Insurance Recovery Law - July 2014 #2

In This Issue:

  • U.S. Bank Wins Coverage Under Delaware Law For $55 Million Overdraft-Related Settlement
  • Excess Coverage Reached By Any Claims That Exhaust Underlying Insurance, Fifth Circuit Rules
  • Do EPA Letters Constitute A Suit? Texas Supreme Court To Decide
  • Insolvency of Underlying Insurer Does Not Trigger Next Coverage Layer

U.S. Bank Wins Coverage Under Delaware Law For $55 Million Overdraft-Related Settlement

Why it matters
In a victory worth tens of millions of dollars, a Minnesota federal court ruled that U.S. Bank is entitled to coverage for three class actions challenging overdraft fee practices. Plaintiffs in the underlying litigation claimed that the bank reordered transactions from highest to lowest instead of chronologically, leading to quicker overdrafts and more fees. U.S. Bank settled the suits for $55 million and then sought coverage from its insurers. The insurers balked, arguing that the settlement constituted uninsurable restitution. The federal court disagreed, concluding that restitution was not barred as a matter of law and so the policy exclusion that precluded coverage for restitution arising from a final adjudication did not apply to a settlement. It is significant that the court held Delaware did not preclude coverage of restitution or “ill-gotten gains claims” as a matter of state law.

Detailed Discussion
Three class actions were filed against U.S. Bank in 2009 with identical allegations. The plaintiffs claimed that instead of applying transactions in chronological order, the bank posted transactions from the highest amount to the lowest amount, creating the most overdrafts and maximizing the overdraft fees assessed on customers.

Four years later the bank settled the suits for a total of $55 million. U.S. Bank then sought coverage for the settlement and defense costs from two insurers: Indian Harbor Insurance Company and ACE American Insurance Company. Both insurers denied coverage.

First, the insurers took the position that the settlement was not a covered loss under the insurance policies because coverage was barred in “[m]atters which are uninsurable under the law pursuant to which this Policy is construed,” such as, they claimed, restitution. As a fallback position, the insurers contended that an exclusion for Extension of Credit by the bank applied and precluded coverage.

U.S. Bank sued for breach of contract and sought a declaratory judgment that defense and indemnification were owed by Indian Harbor and ACE. The insurers moved for judgment on the pleadings, but the court sided with the policyholder.

Significantly, applying Delaware law, the court noted that no authority in the state has held that restitution is uninsurable as a matter of law. Thus, while both parties speculated as to how courts in the state might rule, the court limited its analysis to the disputed exclusion finding that it only precluded coverage for restitution resulting from a final adjudication, thereby including by implication restitution stemming from a settlement.

The court reasoned that the policies “exclude from coverage money to which U.S. Bank ‘is not legally entitled’ only ‘as determined by a final adjudication in the underlying action.’ The provision shows not merely that the parties contemplated the possibility of coverage for restitution, but that they agreed coverage would exist unless the restitution was imposed by a final adjudication.” “When an underlying action alleging ill-gotten gains settles before trial, there is no final adjudication in that action. So here, where the class actions alleging ill-gotten gains were settled before trial, there is no final adjudication and the settlement is not excluded from coverage.”

“The insurers’ reliance on the uninsurable provision to assert that the settlement is not a covered loss under the policies is misplaced,” the court held. “Delaware law does not prohibit insurance for restitution and the parties agreed that restitution is insurable when, as here, the underlying allegations of ill-gotten gains were not finally adjudicated.”

The judge was likewise unmoved by the insurers’ efforts to apply an exclusion for losses paid as a result of an “extension of credit.” As for the Extension of Credit provision, the court found the insurers’ interpretation “overbroad and untenable” because “taken to its extent, the provision would bar coverage of any professional liability claim relating to U.S. Bank’s lending operations. The parties could not have intended to exclude from coverage such a large swath of potential claims.”

To read the opinion in U.S. Bank v. Indian Harbor Insurance Co., click here.

Excess Coverage Reached By Any Claims That Exhaust Underlying Insurance, Fifth Circuit Rules

Why it matters
In a significant victory for policyholders, the Fifth Circuit ruled that the retained limits of a company’s underlying umbrella/excess liability insurance policies could be satisfied by payment of claims the umbrella policies themselves did not cover. The policies provided that the insurers were liable for damages in excess of the retained limits, but nothing in the policies specified how the retained limits could be satisfied. Thus when the policyholder faced claims arising from a hurricane, some of the claims were covered by the umbrella policy and some were not. Since payments up to the retained limits were not restricted to sums exclusively covered by those policies, the policyholder was credited with the payments made to satisfy the uncovered claims. The excess policies were deemed reached by those payments and required to pay the remainder of the claims that were covered by their policies. It is noteworthy that the excess carriers have just filed a request for rehearing of the case by the en banc Fifth Circuit.

Detailed Discussion
According to the underlying complaint, W&T allegedly sustained significant damage to over 150 of its offshore platforms as a result of Hurricane Ike. W&T, the insured, submitted more than $150 million in property damage and operators’ extra expense claims to its primary “energy” carrier, which satisfied the excess policies retained limit. While both the umbrella and energy/primary liability policies have been endorsed to cover removal-of-debris claims, the key difference between them is that the umbrella policies do not cover property damage or operators’ extra expenses that are incurred by W&T itself. They cover only claims against W&T by a third party.

The umbrella carriers, therefore, sought a declaratory judgment that the “retained limit,” necessary to trigger the umbrella policies, had not been met. Instead, the umbrella carriers argued, only payments for claims that would have been covered by the umbrella policies could count toward proper exhaustion.

The district court ruled in favor of the plaintiffs, holding that umbrella policies take effect only when the primary/underlying policy’s retained limit is depleted first by claims also covered in the umbrella policies themselves.

The Fifth Circuit, however, reversed and rendered judgment in favor of W&T, ruling that where the terms of the contract are ambiguous, the court should adopt the interpretation that is most favorable to the insured. After examining the precise language of the contract between W&T and the underwriters, the appeals court ruled that the contract does not specify “how the limit of the underlying policies must be reached” or “state that the retained limit refers exclusively to sums covered by the umbrella policy.” Furthermore, the court ruled that the phrases from the coverage provision actually “fit neatly” into the policyholder’s argument, declaring W&T’s interpretation as “consistent” with the contract as a whole.

To read the decision in Indemnity Insurance Co. of North America v. W&T Offshore, Inc., click here.

Do EPA Letters Constitute A Suit? Texas Supreme Court To Decide

Why it matters
The Texas Supreme Court accepted certification from the Fifth Circuit of the question of whether CERCLA administrative proceedings, including notice letters, administrative orders requiring cleanup, etc., constitute “suits” under a commercial general liability policy, triggering an insurer’s duty to defend. Courts are split on the issue, with some applying a narrow construction of “suit” and requiring a formal complaint be filed against the insured in a court of law to trigger the duty to defend. Others have taken a broader view of the term, holding that the issuance of a PRP letter triggers the duty to defend as the functional equivalent of a suit. Finally, a third group of courts have adopted an “it depends” perspective based on the coerciveness of the specific regulatory action taken by the government whether or not coverage is triggered. The Texas high court now will decide whether administrative actions can be squeezed into the term “suit” under Texas law, addressing this hotly contested issue that has split courts across the country.

Detailed Discussion
McGinnes Industrial Maintenance Corporation, a waste disposal company, removed waste from a paper mill and released it in three ponds adjacent to the San Jacinto River during the 1960s and early 1970s.

During the relevant time period, McGinnes purchased commercial general liability (CGL) policies from Phoenix Insurance Company and the Travelers Indemnity Company. The policies provided that the insurer “shall have the right and duty to defend any suit against [McGinnes] seeking damages on account of . . . property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient.” None of the policies defined the term “suit.”

In 2005 the Environmental Protection Agency (EPA) began evaluating McGinnes’ alleged pollution of a Texas river. In 2007 the EPA sent McGinnes a Potentially Responsible Party letter contending that it had contributed to the hazardous waste contamination at the site. The EPA (1) demanded that McGinnes reimburse the EPA for remediation costs, (2) ordered McGinnes to conduct a Time-Critical-Removal-Action to prevent further contamination, and (3) demanded that McGinnes fund a Remediation/Investigation/Feasibility Study (collectively, the EPA CERCLA Action).

McGinnes tendered the EPA CERCLA Action to its insurers who refused to defend. The insurer claimed its duty to defend was triggered only by traditional “suits,” i.e., lawsuits in a court of law, as opposed to administrative suits such as the EPA CERCLA Action. McGinnes then filed a declaratory judgment action seeking a ruling that a defense was owed and payment for more than $2 million in attorneys’ fees it had already racked up.

A federal district court judge granted summary judgment for the insurers, determining that the EPA CERCLA Action was not a suit triggering the duty to defend. The court based its decision on the fact that when the policies were issued in the 1960s and 70s, “this sort of administrative bullying did not exist.”

McGinnes appealed to the Fifth Circuit.

McGinnes cited dictionary definitions of “suit” to contend that the term is ambiguous, with multiple meanings, and as such should be interpreted in its favor. Alternatively, the insurers argued that during the relevant time frame, Texas courts understood “suit” to mean a proceeding in a court of justice.

Neither the Texas Supreme Court nor the Texas courts of appeals have determined whether the EPA’s actions qualify as a “suit” under a CGL policy, the panel said. Only one court in Texas has weighed in on the issue, where a state trial court judge held that the term was sufficiently broad to include PRP letters.

Lacking guidance from the state, the federal appellate panel punted and certified the question to the Texas Supreme Court.

“[T]his action presents an unsettled question of Texas law. No Texas appellate case has addressed the issue, the parties each make reasonable arguments in support of their position, and other courts considering the issue have not come to a consensus. In light of all this, we respectfully submit that this issue should be decided by the Supreme Court of Texas,” the panel wrote, certifying the following question:

“Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a ‘suit’ within the meaning of the CGL policies, triggering the duty to defend.”

The Texas Supreme Court accepted the case.

To read the decision in McGinnes Ind. Maintenance Corp. v. Phoenix Ins. Co, click here.

Insolvency of Underlying Insurer Does Not Trigger Next Coverage Layer

Why it matters
A Pennsylvania trial court judge decided that the insolvency of an underlying excess insurer did not trigger coverage from an insurer providing a second layer of excess coverage. The case began with a qui tam action that ultimately settled. The insured had three layers of coverage: $5 million primary, $5 million first layer of excess, and a $10 million second layer of excess. After the carrier for the first excess policy was declared insolvent, the second excess carrier refused to pick up the slack, arguing that the underlying limits had not been exhausted because of the insolvency. The court agreed. The court also held that amounts paid in settlement of qui tam actions are uninsurable as a matter of law and thus not covered under D&O policies.

Detailed Discussion
In 1996 a qui tam action was filed against EquiMed, a management company that provided services to specialty medical providers through its subsidiaries, accusing the company of overbilling. The action was ultimately settled for $10 million.

The company had three layers of coverage in place, beginning with $5 million in primary coverage, followed by a $5 million excess policy and a second layer of excess coverage for $10 million. In addition to payment by the primary insurer, the directors and officers and some subsidiary medical offices chipped in to the qui tam settlement.

Reliance National, which provided the first layer of excess, was declared insolvent in 2001. EquiMed and its officers turned to American Dynasty Surplus Lines, the carrier for the second excess layer, for payment. But American refused, arguing that the underlying limits were not exhausted by Reliance’s insolvency. Despite the various contributions of the directors and officers, the insured was unable to show that the actual loss reached $10 million.

The court agreed. American’s policy stated that “[c]overage shall attach only after all such Underlying insurance has been exhausted solely as a result of actual payment or payment in fact of losses of all applicable Underlying Insurance limits.”

The court ruled that “the plain language of the policy . . . establishes that Plaintiffs must have actual payment totaling the required $10 million before Defendants would have a duty to any indemnification under the Policy.”

EquiMed alternatively argued that the $10 million actual loss was satisfied by a combination of the primary insurer’s payment as well as contributions from the officers and subsidiary medical practices. But the court was unmoved.

First, the money paid by the plaintiffs was due to fraudulent billing, the court said, and “disgorgement of ill-gotten gain” was expressly excluded under the policy. Second, the court noted that the directors and officers and their individual medical practices were all named as defendants in the qui tam action. Although their payments totaled $3.36 million, those contributions “are rightly attributed to the entities themselves,” not EquiMed, the court said.

The court further stated, “[t]o do otherwise is nothing more than an irrational shell game, designed to unjustly force [American] to cover entities for which they did not bargain to cover, and for which they have received no consideration in the form of premiums.”

To read the decision in Mountainside Holdings LLC v. American Dynasty Surplus Lines Inc., click here.


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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