In This Issue:

• Pollution Exclusion Doesn’t Bar Coverage for Worker Exposed to Hazardous Chemicals That Were Not “Dispersed”
• In Massachusetts, Insurer Cannot Avoid Coverage Obligations Based on Improper Notice Absent a Showing of Prejudice
• Excess Policy Attaches Based on Insured’s Own Funding to Establish Exhaustion of Underlying Limits
• Cumis Counsel Not Limited to a Single Firm
• Internet Posting Deemed “Publication” Sufficient to Trigger Insurer’s Duty to Defend

Pollution Exclusion Doesn’t Bar Coverage for Worker Exposed to Hazardous Chemicals That Were Not “Dispersed”

Why it matters
A federal district court in Texas strictly construed a pollution exclusion in finding that hazardous materials embedded in mud were not “dispersed” and thus did not fit the terms of the exclusion. The insurer had refused to defend in reliance on the pollution exclusion, which applied to bodily injury claims arising from the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The decision is significant because it limits insurers’ ability to deny a defense to insureds unless exclusionary terms, strictly construed, clearly apply.

Detailed Discussion
The underlying claimant alleged exposure to chemicals while cleaning mud tanks used in oil and gas drilling operations. The claimant was not informed by the policyholder, JC Instride (“JCI”), that the mud tanks contained large quantities of caustic materials and entered the mud tank without proper safety equipment. As a result, he was severely burned and sued a number of defendants, including JCI.

JCI was covered under an insurance policy issued by the Burlington Insurance Company. The policy contained a pollution exclusion barring coverage for “bodily injury . . . which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The term “pollutants” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

Burlington sought a declaratory judgment that it had no duty to defend or indemnify JCI due to the pollution exclusion. Both parties moved for summary judgment.

The district court ruled that the pollution exclusion did not apply because the underlying complaint alleged that the “mud tanks contained large quantities of caustic materials” and, while the claimant came in contact with the caustic materials, there was no “dispersal” of “pollutants.”

The court looked to the Merriam-Webster Dictionary for the meaning of “dispersal” and concluded that “‘[t]o disperse a pollutant means to break it up and scatter it about.’” The claimant, however, did “not allege that caustic materials were ‘dispersed’ in the mud tank. Rather, [he] alleges that the ‘mud tanks contained large quantities of caustic materials’ and that, as he was wading in drilling mud, he was ‘expos[ed] to the caustic materials.’”

Accordingly, the district court required the insurer to defend, but reserved ruling on indemnity.

To read the order in The Burlington Ins. Co. v. JC Instride, Inc., click here.

In Massachusetts, Insurer Cannot Avoid Coverage Obligations Based on Improper Notice Absent a Showing of Prejudice

Why it matters
A Massachusetts state court ruled that an insured’s failure to satisfy a CGL policy’s notice requirement does not excuse the insurer’s duty to defend absent a showing that the insurer suffered prejudice. Further, because the insurer breached its duty to defend and failed to participate in settlement discussions, the insurer was liable for a default judgment entered against its insured for several times the policy’s limit. By failing to defend its insured and to make a reasonable settlement offer when liability was reasonably clear, the insurer exposed itself to judgment of $2.6 million, well in excess of its small limit of liability ($50,000).

Detailed Discussion
A car mechanic, Joseph Boyle, with 28 years of experience agreed to help a friend who worked at an auto repair shop, C&N Corporation. With the truck on the lift, the C&N employee revved the engine and one of the tires exploded, causing Boyle serious injuries.

Boyle’s medical bills exceeded $106,000 and he lost earning capacity of another $256,000. C&N notified its insurance agent and insurer Zurich American Insurance Company of the accident. Although Zurich opened a file and assigned the accident a claim number, the insurer did little else over the next few years.

C&N became insolvent. An attorney for Boyle and his wife therefore contacted Zurich directly, and repeatedly, about coverage for their losses. Zurich did not respond. Zurich later concluded that the Boyles’ claim was covered under C&N’s policy and, having received copies of Boyle’s medical bills, concluded that C&N faced liability in excess of its $50,000 policy limit. Zurich, however, never communicated its conclusion to the Boyles or C&N, let alone made a reasonable settlement offer.

A default judgment was entered against C&N for more than $2.6 million. Because C&N could not pay the judgment, it assigned its rights against Zurich to the Boyles, who filed suit seeking to recover on the default judgment.

At trial, Zurich contended that it had no duty to defend because C&N breached its contractual obligation to “[i]mmediately send [Zurich] copies of any . . . summons or legal paper received concerning [a] claim or ‘suit.’” The insurance policy provided that Zurich had “no duty to provide coverage under this policy unless there has been full and complete compliance” with the notice of suit provision.

The court agreed with Zurich that C&N did not satisfy the notice condition, but ruled that the failure to satisfy the notice condition “does not automatically mean that Zurich had no duty to defend C&N once it learned of the lawsuit from the Boyles’ attorney.” Under Massachusetts law, an insurer is not excused from its duty to defend unless the lack of notice caused it to suffer actual prejudice.

Zurich had learned of the lawsuit from the Boyles’ lawyer, but chose to ignore that information. “Since C&N had previously told Zurich about Mr. Boyle’s injury and likely claim, when Zurich learned of the lawsuit . . . it had every reason to believe that C&N would want Zurich to defend it,” the court reasoned. “At that point, Zurich had to either step in and provide a defense, or at least contact C&N and confirm whether C&N wanted Zurich to defend the suit.” As Zurich had ample time to protect its interests, it could not establish actual prejudice as a result of C&N’s technical violation.

The court concluded that Zurich also breached its duty to C&N by negligently failing to settle the lawsuit within policy limits and therefore was liable for the excess portion of the judgment obtained by the Boyles plus post-judgment interest, a total of approximately $2.6 million.

To read the opinion in Boyle v. Zurich American Ins. Co., click here.

Excess Policy Attaches Based on Insured’s Own Funding to Establish Exhaustion of Underlying Limits

Why it matters
A Texas appellate court, reversing the trial court, ruled that a policyholder is entitled to coverage under a high-level excess policy even though the underlying insurers had not paid their full policy limits. The trial court had ruled that the insured forfeited its excess coverage by settling with its lower-level insurers for less than the full limits of those policies, even though the insured paid the resulting gap and was not asking the high-level excess insurer to “drop down.” The appellate court ruled that the policyholder could establish exhaustion through a combination of payments by insurers and the insured itself. This case is important in that a few recent cases from other jurisdictions had reached a contrary conclusion.

Detailed Discussion
Plantation Pipe operates pipelines that transport petroleum products across many southern states.

Plantation bought insurance consisting of levels of insurance with total limits of $8 million and a higher-level excess policy from Highlands Insurance Company that attached after exhaustion of the first $8 million in coverage.

One of Plantation’s pipelines leaked, and Plantation was required to remediate the site of the leak. Plantation notified all of its carriers, which all denied coverage. Before it knew the full extent of its loss, Plantation filed suit against the insurers at the first three levels based on the belief that its loss would not reach the Highlands policy.

Each of the three insurers underlying Highlands settled by agreeing to pay less than its full policy limit. Plantation received $4.55 million from those three insurers. The remediation costs, however, continued to mount, and Plantation eventually notified Highlands that it had incurred losses in excess of $8 million.

Highlands denied coverage on the ground that the underlying policies had to exhaust by payments by the insurers themselves. Plantation filed suit against Highlands, and the trial court ruled in favor of Highlands.

The appellate court reversed, holding that, under the language of the Highlands policy, exhaustion was appropriate as long as the underlying insurers and Plantation, collectively, paid the amount of the underlying limits ($8 million). “We believe that the language in the Highlands policy is unambiguous, and we see nothing that requires payment of losses solely by the insurers up to the attachment amount in the Highlands policy.”

To read the opinion in Plantation Pipe Co. v. Highlands Insurance Co., click here.

Cumis Counsel Not Limited to a Single Firm

Why it matters
Under California law, policyholders are entitled to independent counsel, often referred to as Cumis counsel, when a conflict of interests exists between an insurer and its insured. In a case of first impression, a California federal district court held that in appropriate circumstances an insured’s Cumis rights entitle it to hire attorneys from more than one law firm. So long as the policyholder demonstrates that the counsel fees were “reasonable and necessary,” the insurer must pay.

Detailed Discussion
As a licensee of Guess? Inc., Signal Products was named as a defendant in a trademark dispute with Gucci America. Gucci alleged that Signal, as well as other licensees, infringed the trade dress of certain handbags and luggage.

Upon receiving Signal’s tender of the underlying action, its primary and umbrella carriers (collectively, “Zurich”) agreed to defend Signal under a reservation of rights. Zurich conceded that its reservation of rights created a conflict of interest and provided Signal a right to independent counsel.

Signal informed Zurich that it had appointed two law firms – O’Melveny & Myers and Steptoe & Johnson – to defend it in the underlying action. Zurich took the position that it had no knowledge of Steptoe & Johnson’s involvement until after the conclusion of the underlying action.

When Zurich refused to reimburse Signal for the fees incurred by Steptoe & Johnson, Signal filed suit claiming that Cal. Civil Code § 2860 does not preclude Signal from hiring a second law firm to act as independent counsel. In relevant part, Section 2860 states that “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured.”

The court first determined that multiple attorneys from the same firm could act as Cumis counsel under § 2860. The court then held: “Having accepted that multiple attorneys may serve as Cumis counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm. . . . Certainly § 2860 does not impose such a requirement. . . .” The court found that it was a question of fact whether the retention of a second Cumis counsel was reasonable and necessary in the circumstances.

To read the decision in Signal Products Inc. v. American Zurich Insurance Co., click here.

Internet Posting Deemed “Publication” Sufficient to Trigger Insurer’s Duty to Defend

Why it matters
Policyholders must be vigilant to ensure that they carry the appropriate insurance to provide coverage for cyber-related losses. In a recent case, a Virginia federal court ruled that coverage was triggered for a lawsuit accusing the insured company of posting confidential medical records on the Internet – even though there was no evidence that anyone ever viewed the information. The court rejected a host of insurer arguments, including that the posting was accidental and the records were not really published. “[E]xposing confidential medical records to online searching is ‘publication’ giving ‘unreasonable publicity’ to, or ‘disclosing’ information about, a person’s private life,” the court concluded, ordering the insurer to defend. This case highlights the need for a forward-looking insurance program related to electronic information.

Detailed Discussion
When patients of Glen Falls Hospital conducted a Google search of their names, the first link that appeared contained a direct link to their medical records. Two patients filed a putative class action alleging that their confidential medical records were accessible and downloadable from the Internet without any security restrictions over a period of several months.

Glen Falls had contracted with Portal Healthcare Solutions for the electronic storage and maintenance of its patients’ medical records. The suit named both Glen Falls and Portal as defendants.

Portal turned to Travelers Indemnity Company to defend the underlying litigation. Travelers disputed its coverage obligations, and Portal filed suit in Virginia federal court.

The court found that the Travelers policy contained two prerequisites to coverage. First, the policies required an electronic “publication” of the material. Second, the published material must have given “unreasonable publicity” to, or “disclose[d]” information about, a person’s private life. The court concluded that the underlying complaint met both prerequisites.

The court rejected Travelers’ argument that the online posting was not a “publication” because the term “publication” does not hinge on the would-be publisher’s intent. Rather, it hinges on whether the information was placed before the public. The court also rejected Travelers’ argument that the posting did not amount to a “publication” because no third party was alleged to have viewed the information. The court found that “publication” does not require third-party access, but only that the information be “placed before the public,” such that the information is available to the public, even if nobody ever accesses or reads it.

As the court explained, “the definition of ‘publication’ does not hinge on third-party access. . . . By Travelers’ logic, a book that is bound and placed on the shelves of Barnes & Noble is not ‘published’ until a customer takes the book off the shelf and reads it.”

As for the second prerequisite, the court found that “[t]here can be no question that posting medical records online without security restriction exposes the records to the general view and thus, gives the records ‘publicity’ since, quite literally, any member of the public can view, download, or copy those records.”

The information clearly “disclosed” information about the patients’ personal lives the moment the records were posted online, regardless whether a third party viewed them. The posting made medical records previously known only to the patient suddenly known to the public at large, the court ruled. As such, the allegations of the complaint triggered Travelers’ obligation to defend.

To read the opinion in The Travelers Indemnity Company of America v. Portal Healthcare Solutions, click here.