Insurance Recovery Law -- May 30, 2013

by Manatt, Phelps & Phillips, LLP

Do Your Homework

The four cases highlighted in this edition of the Insurance Recovery newsletter address a variety of issues from coverage for the environmental impact of allegedly toxic emissions from a coal plant to repeated sexual abuse by a priest.

The one thing the decisions have in common is an important reminder for policyholders: Do your homework. An insured cannot take for granted that prior case law on a similar subject matter either (i) applied the same policy language, (ii) interpreted the policy under the same state’s law, or (iii) involved a fact pattern that would obtain a similar result.

The interpretation of an insurance policy is a phenomenon of state law. Policyholders must carefully read the policy or policies, identify provisions whose interpretation could make or break coverage, and determine up front whether coverage outcomes may vary from state to state.

Repeated Sexual Abuse = Multiple Occurrences, Says New York’s Highest Court

Sexual abuse by the same priest over a six-year period did not amount to a single occurrence under a general liability policy, according to New York’s highest court, triggering a deductible payment for each act of abuse. The policyholder was essentially left uninsured.

The Roman Catholic Diocese of Brooklyn was sued by a minor who was sexually abused by the same priest for several years. The underlying suit settled for $2 million and the Diocese demanded reimbursement from National Union Fire Insurance Co., which provided primary insurance during three of the years abuse was alleged. The policies had a liability limitation of $750,000 and a $250,000 self-insured retention per occurrence.

National Union argued that the abuse, which took place during multiple policy periods and in different locations, constituted multiple occurrences under the relevant policies. National Union contended that the $2 million settlement must be pro-rated over each policy year. For its part, the Diocese pointed to the fact that the abuse involved the same priest and victim, which supported its position that it was a single occurrence. The Diocese also alleged that even though multiple policy years applied, it could target one year and pay only one year’s deductible.

Under the exact same characterization of fact, state jurisdictions are split as to whether those types of facts could constitute a single or multiple occurrence and whether damages must be pro-rated over multiple policy periods. Thus, the determination of the applicable state law meant the difference between the payment or non-payment of a claim that was otherwise covered.

As a result of the court’s holding, each act of abuse triggered a separate occurrence requiring its own separate deductible. The court also declined to apply joint and several liability among the insurers involved in the case, ruling that a pro rata allocation was consistent with the language of the policies at issue.

As pointed out in the concurring opinion and a partial concurrence and partial dissent, other potentially applicable states’ laws could reach a different result and their reasoning very well could have been applied here.

To read the order in Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. click here.

Why it matters: Insurance coverage is a phenomenon of state law. A policyholder cannot take for granted that a coverage dispute will be resolved consistently from state to state. It is essential to analyze the policy to determine whether the interpretation of certain provisions vary from state to state. Here, it was dispositive that the court determined that each act constituted a separate occurrence invoking a new deductible for each act of abuse. Coverage was effectively nullified. Other potentially applicable states’ laws may have looked at factors relating to the cause that would have evoked a single occurrence producing substantial coverage.

5th Circuit Holds Policy Covers EPA Suit

In a coverage dispute based on underlying environmental litigation, the 5th U.S. Circuit Court of Appeals held that Illinois Union Insurance Co. must defend Louisiana Generating LLC in an action brought by the Environmental Protection Agency and the Louisiana Department of Environmental Quality.

“Big Cajun II,” a coal-fired electric steam-generating plant owned by LaGen, was targeted by the EPA and Louisiana’s state equivalent for allegedly toxic emissions. The agencies filed suit seeking a variety of relief, including an order for LaGen to “remedy, mitigate, and offset the harm to public health and the environment” caused by the alleged violations of the Clean Air Act, the assessment of a civil penalty for each day in violation of the CAA, an order to mitigate emissions and an injunction to repair emission control equipment to comply with regulatory standards.

LaGen turned to Illinois Union to defend and pay liability, if any. The applicable state law was again an important consideration, and here the court applied New York law.

Analysis of the policy language at issue covered “Claims, remediation costs, and associated legal defense expenses... a result of a pollution condition.” The Fifth Circuit took great pains to match up the specific policy language at issue with its reading of New York law. The court determined that the policy covered remediation costs and nothing under New York law limited such coverage whether these costs were incurred voluntarily or as a result of a government demand. The insurance company further sought to apply an exclusion for fines and penalties, which the company argued was the context in which these costs were incurred. The court rejected that outcome, holding that the exclusion could not swallow up and nullify the clear grant of coverage for remediation costs.

To read the decision in Louisiana Generating LLC v. Illinois Union Insurance Co., click here.

Why it matters: What does a policy actually pay for? That is the question at the heart of the dispute in the 5th Circuit case, which again serves to remind policyholders to read the policy to understand the terms of coverage. The court’s opinion also emphasizes that under New York law, an insurer has a broad duty to defend and policyholders will be entitled to a full defense as long as some of the underlying allegations are covered by the terms of the policy. The policyholder must be armed with this understanding before it presses its demands for coverage.

Competitor’s False Ad Suit Covered By Liability Policy

A false advertising suit filed by a competitor triggered coverage under a liability policy, according to a federal court in Illinois. This case presents the classic insurance principles that the duty to defend is broadly construed and applies as long as there is a “potential for coverage” and exclusions are narrowly construed and limited in application.

Teikoku Pharma USA filed a complaint alleging false advertising by JAR Laboratories LLC. Teikoku distributes a pharmaceutical product called Lidoderm, a prescription-only patch that contains lidocaine used as a topical analgesic. JAR mounted an advertising campaign to launch a competitive product, the LidoPatch, which was to be sold over the counter.

Here, Teikoku claimed that JAR issued a press release and made comments on its website about LidoPatch that were false and misleading, such as “relief that lasts all day, without a prescription!” and “[l]ike the prescription brand, LidoPatch will provide relief for up to 24 hours.” According to Teikoku, the statements relayed the message that the two products were equally as effective and could be used interchangeably.

JAR sought coverage under policies issued by Great American E&S Insurance Co. (one primary, one excess policy). The policies provided coverage for “personal and advertising injury” defined as injury arising out of “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

The primary policy also contained two exclusions: one for claims alleging infringement of intellectual property such as copyright and unfair competition, and a second based upon injury arising out of the failure of goods or products to conform with statements of quality or performance made in an advertisement.

Great American took the position that it had no duty to defend or indemnify JAR. The insurer argued that the statements at issue in the underlying suit could not reasonably be read to allege that JAR disparaged Lidoderm because the statements all referred to its own product, LidoPatch. The court disagreed and held “[t]hat [JAR’s] statements did not identify Lidoderm by name is immaterial,”; “Whatever words [JAR] used, [Teikoku] clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff’s implicit ‘message’ was about Lidoderm.” Significantly, the court did not limit its analysis to the actual words chosen by the defendant in its advertisement campaign but, rather, honed in on the practical import those words would have in the intended market. Clearly, in contrast, the marketing campaign meant to diminish the superiority of plaintiff’s superior product.

To read the decision in JAR Laboratories LLC v. Great American E&S Insurance Co., click here.

Why it matters: The lesson of this Illinois decision is that words alone cannot define the applicability of a policy to a given set of facts. It is critical that the insurance policy is carefully read and its intended scope of coverage fully understood. From that vantage point the policy is superimposed on what is really at issue in the underlying dispute rather than invoking a hyper technical application of words or labels used in a given pleading.

The court refused to apply the two potentially applicable exclusions raised by defendant under a similar practical analysis. Rigid application of exclusions that make no sense in a real-world context runs counter to the rule that exclusions are narrowly applied. A policyholder needs to understand these guiding principles at the outset of any effort to seek coverage for a given claim.

Insurer Cannot Seek Reimbursement From Independent Counsel

An insurer could not seek reimbursement for money paid to independent counsel via a direct suit, the California Court of Appeal has ruled.

In an unpublished decision, the court held that because Hartford failed to provide a defense for its insured, a series of consequences flowed from that proved improvident decision.

“California law bars an insurer, like Hartford, in breach of its duty to defend from thereafter imposing on its insured its own choice of defense counsel, fee arrangement or strategy.” Here, the court made a natural extension of those consequences by preventing the insurer from attempting to end-run the insured and seek reimbursement directly from the low firm that defended the case: “This court now takes the law one slight step further by holding Hartford likewise is barred from later maintaining a direct suit against independent counsel for reimbursement of fees and costs charged by such counsel for crafting and mounting the insureds’ defense where Hartford considers those fees unreasonable or unnecessary.”

This case initially presented the classic Cumis issue under California law. When an insurer denies or otherwise reserves its rights with respect to its duty to defend, the policyholder is allowed to engage independent counsel. The significance is that the insured and independent counsel maintain attorney-client protection that cannot be breached by the insurer. Second guessing of the defense also is barred.

Here, at the conclusion of the underlying litigation, Hartford paid more than $15 million in defense fees and costs to Squire Sanders. With the invoices paid, Hartford sought reimbursement from the law firm, arguing that Squire submitted improper invoices. Hartford requested money back for amounts paid for non-insureds and those in the non-California litigation as well as excessive fees or costs.

The panel dismissed the suit, ruling that Hartford did not have a quasi-contractual right rooted in common law to maintain a direct suit against independent counsel for reimbursement of allegedly excessive or otherwise improperly invoiced defense fees and costs where it had disclaimed coverage for the action under the relevant policy.

Simply put, Hartford’s fight was with the wrong party, the court said. Independent counsel owes certain limited duties to the insurer, the court acknowledged, but it “represents the insured alone.”

To read the decision in J.R. Marketing v. Hartford Casualty Insurance Co., click here.

Why it matters: The case represents further confirmation that Cumis counsel owes complete fidelity to the insured and has no quasi-contractual relationship with an insurer that disputes its defense obligations. The insurer has no standing after the fact to second-guess the law firm’s handling of the case and cannot gain access to otherwise privileged information in some effort to discredit the defense for its own pecuniary interest. It is the representation of the “insured alone” that is most noteworthy as a guiding principle. Insurance coverage disputes should never prejudice in any respect the defense of the underlying claim.

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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