Orrick's Policy Observer - October 2012


[authors: Celia M. Jackson and Richard DeNatale]

State of California v. Continental Insurance: Opinion Holds Insurers to Their Words

Commercial general liability, or CGL, policies typically run for one year and insure businesses against liability to third parties for property damage or bodily injury that occurs during that year. But complex litigation often results from injuries that are not confined to a single year. Lawsuits claiming exposure to asbestos or toxic chemicals, or property damage caused by pollution, typically allege damage that occurs progressively over many years or even decades. In such situations, does the policyholder get the benefit of all the insurance policies it purchased over the years, or is coverage limited to the insurance available for one particular year? 

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Sixth Circuit Finds Data Breach Coverage in Crime Policy

The U.S. Court of Appeals for the Sixth Circuit held on August 23 that shoe retailer DSW Inc. was entitled to coverage under a computer fraud rider to its corporate crime policy for losses resulting when a hacker stole customer credit card and checking account information from the company’s main computer system. Retail Ventures, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA., No. 10-4567/4608 (6th Cir. Aug. 23, 2012). The hacker stole data concerning more than 1.4 million customers using the wireless network at one DSW store to download the information, and then used the data in a series of fraudulent transactions. DSW sought coverage for expenses it incurred for customer communications, public relations, customer claims and lawsuits, and attorney fees in state and federal investigations related to the hacking incident. Applying Ohio law, the court rejected the insurer’s claim that the policy was a fidelity bond covering only the insured’s own losses and not its liability for the losses of others, finding that the label given to the policy did not override the plain and ordinary meaning of the policy wording. The court rejected the insurer’s argument that the policy only covered “direct” losses, finding that the policy’s limitation of coverage to losses “resulting directly from” the theft of insured data did not unambiguously require the loss to result “solely” or “immediately” from the theft. The court also concluded that a trade secrets exclusion did not apply to the loss.

New Mexico Supreme Court Finds “Sudden and Accidental” Exception to Pollution Exclusion Allows Coverage of Gradual but Unexpected and Unintended Releases

In United Nuclear Corp. v. Allstate Ins. Co., Docket No. 32,939 (N.M. S. Ct., Aug. 23, 2012), New Mexico’s highest court concluded that the “sudden and accidental” exception to the qualified pollution exclusion provides coverage for “unexpected and unintended” releases of pollutants, and does not require that the releases be temporally abrupt. General and excess liability policies issued from the early 1970s through the mid-1980s usually contained this exclusion. The case involved alleged releases of contaminants at tailings impoundments at several uranium mines. Allstate asserted that coverage of the releases was excluded because they were not temporally abrupt. Reversing an intermediate appellate court decision, the court found the term “sudden” ambiguous, in that it could include either abrupt or unexpected releases. The court cited multiple dictionary definitions and the divergence of opinions among other courts as a basis for its opinion that the term was ambiguous. Then the court considered the drafting history of the exclusion as a basis for assessing insurance industry intent. The court concluded that “sudden” should be given the non-temporal interpretation favoring coverage.

Fifth Circuit Rules That Umbrella Insurer Suffered Prejudice by Late Notice When Jury Verdict Penetrated Its Coverage

The U.S. Court of Appeals for the Fifth Circuit on August 2 shed new light on the application of the “notice prejudice” rule to excess insurers under Texas law. In Berkley Regional Ins. Co. v. Philadelphia Indem. Ins. Co., No. 11-50595 (5th Cir. Aug. 2, 2012), the court ruled that a policyholder was not entitled to coverage from its umbrella insurer when it failed to provide notice of a claim until after a jury had entered a verdict exceeding the attachment point of the umbrella policy. When it was sued following a serious slip-and-fall incident, the policyholder tendered the claim to its primary carrier, which had issued a policy with limits of $1 million. The plaintiff’s expert estimated the damages at $1.25 million, and the defendant’s expert estimated the damages at $800,000. In mediation, the plaintiff initially offered to settle for $800,000, but the parties reached impasse in the settlement range of $150,000-$215,000. At trial, a jury awarded damages of $1,654,663.50 plus post-judgment interest and costs. Assessing Texas cases addressing the “notice prejudice” rule in the context of primary insurance, the court concluded that the umbrella insurer was prejudiced because it was not afforded an opportunity to “‘join in’ the investigation, to settle a case or claim, and to interpose and control the defense.” The court commented that, “[a]lthough we distill these principles from cases involving primary carriers, we discern no basis for a different rule for excess carriers.” While the court acknowledged that the position of an excess carrier is different from that of a primary insurer, it observed, “[O]nce the case is ‘over,’ notice is clearly too late.”

Indiana Appellate Court Finds Coverage for Pollution in Personal Liability Provision of CGL Policy

Reversing a trial court ruling, the Indiana Court of Appeals held on August 28 that a policyholder was entitled to pollution coverage under the “Personal and Advertising Liability” provision of a CGL policy issued by Cincinnati Insurance Company. FLM, LLC v. Cincinnati Ins. Co., No. 49A02-0902-CV-127 (Aug. 28, 2012). Plaintiff FLM leased property to a recycling company for the handling and disposal of foundry waste from a Chrysler plant. After regulatory authorities cited FLM for violations related to the storage of the waste, FLM sought coverage under the CGL policy issued to the recycler. The court concluded that Cincinnati’s personal injury coverage, which extended to claims for “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises” resulting from an “offense,” such as “wrongful entry” or “invasion of the right of private occupancy,” was broad enough to extend to third-party claims involving the dispersal of foundry waste from the FLM property.

Lumbermens Mutual, American Manufacturers Mutual, and American Motorists Insurance Company in Rehabilitation Proceedings

On August 16, an Illinois Circuit Court approved an Agreed Order of Rehabilitation for Lumbermens Mutual Casualty Company, American Manufacturers Mutual Insurance Company, and American Motorists Insurance Company (collectively, “AMICO”). In the Matter of the Rehabilitation of Lumbermens Mutual Cas. Co., et al., Mo. 12 CH 24227 (Ill Cr. Ct., Cook County, Aug. 16, 2012). The order vests title to all the assets and liabilities of AMICO in the Illinois Director of Insurance as statutory rehabilitator with authority to manage the AMICO estate. The court entered an injunction which, among other things, bars all claims and causes of action which have been or may be asserted against the company. Such claims or causes of action may be asserted against the AMICO estate only in the rehabilitation proceedings.

KWELM Scheme Prepares to Wrap Up

The administrator for the longstanding schemes of arrangement for the insolvent London Market "KWELM companies" (Kingscroft Insurance Company Limited, Walbrook Insurance Company Limited, El Paso Insurance Company Limited, Lime Street Insurance Company Limited, and Mutual Reinsurance Company Limited), is finally preparing to wrap up. Walbrook and El Paso previously paid all outstanding claims. On September 30, 2012, the remaining three KWELM companies declared their ultimate dividend percentages and sent final "top-up" payments for agreed claims to scheme creditors. The final declared claim percentages are as follows:

  • Kingscroft – a top-up of 2.41%, bringing total scheme dividends to 86.41% of agreed claims.
  • Lime Street – a top-up of 3.25%, bringing total scheme dividends to 90.25% of agreed claims.
  • Mutual Re – a top-up of 1.42%, bringing total scheme dividends to 76.42% of agreed claims.

These are the final scheme payments and it is anticipated that the scheme administrators will formally close the schemes in 2013.

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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