, Opelousas General Hospital Authority filed an amended complaint in active litigation, adding HealthSmart as a defendant. The Opelousas lawsuit was not served on HealthSmart until January 15, 2014. On January 23, HealthSmart notified Flectat of the lawsuit.

Flectat denied coverage based on the timing of the claim. HealthSmart then filed a declaratory judgment action in the U.S. District Court for the Western District of Louisiana, alleging breach of contract and implied covenant of good faith and fair dealing based on the failure to defend. Flectat filed a motion for summary judgment, arguing that no coverage existed under its policy because HealthSmart failed to satisfy two requirements of the policy: that a “Claim” must be first made against the insured within the policy period and that the Claim must be reported to Flectat within the policy period.

The policy defined “Claim” as “a written demand or service of civil proceedings by one or more claimants seeking any of the following: monetary damages, injunctive relief, retraction or correction, arbitration or mediation.” The “Notice of Claim” provision provided that, “as a condition precedent to Your right to indemnity under this Policy, You shall give Us written notice of any Claim made against You or any specific act, error or omission which is reasonably expected to give rise to a Claim, as soon as practicable but in any event the earlier of 30 days after You first receive notice of any Claim made against You or You first become aware of any specific act, error or omission which is reasonably expected to give rise to a Claim, or the end of the Policy Period.”

According to Flectat, even though HealthSmart was added as a defendant on December 12, 2013, HealthSmart had no knowledge of the Opelousas lawsuit until January 15, 2014, when it was served. Thus, Flectat argued, the claim was not made against HealthSmart until 15 days after the policy expired. Notice of the claim similarly was late—23 days after the policy expired—Flectat argued.

HealthSmart countered that, because the definition of “Claim” includes “a written demand,” the Claim occurred on December 18 when Opelousas amended its petition to add HealthSmart as a defendant. U.S. District Court Judge Richard T. Haik, Sr. agreed, and denied Flectat’s motion for summary judgment.

The definition of a Claim “does not include a requirement that such a ‘written demand’ be discovered by, received by, served upon or otherwise provided to the insured,” he wrote. “Rather, the definition acknowledges the distinction between the date a claim is made against the insured and the date the insurer receives written notice of the claim. Considering the unambiguous definition of ‘Claim,’ the Court finds that a claim was made against HealthSmart during the Policy period.”

Further, the court held, HealthSmart provided timely notice when it informed Flectat of the lawsuit on January 23. According to the court, this timing was compliant with the “as soon as practicable” language of the notice provision. The court rejected Flectat’s argument that the comma before the “or by the end of the Policy Period” applied only to the notice and awareness portion and did not extend the policy period.

“While the Court does not disagree with Flectat’s grammatical interpretation of the Notice provision, it does not conflict with HealthSmart’s assertion that the provision permitted HealthSmart’s notification on January 23, 2014, within 30 days after HealthSmart first received notice of the Claim,” Judge Haik wrote.

“Under Flectat’s analysis, if a written demand had been made during the Policy period and the insured first received notice of the Claim or was served with the Claim on December 31, the insured would be unable to notify Flectat in writing before the end of the Policy period and would be denied insurance coverage. The Court finds that Flectat’s strained construction of the Policy language would render the carefully worded and punctuated notice requirements moot and would produce absurd consequences.”

To read the opinion in HealthSmart Benefit Solutions, Inc. v. Principia Underwriting, click here.

Plaintiff’s Alternate Theories Bring Complaint Within Scope of Policy Coverage, Indiana Appellate Court Concludes

Why it matters: Policyholders should be mindful that if any potentially covered claims are included within a lawsuit, the duty to defend generally is triggered even if some or most claims clearly are not covered. In this illustrative case, the Indiana Court of Appeals reversed summary judgment in favor of an insurer on the duty to defend, holding that some of the claims in an underlying complaint against the insured fell within the policy’s scope of coverage. In particular, the underlying plaintiff alleged that a security contractor incorrectly accused him of shoplifting, assaulted him, and detained him in a store. In the ensuing coverage action, the trial court held that an assault and battery exclusion precluded coverage for the underlying lawsuit. But the Court of Appeals reversed, holding that claims for false imprisonment and slander in the underlying lawsuit were potentially covered and did not “arise out of” nor were they “related to” assault and battery.

Detailed discussion: On March 18, 2010, Arthur Barnard and his fiancée went to a Menards retail store in Indianapolis. Barnard purchased some items and the couple exited the store. But as they headed for their car, a loss prevention officer allegedly grabbed Barnard by the arm, slammed him into a vehicle, and threw him on the ground. Accusing him of stealing a hasp worth $1.99, the loss prevention officer then forced Barnard back into the store.

Barnard sued Menards and Blue Line, the company that contracted with Menards to provide security services, claiming that he was detained in the store for an unreasonable amount of time, that he was slandered, and that he was injured as a result of the incident.

Blue Line was insured by Capitol Specialty Insurance Corporation, with Menards listed as an additional insured on the policy. The policy provided coverage for any lawsuit seeking damages for bodily injury, property damage, and personal and advertising injury. The definition of “personal and advertising injury” included “false arrest, detention, or imprisonment” as well as “[o]ral or written publication in any manner … that slanders or libels a person.” The policy also featured an endorsement excluding coverage for assault and battery.

Seeking to enforce Capitol’s defense obligation, Menards and Blue Line sued Capitol. Capitol then filed a motion for summary judgment based on the assault and battery exclusion in its policy. The trial court judge granted the motion, and Menards and Blue Line appealed.

The Court of Appeals agreed with Capitol that the term “assault and/or battery” was unambiguous. Nevertheless, the court held, Barnard’s alternative theories of liability brought the underlying complaint within the scope of coverage despite the assault and battery exclusion.

“While Capitol does not have the duty to defend or indemnify Menard or Blue Line with respect to the allegations of battery, there is no such exclusion applied to his claims of false imprisonment or slander,” the court opined. “If a claim is clearly excluded under the policy, then no defense is required, but ‘[t]here is no question that if the policy is otherwise applicable, the insurance company is required to defend even though it may not be responsible for all of the damages assessed.’”

The policy was “otherwise applicable” apart from the battery, the court explained. “We do not agree with Capitol’s assertion that the entire incident ‘arose out of’ or was ‘related to’ the battery. What occurred inside the store was separate from and unrelated to what occurred outside in the parking lot. In other words, we do not find this to be one continuous, ongoing incident that is categorically excluded from coverage.”

Because the policy applied to Barnard’s allegations related to false imprisonment and slander, the court held that Capitol was required to defend Menards and Blue Line. “Whether Capitol is responsible for a portion of the damages, if any, will have to be determined at a later date,” the court added.

The court also rejected Capitol’s reliance on another exclusion applicable to “[t]he use of force to protect persons or property.” “The sole purpose of Blue Line’s business—for which Menard contracted, and which Capitol insured—is to protect the store’s property,” the court opined. “To interpret this provision in the way suggested by Capitol would render the entirety of the Policy illusory.”

To read the decision in Barnard v. Menards, Inc., click here.

California or Arkansas? California Appellate Court Considers Jurisdiction

Why it matters: When insuring risks in different states, insureds should be wary of jurisdictional limitations that may preclude them from pursuing coverage actions in their home state. In this cautionary case, the California Court of Appeals considered an insurance dispute involving a California policyholder who purchased coverage for a rental property in Arkansas from a Michigan-based insurer. When two fires damaged the Arkansas property and the insurer sought to treat both fires as a single loss subject to a single limit, the policyholder filed a declaratory judgment action in California state court. The insurer moved to dismiss, arguing that it did not have connections with California adequate to support jurisdiction by a California court, and that the property damage at issue occurred outside of California. The policyholder countered that, not only did the insurer issue its policy in California, but the policy included coverage for certain risks that could have occurred in California. The Court of Appeals agreed with the insurer, affirming the trial court’s prior dismissal. In particular, the court held that the insurer’s contacts were insufficient to exercise personal jurisdiction. “What is most important here is that [the insured’s] lawsuit does not arise out of any of the risks, losses and damages covered by the policy that could have occurred in California,” the court opined.

Detailed discussion: Jacob W. Greenwell lived in Tracy, California. He acquired ownership of an apartment building in Little Rock, Arkansas in September 2007. Working through an insurance agency in Little Rock, he applied to Auto-Owners Insurance Company for commercial property and commercial general liability (CGL) coverage. The combined policy was mailed to Greenwell in California, and was renewed three times between 2007 and 2010.

In June 2010, the apartment building was damaged by a fire. A second fire the next day resulted in additional damage. Auto-Owners initially treated the incidents as two separate losses subject to two separate limits under its policy, but later reversed its position and asserted that the fires constituted a single loss subject to a single limit.

Greenwell sued Auto-Owners in California state court for breach of contract and bad faith. Auto-Owners sought to dismiss the suit for lack of personal jurisdiction, arguing that, with the exception of Greenwell’s policy, it did not do any business in California. The trial court agreed, declining to exercise personal jurisdiction over Auto-Owners and dismissing Greenwell’s lawsuit. Greenwell appealed.

Noting that “[t]his case goes to show that sometimes life can be like an essay question on a law school exam,” the Court of Appeals agreed with Auto-Owners and the trial court, affirming the trial court’s refusal to exercise personal jurisdiction. While the court acknowledged that the insurer purposefully availed itself of the privilege of conducting activities in California by writing a policy that covered various risks that could have arisen in California, it concluded that no substantial nexus existed between Auto-Owner’s activities in California and Greenwell’s lawsuit.

“[T]he owner is not suing the insurer for any California risk that came to fruition; he is suing the insurer because of something that happened to his business property in Arkansas, which is where he obtained the insurance at issue, the main purpose of which was to cover potential risks and damage to that Arkansas property,” the court explained.

No evidence existed that Auto-Owners purposefully solicited Greenwell’s business in California, the court added. Further, Greenwell could not credibly maintain that he would be prejudiced by having to pursue Auto-Owners in Arkansas because his apartment building was located there and he conducted substantial business there. “While Arkansas may not be the home state of either party, both parties were doing substantial business in Arkansas—Greenwell by owning an apartment building there and Auto-Owners by writing insurance policies on such businesses,” the court opined.

The court applied a three-prong test to determine whether California courts could exercise jurisdiction over Auto-Owners: Auto-Owners must have purposefully availed itself of California’s benefits, the controversy must be related to or arise out of Auto-Owner’s contacts with California, and the exercise of jurisdiction must comport with fair play and substantial justice.

Beginning with purposeful availment, the court found that Auto-Owners’ contacts with California were sufficient. “By entering into an insurance contract with Greenwell, Auto-Owners created continuing obligations between itself and a resident of California,” the court wrote. “Moreover, because the policy covered risks and losses that could have occurred in California, and damages that could have been imposed on Greenwell in California, and because Auto-Owners undertook an obligation to defend Greenwell against suits seeking such damages, Auto-Owners had reason to know that it might be subject to litigation in California based on the obligations it undertook to Greenwell in the insurance contract.”

However, the panel then determined that Greenwell failed to establish a substantial nexus between the current controversy and Auto-Owner’s contacts with California. Examining the “intensity” of the nature and scope of Auto-Owners’ contacts with California, “it appears with the exception of the insurance contract at issue, Auto-Owners does not conduct and has not conducted any business in California.” Specifically, Auto-Owners “is not licensed or authorized to do business in California, does not write policies in the state, does not have agents licensed to sell its products there, does not solicit business or have employees in the state, does not pay taxes to California, and has never commenced a legal action there. . . . So far as the record shows, Auto-Owners’ only contact with California is that it agreed to write a commercial policy for Greenwell, who does business in Tracy under the name Greenwell Properties,” the court concluded.

Although some of the risks covered by the policy could have arisen in California, the court held, “the primary purpose for the insurance was to cover risks related to the apartment building Greenwell owned in Arkansas.” The court further noted that the portion of the premium paid for CGL coverage was calculated by reference to the number of apartments in the building.

“What is most important here is that Greenwell’s lawsuit does not arise out of any of the risks, losses, and damages covered by the policy that could have occurred in California,” the court wrote. “Instead, the lawsuit relates directly to fires that damaged the apartment building Greenwell owned in Arkansas and Auto-Owners’ alleged bad faith refusal to pay what Greenwell contends were the full insurance proceeds due to him because of those fires. Thus, what is at issue here are losses that occurred in Arkansas that were covered (or not, as the case may be) by the commercial property coverage in the policy that Greenwell obtained through an insurance agent in Arkansas.”

To read the decision in Greenwell v. Auto-Owners Insurance Co., click here.