In This Issue:
Virginia Federal Court Rules Under D&O Policy that Search Warrant and Subpoena Trigger Defense Obligation Even Without A Formal Complaint or Demand
Why it matters: With increasing governmental investigations relating to government contracting, foreign business operations under the Foreign Corrupt Practices Act, fair advertising and consumer issues under the purview of the FTC and state agencies and otherwise, the question of what event in an investigation triggers coverage is critical. In this decision, the court joined other courts, including most prominently the Second Circuit in MBIA Inc. v. Federal Insurance Co., in holding that investigatory subpoenas and search warrants may trigger coverage. Corporations that receive investigator letters, subpoenas and search warrants – even if no formal demand or claim has been made – should promptly consult their insurance policy that provides coverage for directors, officers, and the company itself to evaluate the possibility of obtaining such coverage.
Protection Strategies, Inc. (PSI), a government contractor that did business with NASA, purchased a form of directors and officers coverage from Starr Indemnity & Liability Co. that covered individuals and the company itself. During the coverage period, PSI received a search and seizure warrant and subpoena from the Inspector General of NASA. A few months later the U.S. Attorney for the Eastern District of Virginia also sent PSI a letter indicating that PSI was under investigation for civil liability stemming from its participation in the Small Business Administration Section 8(a) program.
PSI demanded payment of defense costs, and Starr denied coverage on the ground that warrants and a subpoena were not “demands for relief” and thus there was no “Claim.” The court disagreed.
As the court found, Starr’s policy broadly defined Claim to include (in Part I) any “written demand for monetary, non-monetary, or injunctive relief made against an Insured,” as well as (in Part II) any “judicial, administrative, or regulatory proceeding, whether civil or criminal, for monetary, non-monetary or injunctive relief commenced against an Insured . . .by (i) service of a complaint or similar pleadings; (ii) return of an indictment, information, or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges.” The court found that the search and seizure warrant, subpoena and letter constituted a Claim under both parts of the definition.
For example, the search warrant was a written demand for non-monetary relief in the form of having to turn over documents. Under Virginia law, policy language must be construed in favor of the insured “and strictly against the insurer.” As such, Starr was obligated to reimburse PSI’s defense costs.
To read the decision in Protection Strategies, Inc. v. Starr Indemnity & Liability Co., click here.
New Jersey Supreme Court: Insurer with Obligation to Defend and Indemnify Has Direct Contribution Rights Against Co-Insurer of Continuous Property Damage
Why it matters: In this case, New Jersey further committed to its pro rata allocation doctrine by holding that one insurer directly can obtain contribution from a co-insurer in a continuous injury case so that each insurer pays its pro rata share, even if the policyholder had released that co-insurer after it paid less than its pro rata share. From one perspective, this could be disadvantageous to policyholders, because they may not be able to obtain a quick and discounted settlement from one insurer to cover ongoing defense costs while the policyholder pursues claims against other insurers. But it is likely that this decision in fact will afford policyholders greater leverage with their insurers, because each insurer ultimately will be held responsible for its pro rata share, whether through direct payment to the policyholder or through a contribution action from a co-insurer. For that reason, insurers have nothing to gain from attempting to pay less than their proportionate share.
The New Jersey Supreme Court addressed an issue of first impression in that state arising from a general contractor’s (Roland Aristone, Inc.) building of a middle school for a township. Aristone purchased insurance coverage from five different carriers over the period of ongoing property damage in question: Pennsylvania Manufacturers’ Association Insurance Company (PMA), Newark Insurance Company, Royal Insurance Company, OneBeacon Insurance Company, and Selective Way Insurance Company.
When the township sued Aristone, OneBeacon and Selective paid Aristone’s defense costs, but PMA and Royal refused, prompting Aristone to sue PMA and Royal. PMA ultimately settled by paying $150,000 and Aristone and PMA entered into a bilateral release whereby Aristone agreed to release PMA from any further obligation to pay defense or indemnity arising from the claim.
After the underlying case settled for $700,000, OneBeacon informed PMA and Royal that OneBeacon and Selective each had paid 50% of the defense costs. Based on the New Jersey pro rata, time and amount on the risk approach, OneBeacon proposed a reallocation of defense costs to PMA and Royal (there apparently was no disagreement that Selective’s share was 50%). OneBeacon then sued PMA and Royal for contribution. Royal settled, and OneBeacon and PMA proceeded to trial, in which OneBeacon prevailed.
The trial court found that PMA had paid a share of the $700,000 settlement with the township, but still owed a share of the $528,868 in defense costs. The court found that PMA was liable for $84,618 in defense costs. The court also awarded OneBeacon its legal fees and prejudgment interest.
On appeal, the Supreme Court unanimously affirmed, holding that “[a]llocation of defense costs in the circumstances here serves important objectives,” including “conservation of the parties’ resources, fostering of a prompt and fair resolution of litigation, creation of incentives for policyholders to maintain coverage, and fair and equitable allocation of the cost of litigation to all responsible carriers.”
The court relied on the “continuous trigger” theory and a pro rata formula set forth in state precedent (Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994)). The court further held that Aristone’s release of PMA did not bind OneBeacon, because the contribution rights between and among co-insurers is independent and the obligations of successive insurers in a continuous injury claim can be readily determined by equitable allocation.
The court found that such equitable allocation serves four important policy principles.
First, allowing insurers to sue each other “creates a strong incentive for prompt and proactive involvement by all responsible carriers and promotes the efficient use of resources of insurers, litigants and the court.” Knowing it will be responsible for a portion of the defense will motivate insurers “to invest in a vigorous defense” and lead to more effective defense of policyholders, the court said.
Second, “recognition of a direct claim by one insurer against another promotes early settlement,” given that all insurers can expect to be allocated, directly or through contribution, their pro rata portion of the defense costs and indemnity.
Third, this rule will motivate policyholders “to purchase coverage that is continuous, at a level commensurate to the policyholder’s personal or business risks.” “The prospect of legal fees and other defense costs creates an additional incentive for a policyholder to be adequately and continuously insured.”
Finally, the court found that this sharing through equitable allocation is fundamentally fair. “[A]n insurer that refuses to share the burden of a policyholder’s defense is rewarded for its recalcitrance, at its co-insurer’s expense, unless the insurer who pays more than its share of the costs has an effective remedy. Recognition of an insurer’s contribution claim against its co-insurer serves ‘the demands of simple justice.’”
To read the decision in Potomac Ins. Co. of Ill. v. Pennsylvania Manufacturers’ Association Ins. Co., click here.
Battery Exclusion Prevents Coverage for Exotic Dancer Set on Fire By Customer
Why it matters: An exotic dancer was the victim of a terrible crime perpetrated by a spurned applicant for a job as an exotic dancer. The victim sued the nightclub owner and accepted an assignment of the nightclub owner’s insurance coverage claim. The insurance policy, however, had an assault and battery exclusion and the victim thus was left without coverage. This case is an important reminder to settling plaintiffs, individual or corporate, to carefully evaluate the strength of a coverage claim before accepting that claim in lieu of direct compensation. If, as in this case, an exclusion applies, then the victim could be left without compensation. Also, even if the assignment is accepted, the victim should not release the underlying defendant in the event the insurer is not required to pay.
Nightclub dancer Roberta Busby was attacked by a local mother of four who allegedly was angered after she was denied a job dancing at the club, Babes & Beer. After dousing Busby with a flammable liquid, the assailant set Busby on fire, causing severe burns over 40 percent of her body, which required more than two dozen skin grafts. A jury convicted the assailant of torture and aggravated mayhem and she was sentenced to life in prison.
Busby filed suit against Oxnard, the owner of Babes & Beer. A trial court judge entered a $10 million stipulated judgment in Busby’s favor against Oxnard and the company contemporaneously assigned all of its rights under its insurance policy to Busby.
Oxnard’s insurer, Mount Vernon Fire Insurance Co., declined to indemnify Oxnard and to pay Busby’s claim. Instead, it filed a declaratory judgment that an exclusion for “Assault or Battery” precluded its involvement.
Specifically, the exclusion denied coverage for “all ‘bodily injury’ . . . arising out of ‘assault’ or ‘battery.’” Battery was defined as “negligent or intentional wrongful physical contact with another without consent that results in physical or emotional injury.”
Busby argued that actual “body-to-body” physical contact was necessary for the battery exclusion to apply. Because her assailant never actually touched her – throwing the flammable liquid and flame – she said coverage was required. But the appellate court found that such a narrow definition of battery was incorrect. Not only did the policy itself broadly define the term “battery,” the tort of battery “generally is not limited to direct body-to-body contact,” the court wrote.
The Restatement Second of Torts specifically notes that the “[m]eaning of ‘contact with another’s person’ does not require that one ‘should bring any part of his own body in contact with another’s person . . .. [One] is liable [for battery] . . . if [one] throws a substance, such as water, upon the other.”
Further, the court found the language of the exclusion to be broad in scope. “The exclusion’s definition of battery as ‘physical contact with another’ does not distinguish between directly striking an individual and striking an individual through an intermediary object.” If the assailant had “struck Busby with a closed fist, there could be no argument that such a striking was not a ‘battery’ under Oxnard’s policy. Could the answer be any different if that fist contained a glass container that was used to strike Busby?”
The court answered its own question by stating that “no reasonable person would make such an argument. How, then, could or should the result be any different if the glass container were filled, as in this case, with a flammable substance used to set Busby afire?”
To read the opinion in Mount Vernon Fire Insurance Co. v. Oxnard Hospitality Enterprise Inc., click here.