In This Issue:
A little knowledge can go a long way
The cases analyzed in this week's newsletter illustrate an important principle for policyholders: a basic understanding of how their policies work and the controlling insurance law in the relevant state(s) can make all the difference in whether, and to what extent, they are able to secure coverage.
For example, most insurance policies contain mandatory conditions like notice of claims and cooperation with the insurer. Failure to comply with these conditions may result in a denial of coverage. Other key terms will vary among policies as well, so policyholders need to have at least a basic understanding of these terms for each of their policies and how they differ from each other in order to maximize coverage.
Moreover, insurance law is state-specific, and can differ significantly from state to state. Being aware of the controlling state's law is critical in determining which risks are likely to be covered by insurance and the best strategy for presenting claims to the insurer.
In the first case addressed below, the insured learned this lesson the hard way. Seeking coverage for an employment discrimination lawsuit, the policyholder failed to appreciate the difference between a "claims made" policy and the "claims made and reported policy" that it had purchased. The policyholder also failed to recognize when a triggering "claim" had been made against it under controlling state law. Accordingly, the policyholder lost out on coverage.
In the second case, the insured managed a better result by challenging - and bringing about a critical change in - the law. In that case, West Virginia's highest court reversed more than a decade of prior case law to find that commercial general liability policies can cover defective construction, joining a growing majority of states in that regard.
The third case presents an important lesson for policyholders on timing – that they need not wait for their damages to be fully determined or for their insurer to issue a coverage determination before initiating coverage litigation. Initiating litigation early may expedite the inevitable where the insured believes its claims are likely to be denied. Moreover, being the first party to initiate coverage litigation may be a critical factor where choice of law is at issue, making timing of coverage litigation an important strategic consideration.
Finally, as demonstrated by the fourth case, an understanding of Alabama law regarding the "number of" occurrences issue and a cohesive theory of how releases of contaminants from its natural gas pipeline were governed by that law helped an insured maximize its coverage for environmental losses. Although multiple locations along the pipeline were contaminated, the insured pointed to prior case law to support its argument that a single "occurrence" may have multiple and disparate impacts over time. As a result, the Alabama Supreme Court affirmed a jury verdict of several million dollars in coverage, proving that a little knowledge really can go a long way towards maximizing coverage.
Claims made vs. claims made and reported
A federal district court in Maryland recently distinguished a claims made policy, which is triggered by a claim during the policy period, from a claims made and reported policy, which requires both a claim during the policy period and reporting of the claim to the insurer during the policy period (or by some specified date after the end of the policy period).
The Financial Industry Regulatory Authority ("FINRA") purchased two employment liability policies from AXIS covering the periods March 31, 2010, to March 31, 2011, and March 31, 2011 to March 31, 2012. The policies provided coverage where the "Claim" at issue "is first made against the insureds during the Policy Period . . . and reported in writing to the Insurer as soon as practicable . . . but in no event later than sixty (60) days after the expiration of the Policy Period . . ." A "Claim" was defined as "the receipt by any Insured of . . . a written demand against any Insured for monetary or non-monetary relief."
FINRA received notice in April 2011 that a former employee had filed a charge of discrimination with the Equal Employment Opportunity Commission, and provided notice of the charge to AXIS in August 2011. AXIS agreed to defend the claim under a reservation of rights. However, when the employee's claim later settled, AXIS denied coverage for the amount of the settlement.
Specifically, AXIS took the position that only the 2010-2011 policy was potentially implicated because the employee had made a "Claim," as defined by its policies, on February 3, 2011 – during the 2010-2011 policy period. According to AXIS, the claim was in the form of an email from the employee's attorney to FINRA's associate vice president and associate general counsel, which read:
Not to quibble, but just so that we are clear, I did not ask for 5 years of "severance pay." I said that [the employee] believed that FINRA's decision to terminate his employment was discriminatory, in that his age was a motivating factor. I added that [the employee] would settle that claim for a sum equal to 5 years' pay. You said that you could get him 12 months, but no more than that and that if [the employee] chose not to accept that, his last day would be March 31. [The employee] rejects your counter-offer.
AXIS argued that this email constituted a "written demand . . . for monetary relief" pursuant to the policy, which required FINRA to provide notice during the policy period or within 60 days thereafter. And because FINRA did not provide notice of the claim to AXIS until more than 60 days after the end of the 2010-2011 policy period, the 2010-2011 policy was never triggered. FINRA, on the other hand, characterized the e-mail as "merely a recounting of an oral conversation the day before," and not a written demand for monetary relief.
But the court agreed with AXIS, holding that "[a] reasonably prudent person could not read the policies and conclude . . . that the February 3, 2011 e-mail was anything other than a claim." Just because the employee initially made an oral demand did not make the subsequent writing less of a written demand, the court opined.
It is clear that [the employee], through counsel, was asserting a legal claim for employment discrimination and demanding money in an amount equal to his salary for five years to settle that claim. . . . Any other reading of the e-mail is fanciful. The e-mail is a demand not for an amorphous "something due" but specifically for a monetary payment of a specifically requested amount. It is of no moment that the e-mail clarifies a prior oral demand, as it still states the demand, and it manifests the demand in written format.
FINRA's General Counsel's subjective belief that he was simply negotiating a severance agreement (and not a claim) demonstrated only that "he misunderstood the demand," the court held. The lack of formality in the e-mail was irrelevant because a demand was made – "a sum equal to five years' pay" – and the possibility of a lawsuit was clear.
In response, FINRA appealed to Maryland's notice-prejudice statute, contending that any delay in notice to AXIS was de minimis and did not prejudice the insurer. But the court rejected that argument, holding that the statute applies only to claims made policies, not claims made and reported policies. Indeed, the court held, claims made and reported policies require reporting during the policy period in order to be triggered, making the notice-prejudice irrelevant to those policies.
To read the decision in FINRA v. Axis Insurance Co., click here.
Why it matters: Understanding the difference between a claims made policy and a claims made and reported policy – and knowing which one you have – can be coverage-determinative, as the FINRA case demonstrates. Although notice-prejudice statutes and case law may be helpful in some circumstances, they do not apply uniformly from state to state, and therefore should not be relied upon as a substitute for strict compliance with the terms of the policy. Also, where policyholders have any doubts whether a third party demand constitutes a claim, they would be well advised to review the language of their policy carefully and any case law in their state interpreting similar language.
West Virginia joins increasing majority of states finding coverage for defective construction
The West Virginia Supreme Court recently decided that defective construction constitutes a covered "occurrence" under standard-form commercial general liability policies. Recognizing the growing majority of states nationwide that have come to the same conclusion, either through judicial decision or statute, West Virginia's highest court overruled several of its prior decisions to the contrary.
The West Virginia case involved a home builder (Pinnacle) that was sued by a purchaser for defects in construction of a custom home, including uneven floors, a sagging support beam, water infiltration through the roof and a chimney joint, and multiple cracks in the drywall. Among other damages, the homeowner claimed diminution in the market value of her home.
Pinnacle sought coverage from Erie Insurance Property and Casualty, its CGL insurer. Erie denied coverage, based on the Supreme Court's prior decisions that defective construction, without more, was not an "occurrence" for purposes of triggering CGL coverage. The trial court agreed with Erie, and granted its motions for summary judgment.
On appeal, the Supreme Court recognized that, since its most recent reiteration that faulty workmanship was not a triggering "occurrence," the majority of courts nationwide had decided this issue to the contrary. The Court then questioned the logical foundation of its prior decisions and, after reconsideration, reversed its course.
Looking to the definition of "occurrence" (i.e., "an accident, including continuous or repeated exposure to substantially the same general harmful conditions"), the court noted that standard-form CGL policies do not define "accident." Clearly, the Court opined, Pinnacle did not intentionally construct a defective house.
It goes without saying that the damages incurred by [the homeowner] during the construction and completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it hired the subcontractors alleged to have performed most of the defective work. Common sense dictates that had Pinnacle expected or foreseen the allegedly shoddy workmanship its subcontractors were destined to perform, Pinnacle would not have hired them in the first place. . . . To find otherwise would suggest that Pinnacle deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation in the process.
After finding coverage was available, the Court then dismissed Erie's arguments for application of various standard-form construction-related exclusions, holding that the various construction defects constituted "property damage" under the terms of the policy.
In reaching its decision, the Supreme Court cited to similar decisions in Arizona, California, Connecticut, Florida, Georgia, Indiana, Kansas, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Tennessee, Texas, and Wisconsin, and further noted that three states – Arkansas, Colorado, and South Carolina – have mandated that CGL policies include coverage for defective construction by statute. According to the Supreme Court, courts in Alaska, Hawaii, Illinois, Iowa, Kentucky, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, and Pennsylvania have issued decisions to the contrary.
To read the West Virginia Supreme Court's decision in Cherrington v. Erie Insurance Property and Casualty Co., click here.
Why it matters: Coverage for faulty workmanship under CGL policies has been a hotly contested issue for many years, with both sides able to cite favorable cases in multiple jurisdictions. In recent years, however, a clear majority of jurisdictions have recognized that faulty workmanship is an "occurrence" for purposes of triggering CGL coverage. West Virginia is now among those jurisdictions. Although policyholders engaged in construction work now face a positive outlook as more jurisdictions join the majority, they still need to understand the law on this issue in the jurisdictions whose substantive insurance law may apply to claims brought against them and structure their risk management strategies accordingly.
Coverage for hailstorm neither "abstract nor hypothetical," Texas court rules
An insured could seek a declaratory judgment of coverage under a property insurance policy just four days after filing a claim, even where the amount of damages was undetermined and the insurer had yet to issue a coverage determination, a Texas federal district court recently ruled.
A hailstorm allegedly caused extensive damage to 15 properties owned by a real estate company (Triyar) in the Phoenix, Arizona, area. Triyar submitted a claim for the damages to Lexington Insurance Company, its property insurer, on October 1, 2012. Just four days later, on October 5, 2012, Triyar sued Lexington in Texas federal court, requesting declarations that (i) Lexington owed coverage for the property losses under its policy, and (ii) if Lexington did not pay the claims promptly, it would be in breach of the terms of its policy and its duty of good faith and fair dealing.
Lexington sought to dismiss the lawsuit because it was still investigating Triyar's claims, Triyar had yet to submit a proof of loss, and Lexington had yet to deny Triyar's claims. Thus, according to Lexington, the lawsuit was merely speculative and not ripe or justiciable.
But the court disagreed as to a declaration of Lexington's obligation to provide coverage.
[I]t is true that the parties have not yet determined the amount of Triyar's damages . . . But Triyar does not ask the Court to enter a ruling based on some speculative future event. The factual basis for Triyar's claim – the October 2010 hailstorm – is a past event that is neither abstract nor hypothetical . . . Declaratory judgment actions are often used to determine whether insurance coverage exists for damage caused by a past event, even in cases in which the plaintiff's damages have not yet been determined.
The court also considered the hardship to Triyar of withholding a declaratory judgment. A limitations defense could arise if the declaratory action was dismissed and a future suit was required, the court noted, and "that possibility also favors a finding of ripeness." Thus, "Triyar's action for a declaration to establish coverage under the policy is ripe for decision regardless of whether a breach of that policy has occurred," the court concluded.
To read the decision in Triyar Cos. v. Lexington Insurance Co.,click here.
Why it matters: Some policyholders may believe that, once they have submitted a claim to their insurer, their hands are tied until the insurer issues a determination of coverage. In many cases this may take weeks or months – arguably much longer than it should. This case illustrates that policyholders may be able to submit a claim and then proceed directly to adjudication. Although many policyholders would not be inclined to litigate their coverage claims before their insurer issues a coverage determination, this option may expedite the inevitable where the insurer has indicated informally that it will deny the claim when presented. It also may be an important strategic consideration where more than one jurisdiction's substantive insurance law may apply to a claim. In such cases, winning the race to the courthouse may be a critical factor in determining the applicable law.
Releases of PCBs along pipeline are a single occurrence, says Alabama Supreme Court
Video games developers will now be able to certify the privacy of their mobile applications under an expanded program offered by the industry's self-regulatory body, the Entertainment Software Rating Board (ESRB).
Sonat discovered in the 1980s that releases of contaminants from its natural gas pipeline stretching from Texas to Georgia were causing environmental damage. Specifically, Pydraul, a lubricating oil containing polychlorinated biphenyls, or PCBs, was used and released at all 38 compressor stations along the pipeline. PCB contamination was discovered at 13 of the stations as a result of these releases. Mercury was also discovered to have been released from metering stations along the pipeline. Sonat took remedial action at the contaminated sites.
Certain Underwriters at Lloyd's, London ("Lloyd's") issued umbrella and excess general liability policies to Sonat from 1949 to 1987. Most of the policies contained standard "occurrence" language, defining "occurrence" as "[a]n accident or a happening, event or a continuous or repeated exposure to conditions which results unexpectedly and unintentionally as applied to the Assured seeking indemnity hereunder, in . . .property damage . . .during the policy period," and stating that "[a]ll such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence." The Lloyd's policies further limited coverage to those amounts Sonat was "legally obligated" to pay "as damages" and excluded coverage to property "owned by" Sonat.
In 1991 Sonat notified Lloyd's of PCB and mercury contamination along its pipeline. Lloyd's denied coverage. In 2001 Sonat filed a coverage action in Alabama state court. In order to minimize the effect of multiple self-insured retentions across the years of coverage at issue, Sonat argued at trial that a single "occurrence" caused the environmental damage at representative sites chosen by the parties. The trial jury agreed with Sonat.
Lloyd's appealed, arguing in part that the trial court should have entered summary for Lloyd's on the definition of "occurrence" in the policies. Specifically, Lloyd's argued, the compressor stations were contaminated in different ways by virtue of different acts or omissions, which resulted in multiple different occurrences.
In a 72-page decision, the Alabama Supreme Court disagreed with Lloyd's, holding that Lloyd's had failed to demonstrate more than one occurrence as a matter of law. The Court first discussed the law of Alabama (and other states) holding that all damage arising from a single cause constitutes a single occurrence, unless there is a "separate, intervening cause" that "can break the chain of causation." Applying this principle to the facts at issue, the Court noted that:
Sonat had cleanup areas at each site where Pydraul (and the PCBs in that lubricant) had contaminated the groundwater; that contamination was caused by the use of Pydraul through a unitary pipeline, and the manner of operating each compressor station was the same. . . . [W]e cannot say that there was a separate intervening cause.
Although PCBs were found at different places in different compressor stations, the court held, Alabama cases recognize that "one occurrence may have multiple and disparate impacts on individuals and that injuries may extend over time." Thus the Court was not persuaded by Lloyd's arguments and upheld the jury's findings regarding a single occurrence.
The Court also rejected Lloyd's other challenges on appeal. The first challenge was that cleanup costs associated with contaminated soil and groundwater under Sonat's property were excluded by the so-called "owned property exclusion." Citing the majority position nationwide, the Supreme Court held that "on-site soil cleanup is not barred by an owned-property exclusion where there is a threat that the contaminants in the soil on the insured's property will migrate to groundwater or to the property of others."
Lloyd's second challenge was that the cleanup costs incurred by Sonat were incurred voluntarily as the result of a business decision, and therefore were not covered "damages" under its policies. The Court disagreed, noting that the cleanup obligations were compelled by federal law and a consent decree with the Mississippi Department of Environmental Quality. In any event, the court held, "we will not limit . . .damages to those arising out of a suit, claim, or action by a third party."
To read the decision in Certain Underwriters at Lloyd's of London v. Southern Natural Gas Co., click here.
Why it matters: As this case demonstrates, the number of "occurrences" at issue in a particular loss often has a profound impact on the amount of coverage available for the loss. Where one or more high deductibles are at issue, as in this case, a single-occurrence position may favor the policyholder. Conversely, where a policyholder needs multiple years of coverage to fully cover a loss, a multiple-occurrence position may be more favorable. In either case, numerous courts have held that standard-form occurrence language should be construed in a manner that maximizes coverage. That said, determining the number of occurrences at issue tends to be a highly fact-intensive inquiry, as it was in this case. In order to maximize coverage for a loss where more than one occurrence may be at issue, policyholders would be well advised to undertake a careful analysis of the number of occurrences at issue prior to submitting a claim. At the very least, this analysis should consider the applicable policy limits and deductibles, the salient facts supporting one or more occurrences, and the case law regarding number of occurrences in the relevant jurisdiction(s).