In This Issue:
Insurers Had Duty to Defend Regardless of Whether Allegations in Underlying Cases Are True or False, Says Illinois Court
On April 12, 2013, an Illinois trial court ordered that Travelers Casualty & Surety Company, Century Indemnity Company, and Travelers Indemnity Company of Connecticut, which issued primary and excess general liability policies to Illinois Tool Works Inc. (“ITW”) from 1971 to 1987, must defend ITW against thousands of toxic tort lawsuits. These lawsuits alleged bodily injury damage against ITW caused by exposure to toxic substances (including benzene, asbestos, and manganese) as a result of plaintiffs’ use of various welding products manufactured by ITW and its related companies. The insurers argued that they had no duty to defend these underlying claims because ITW had established in the tort litigation that it did not enter the welding products business until 1993—well after the periods of their policies.
The Court rejected the insurers’ arguments, holding that regardless of whether the underlying allegations that ITW manufactured the welding products at issue before 1993 were in fact true, the insurers had a duty to defend ITW because ITW purchased the insurance to cover “groundless, false and fraudulent” claims as well as meritorious ones. According to the Court, “the underlying allegations of [ITW]’s involvement, that they ‘designed, manufactured, sold or distributed’ certain products, required [ITW] to litigate to obtain dismissal from the underlying complaints on the basis that they were not involved. They purchased the ‘litigation insurance’ at issue in order to enable them to do so.” Thus, the Court held, the insurers were required to defend any claims that alleged exposure to ITW’s products during the periods of the insurer’ policies, or where there was no specific exposure period alleged.
Importantly, the Court also rejected the insurers’ arguments that they were not required to defend claims against ITW involving products manufactured by companies acquired by ITW after the periods covered by the policies at issue. The Court found that “[i]t cannot be said that an insurer is deemed to insure against only the litigation defense risks inherent in the business of the insured at the time the policy is issued because the insurer agreed to defend the insured against groundless, false and fraudulent claims.”
Finally, the Court turned to allocation of defense costs among the implicated policies. ITW argued for application of “all sums” (or joint and several) allocation, in which all insurers whose policies are triggered by a loss are jointly and severally liable, up to the limits of the policies, for the insured’s losses, with no allocation to the insured permitted. The insurers, on the other hand, argued that pro rata allocation applied, in which they only would be liable for a pro rata share of ITW’s loss, based on their respective “time on the risk” relative to ITW’s other insurers, with periods during which ITW did not maintain insurance allocated to ITW. Relying largely on the Illinois Court of Appeal’s recent decision in John Crane, Inc. v. Admiral Insurance Company, the Court held that ITW’s primary insurers were liable for ITW’s defense costs on an “all sums” basis, and were not, as they had asserted, entitled to pay only a pro rata share of those costs. Once the primary insurance is exhausted, the Court held, ITW’s excess insurers likewise must pay defense costs on an “all sums” basis. Although the Court recognized that some Illinois courts had favored pro rata allocation, it held that the facts in this case were “not distinguishable” from John Crane.
Why it matters: This case recognizes that the facts alleged in the underlying tort complaint—not the actual facts—determine an insurer’s duty to defend tort claims, even if the tort plaintiffs’ allegations are demonstrably false. This case also recognizes the split among Illinois courts on “all sums” versus pro rata allocation, and adopts the reasoning of a recent Illinois Court of Appeal’s decision in holding that “all sums” allocation applies to both primary and excess policies.
Missouri Court of Appeals Finds That “All Sums” Allocation Applies in Environmental Coverage Suit
Doe Run Resources Corporation (“Doe Run”) scored a major victory earlier this month when the Missouri Court of Appeals reinstated a $62 million verdict for the company against Certain Underwriters at Lloyd’s London (“Lloyd’s”) stemming from environmental contamination at several of Doe Run’s historical operating sites.
Beginning in the 1800s, Doe Run operated mining, milling, and smelting operations in Missouri. These operations generated lead-containing wastes known as “chat piles” and “tailings ponds,” which were deposited on six different sites. The U.S. Environmental Protection Agency (“EPA”) determined that, due to wind and water erosion, the wastes had migrated from the chat piles and tailings ponds to neighboring properties, causing property damage. The EPA ordered Doe Run to remediate the sites and surrounding areas.
Doe Run sought coverage from Lloyd’s pursuant to seven excess insurance policies in effect from 1952 to 1961. Lloyd’s denied the claim. In the ensuing coverage suit, the trial court, prior to trial made certain pre-trial rulings, the effect of which was that three of the sites were not covered, there was only a single “occurrence” at each site per policy period, and New York law governed coverage issues so that Doe Run’s losses were allocated to Lloyd’s coverage on a pro rata basis.
Despite the trial court’s pre-trial rulings, the jury received evidence regarding all six sites. The jury found Lloyd’s liable for coverage under all of the policies for all six sites, awarding Doe Run $62,481,238.30. However, based on its pre-trial rulings, the trial court reduced the damages to just over $5 million. Both parties appealed.
The Court of Appeals reversed the trial court’s determination that New York law governed interpretation of the Lloyd’s policies, instead holding that Missouri law applied because Missouri was the “principal place of the insured risk” under Section 193 of the Restatement (Second) of Conflict of Laws. Specifically, the Court held, “[t]he risks at issue in the underlying lawsuit concern parties, operations, and sites located in Missouri. Each of the six sites is located in Missouri. Doe Run is headquartered in Missouri, with nearly all of its business, property, and employees in Missouri.”
Then, applying Missouri law, the Court held that the language of the Lloyd’s policies, including insuring language requiring Lloyd’s to pay “all sums” and “the total sum” that the “assured becomes obligated to pay,” mandated application of “all sums” rather than pro rata allocation. However, the Court limited its holding to the specific language of the Lloyd’s policies, and did not purport to “reach the issue of whether Missouri law requires an all sums approach or a pro rata approach as the plain language of the policies governs here.”
Further, the Court reversed the trial court’s ruling that the property damage at each site resulted from a single “occurrence,” which had substantially limited the amount of coverage available to Doe Run. Under Missouri’s “cause” test, the Court held that Doe Run’s chat piles, tailings ponds, and active operations “constitute separate and distinct causes of contamination that resulted in separate occurrences at each of the six sites at issue.” Chat piles and tailings ponds were physically distinct, and sometimes were miles apart, with different migration profiles constituting separate causes of contamination and different remediation techniques required by the EPA, the Court noted. Thus, “under the cause approach, there were three occurrences at each site in active operation during the policy period—active operations, chat piles, and tailings ponds—and two occurrences at inoperative sites – chat piles and tailings ponds.”
Finally, the Court upheld the jury’s imposition of a ten percent penalty against Lloyd’s based on the jury’s finding that Lloyd’s handling of Doe Run’s claims was “vexatious and recalcitrant.” For instance, Lloyd’s corporate designee testified at trial that Lloyd’s “never paid a single environmental claim unless ordered to do so by a court or as part of a negotiated settlement. From this testimony, the Court held, the jury was free to infer that [Lloyd’s] had no intention to pay [Doe Run’s] claim unless ordered to do so by the court. As such, a reasonable juror could find that the refusal to pay was willful and recalcitrant.”
Why it matters: Although the Court of Appeals expressly limited its “all sums” holding to the language in the Lloyd’s policies, the language it interpreted is common in historical general liability policies, and may be the basis for broader “all sums” rulings when Missouri courts are presented with similar language. In addition, the Court of Appeals applied Missouri’s test for determining the applicable number of “occurrences” in a manner that was decidedly coverage-maximizing. Finally, the Court of Appeals declined to disturb the jury’s finding that Lloyd’s had acted in a manner that essentially constituted bad faith in the handling of Doe Run’s environmental claims.
Insurer Must Produce Post-Litigation Claims Documents Prepared in the Ordinary Course of Business, New York Court Rules
An insurer being sued for bad faith for failing to timely pay defense costs—after an appeals court held that its insured was entitled to such costs—must produce documents relating to the timing of the payments, a New York trial court has ruled.
The insured, Estee Lauder, was sued by the State of New York and a private party in connection with alleged contamination of two landfills. Estee Lauder sought defense and indemnity for the lawsuit from its liability insurer, OneBeacon, which denied coverage. Estee Lauder then sued OneBeacon in New York state court. The Court held that Estee Lauder was not entitled to coverage on the grounds of late notice. But the Appellate Division reversed, holding that Estee Lauder was entitled to “all post-tender reasonable fees and expenses necessarily incurred in the defense” of one of the underlying cases, as well as prejudgment interest from the date of OneBeacon’s decision not to defend.
Despite the Appellate Division’s ruling, OneBeacon did not make any defense cost payments to Estee Lauder for approximately 20 months after Estee Lauder provided unredacted defense cost invoices to OneBeacon. As a result of the delay in payment, Estee Lauder amended its complaint to add a cause of action for bad faith. Estee Lauder then filed a series of discovery motions seeking to compel production of documents related to the delay, including documents regarding OneBeacon’s internal communications regarding the timing of payment.
In response, OneBeacon resisted producing such documents, arguing that Estee Lauder had no need for such communications. The Court held that OneBeacon’s communications would provide an essential “view into the actual deliberations concerning payment,” and therefore that discovery of such communications was relevant and “substantially necessary.”
Alternatively, OneBeacon argued that the communications were protected from discovery because an insurance company’s communications after an insured has filed suit are categorically protected as attorney-client communications or attorney work product. OneBeacon claimed that this argument had particular application in the instant matter because many of the post-appeal communications regarding payment of Estee Lauder’s defense costs involved attorneys. The Court rejected this argument, holding that:
the payment of attorney’s fees to a covered client is an ordinary part of an insurer’s business. Thus, these documents cannot be considered attorney work product simply because they were created during midstream of a litigation. Typically during a litigation, the obligation to pay is unclear and the question to be decided through litigation, but here, the Appellate Division resolved the question of whether OneBeacon had to pay a subset of Estee Lauder’s claim. Thus, the logic of maintaining a post-litigation bar is removed.
Thus, the Court declined to endorse a categorical privilege for these post-litigation communications—even where attorneys were involved—because they were created as part of the insurer’s ordinary business. But the Court did not preclude OneBeacon from asserting privilege as to individual communications by way of a privilege log. The Court further held that OneBeacon had not placed any privileged communications “at issue” (and thereby waived privilege) merely by asserting that its delay in paying Estee Lauder’s defense costs was related to OneBeacon’s legal strategy of pursuing a global settlement with Estee Lauder.
Why it matters: In coverage litigation, insurers often assert that communications regarding handling of the insurance claim at issue are privileged. This is particularly the case once coverage litigation has commenced, and when attorneys are involved in such communications (even though the attorneys may not be acting strictly in a legal capacity). This decision demonstrates that, under New York law, there is no categorical protection for post-coverage litigation communications that are an ordinary part of the insurer’s business, and that this result does not change simply because attorneys are involved in the communications.
“Professional Services” Exclusion Applies to Securities Broker-Dealer
The U.S. District Court for the Eastern District of New York recently held that a “professional services” exclusion precludes an insurer’s obligation to defend lawsuits arising from a broker-dealer’s alleged misrepresentations regarding shares in real estate investment trusts (“REITs”) and failure to conduct adequate due diligence of the REITs.
New York-based David Lerner Associates (“DLA”), a broker-dealer, served as the managing dealer for Apple REITs. In 2011, the Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary complaint against DLA, alleging that DLA sold more than $300 million worth of shares in a REIT by misrepresenting the value of the shares, and failed to perform adequate due diligence on the operations of the REIT. Four class action lawsuits subsequently were filed making the same allegations as the FINRA complaint.
Philadelphia Indemnity Insurance Company (“Philadelphia”) issued a Private Company Protection Plus Insurance Policy to DLA (the “Philadelphia Policy”) covering the period during which the FINRA and class action lawsuits were filed against DLA. DLA sought reimbursement for the costs of defending the suits, but Philadelphia denied coverage. Philadelphia relied on a “Professional Services Exclusion” in the Philadelphia Policy, which provided that there was no coverage for any claim against DLA arising from DLA’s performance of, or failure to perform, “professional services for others.”
DLA sued Philadelphia to obtain coverage, arguing that the term “professional services” was not defined in the Philadelphia Policy and, as a result, was ambiguous and must be construed in favor of coverage. The Court disagreed, holding that the language of the professional services exclusion was not ambiguous and clearly included DLA’s conduct at issue in the FINRA and class action lawsuits. In particular, the Court noted that New York courts apply the professional services exclusion in cases where the insured “acted with the special acumen and training of professionals when engaged in the acts” at issue. Applying this standard, “it is clear that the only reasonable interpretation of ‘professional services’ is that individuals engaged in the due diligence and sale of financial products are engaged in professional services.” Indeed, the Court held, “[t]o perform due diligence on REITs and market those securities, individuals are employed in an occupation, they rely on specialized knowledge or skill, and the skill is mental rather than physical.” Thus, the Court held, the “alleged actions or inactions [of DLA] quintessentially and unambiguously fall within a common-sense understanding of the term ‘professional services.’”
The Court further rejected DLA’s contention that financial advisors are not classified as professionals under New York state malpractice law and therefore do not perform “professional services” for purposes of the Philadelphia Policy. In particular, the Court noted that other courts in New York previously had considered and rejected similar arguments as “misplaced.”
Why it matters: Failure of Philadelphia to define the term “professional services” did not result in ambiguity. Indeed, the Court had little difficulty finding that a “common sense” understanding of that term encompassed DLA’s business of analyzing and marketing securities. As a result, defense of lawsuits arising from DLA’s alleged failures in that regard were precluded by the exclusion.
Nonparty Investor Can’t Hold Broker Liable For Insurance Policy, California Court Says
An insurance broker was not liable to an investor for issuing incorrect coverage because the broker owed no duty to a non-client third party, the California Court of Appeal recently determined. The investor also was not able to recover under the condominium policy that was issued due to a “vacancy exclusion” that the Court held was applicable.
Joy Investment Group (“Joy”) obtained a loan to construct a multi-unit condominium complex. As required by its lender, Joy purchased insurance covering the construction, including fire and extended coverage, builder’s all-risk coverage, and general liability insurance. This insurance was procured by Joy’s broker, Koram Insurance Center (“Koram”).
Prior to completion of the project, Joy defaulted on its loan and an investor, Michael Braum, purchased the note from the lender. The construction insurance then lapsed and Joy worked with Koram to purchase new coverage. Joy informed Koram that most of the condo units had been sold and a homeowners association had been created. Koram therefore suggested replacing the construction insurance with condominium insurance issued to the homeowners association, and Joy agreed. Koram placed this coverage with Travelers Property Casualty Company of America (“Travelers”). Despite Joy’s representations to Koram, it was undisputed that no one lived in the condominium units, nor had a certificate of occupancy been issued for the complex.
Not long after the new Travelers condominium policy was issued, the construction project allegedly was damaged by the theft of appliances, toilets, faucets, and air conditioning units. Braum submitted a claim to Travelers for the loss, which Travelers denied, citing an exclusion for theft and vandalism that applied when the property has been “vacant” for more than 60 consecutive days prior to the loss. Braum then sued Koram for professional negligence (for procuring condominium insurance for Joy instead of builder’s risk insurance) and Travelers for breach of contract (under the condominium policy). Travelers and Koram moved for summary judgment as to all of Braum’s claims.
The trial court denied the defendants’ summary judgment motions, but the Second District Court of Appeal reversed. As to Braum’s breach of contract claims against Travelers, “the vacancy exclusion is applicable to the claim and plainly bars coverage,” the Court held. In particular, the Court of Appeal rejected the trial court’s interpretation that the 60-day vacancy period could not begin to run prior to issuance of the policy. According to the Court of Appeal, there was no language in the policy supporting that interpretation. The Court of Appeal also rejected the trial court’s conclusion that the vacancy exclusion resulted in illusory coverage. Finally, the Court of Appeal rejected Braum’s contention that the vacancy exclusion cannot apply to buildings that are not yet completed because that contention also is not supported by the language of the policy.
As to Braum’s claims against Koram for professional negligence, the Court of Appeal first held that Koram’s duty to provide insurance to Joy extended only so far as Joy, the client, requested. Because Koram had procured precisely the type of insurance requested by Joy, Koram did not breach any duty to Joy. Moreover, the Court of Appeal reasoned, Koram did not expand its duty to Joy by misrepresenting the nature, extent, or scope of the coverage it procured, or by holding itself out as having expertise in selecting the type of insurance that Joy should be purchasing. Thus, “if [Joy] breached its contract with the bank (and [Braum]) by failing to maintain builder’s risk insurance, the remedy of [Braum], if any, is against [Joy].”
The Court of Appeal further held that Koram’s duty of reasonable care ran only to its client, Joy, and not to Braum. In so holding, the Court of Appeal held that Braum could not establish himself as a third-party beneficiary of Koram’s duty to Joy under the facts at issue. Indeed, the Court noted, Braum never even had any contact with Koram. Likewise, Braum could not establish that Koram owed Braum a separate duty as a “potential victim” of Joy’s conduct. Brokers do not have a duty to procure insurance that potential victims of the insured may ultimately desire to possess, the Court of Appeal held.
Why it matters: The decision allows brokers in California to breathe easier, at least with regard to potential liability to non-client third parties. The Court of Appeal rejected the notion that brokers owe duties to their clients beyond that of reasonable care in procuring requested insurance (except in situations where the broker misrepresents the nature or scope of the coverage being provided, there is a request by the insured for a particular type of coverage, or the broker holds itself out as having expertise in a given field of insurance). The Court of Appeal also rejected the notion, as a general matter, that brokers owe a duty to procure coverage for potential victims of their clients’ conduct.