All Sums or Pro Rata: Did You Get the Coverage You Bought?
In recent decades, liabilities stemming from long-term bodily injury or property damage—as from exposure to asbestos or contamination of the environment—have presented a variety of new challenges for policyholders seeking to recover from their insurers under comprehensive general liability (“CGL”) policies. Injury or damage involved in such “long-tail” claims typically touch multiple policy periods. Most CGL policies are implicated or “triggered” if injury or damage happens during the policy period, regardless of when the claim is made. An employee’s inhalation of asbestos fibers may lead to injury that occurs over many decades, as might contamination from a leak of hazardous material. This is quite unlike more traditional and instantaneous “slip and fall” type bodily injury and property damage claims, which only trigger a single liability policy because they happen instantaneously and the resulting claim follows quickly.
While claims involving long-term injury present many complex factual issues, a critical legal issue raised by long-tail claims is the scope of an insurer’s obligations once an insurance policy has been triggered. A policyholder that faces liability claims implicating multiple years may find that the claim is covered under many, if not all, of its insurance policies, yet later learn that it is entitled to receive significantly less than full coverage for the claim. Resolution of this issue, known as the “allocation” issue, varies greatly from state to state. In one recent decision, an Indiana appellate court reached the opposite conclusion of the state’s highest court on questionable grounds. The question is how much coverage a policyholder can obtain from a triggered policy.
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Recent Client Wins
Orrick Wins Unanimous Duty to Defend Case for Expedia Before the Washington Supreme Court
An Orrick team obtained a major victory for travel website Expedia from the Washington Supreme Court. On July 3, 2014, in a 9-0 ruling for Expedia, the Court reversed both the appellate court and trial court and held that Expedia was entitled to a prompt determination of its duty to defend and that discovery that may impact the underlying litigation should be stayed. Expedia, Inc., et al. v. Steadfast Ins. Co., et al., 2014 WL 3199497 (July 3, 2014). The Court’s holding regarding a stay of discovery creates new law in Washington State, has been closely monitored by the insurance industry and the Washington public and private business industry, and benefits all policyholders in the state.
Expedia initially sought coverage for several underlying lawsuits brought by state and local taxing authorities regarding alleged underpayment of hotel occupancy taxes. Expedia’s insurers denied coverage and refused to honor the duty to defend, asserting various defenses.
The matter ultimately reached the Washington Supreme Court, which unanimously held that insurers that promise to defend an insured party from lawsuits must pay for the cost of defense as soon as this broad duty is triggered, regardless of whether the insurer has a defense that might ultimately relieve it of this duty. The Court also held that an insurer may not pursue discovery in an attempt to establish a defense to coverage that potentially prejudices the policyholder in the underlying litigation.
As a result, after years of litigation, the Washington Supreme Court remanded the case to the trial court to determine the insurers’ duty to defend Expedia in 54 separate federal and state lawsuits throughout the country. Our team was led by Mark Parris, and included Paul Rugani, Richard DeNatale, Celia Jackson and others.
Orrick Wins Dismissal of Monoline Insurer’s Fraud Claim Against Credit Suisse
An Orrick team representing Credit Suisse in several lawsuits brought by monoline insurers who insured residential mortgage-backed securities (“RMBS”) succeeded in dismissing the fraud claim of Assured Guaranty Municipal Corporation. Assured Guaranty Municipal Corp., et al. v. DLJ Mortgage Capital, Inc., et al. 2014 WL 3288335 (July 3, 2014). Assured originally sued Credit Suisse in October 2011, alleging breach of contract claims in connection with six RMBS deals from 2006 and 2007. Assured alleged that Credit Suisse breached certain representations and warranties regarding the characteristics of approximately $2.2 billion of securitized mortgage loans. Two years later, in October 2013, Assured amended its complaint to add a fraudulent inducement cause of action, alleging that Credit Suisse misrepresented, among other things, the characteristics of the securitized loans. Assured contended that its fraud claim entitled it to recovery on both loans that alleged breached representations and warranties as well as non-breaching loans in the six deals. New York State Supreme Court Justice Shirley Kornreich disagreed and dismissed Assured’s fraud claim. Credit Suisse is represented by an Orrick team that is led by Barry Levin and includes Darren Teshima, John Ansbro, Richard Jacobsen, Daniel Dunne and others.
News Briefs
Texas Appeals Court Rules Settlement of Oil Cleanup Claim With Underlying Insurer Does Not Negate Excess Coverage
Reversing a lower court decision, a Texas appellate court has ruled that Plantation Pipe Line Company’s settlement with underlying insurers for less than their policy limits did not result in forfeiture of its rights to claim coverage under an excess policy issued by Highlands. Plantation Pipe Line Co. v. Highlands Ins. Co. in Receivership, No 11-12-00029-CV (Tex. 11th Ct. of App. Aug. 29, 2014). Plantation sued its insurers after spending some $12 million cleaning up contamination from a 1975 oil pipeline leak. After settling with insurers underlying Highlands’ $8 million attachment point for a total of $4.55 million, Plantation sought recovery of the portion of the remaining losses that exceeded Highlands’ attachment point. Highlands resisted coverage on grounds that its policy attached only after the underlying insurers had paid or been held liable to pay their full policy limits. The court noted, however, that the Highlands policy did not use the term “full policy limits,” but instead turned on payment of the full amount of underlying insurers’ “ultimate net loss.” And Highlands followed form to an underlying policy that defined “ultimate net loss” as including “all sums which the insured or any organization as his insurer, or both, become legally obligated to pay as damages, whether by reason of adjudication or settlement ….” The appellate court concluded that the Highlands exhaustion requirement was satisfied by payments made either by the underlying insurers or the insured, or both, up to the attachment point of the Highlands policy.
Hurricane Sandy: New York Trial Court Finds Flood Sublimit Applies to Financial Losses Stemming From Construction Delay
In a matter of first impression in New York, a state trial judge recently ruled that a flood sublimit in a builders risk policy capped coverage not only for physical property damage but also for economic losses stemming from delays in completion of a Manhattan construction project, even though the policy provided a separate sublimit for “delay in completion losses.” El-Ad 250 West LLC v. Zurich American Insurance, Index No. 652964/2013 (N.Y. Sup. Ct., N.Y. County June 30, 2014). The insured, a real estate developer, was forced to delay completion of the project due to physical damage caused by Superstorm Sandy. Zurich’s policy provided $115 million in coverage per occurrence, with separate sublimits of $108 million for physical damage, $7 million for delay in completion, and a $5 million annual aggregate for flood losses. Surveying case law outside New York, the court concluded that the $5 million flood sublimit applied to both physical and nonphysical losses because it specified that it covered “all losses or damages arising” from a flood. The court underscored, however, that its finding was specific to the policy it considered, noting that other cases had come to a different conclusion based on different policy language.
Federal Court: “Insured v. Insured” Exclusion Does Not Bar Coverage of Directors and Officers in $367 Million Bank Loss
A U.S. District Judge in Puerto Rico recently ruled that the “insured v. insured” exclusion in an AIG D&O policy did not bar coverage of the FDIC’s claims against former directors and officers of the defunct Westernbank of Puerto Rico. W Holding Co. v. AIG Ins. Co., No. 11-2271 (GAG) (D.P.R. July 9, 2014). After taking over the failed bank, the FDIC sued former directors and officers for allegedly breaching their fiduciary duties in making financial decisions that resulted in losses exceeding $367 million. Taking sides in a split in the case law, the court rejected the insurer’s argument that the FDIC could not collect under the policy because it had stepped into the shoes of the bank as an insured in pursuing coverage. The court held that the FDIC was pressing the claim on behalf of the bank’s depositors and account holders. In so holding, it emphasized the exclusion’s “obvious intent” to protect against “collusive suits from insured parties,” which would not be served by depriving the FDIC of policy benefits. Separately, the court concluded that some of the losses were covered under the 2006-07 tower of D&O coverage and other losses were covered under a 2009-10 tower, rejecting the insurer’s argument that all the claims were related. The court acknowledged that the losses involved similar factual allegations, albeit with respect to distinct lending transactions, and a “degree of overlap debatably nearing ‘substantial.’” The court concluded, however, that treating the allegations as related “would ignore the diverging fact-specific nature of the FDIC claims.”
Eighth Circuit Holds That Two Camp Drownings Were One Occurrence
The Eighth Circuit held that claims arising out of the drowning deaths of two boys at a youth sports camp constituted a single occurrence under a general liability policy. Fellowship of Christian Athletes v. AXIS Ins. Co., et al, 2014 WL 33777796 (8th Cir. July 11, 2014). Under Missouri law, to determine the number of occurrences, courts apply a “cause” approach, under which a negligent act that causes multiple injuries is considered a single occurrence. The Eighth Circuit rejected the argument that the injuries had to occur almost simultaneously, holding that the cause approach does not require a “space and time” component. The appellate court affirmed the trial court’s holding that the underlying action alleged that the boys drowned as the result of the camp’s single negligent act of allowing the boys who could not swim to attend a pool party.
OIC Run-Off Limited (Formerly Orion) Hearing on Amended Scheme Postponed Until October 2014
The court hearing to request permission to convene a scheme creditors meeting to consider the OIC Run-Off Limited Amended Scheme, which was originally scheduled for August 2014, has been postponed until October 2014. No hearing date has been set. If the court allows the meeting to proceed, the Amended Scheme will be considered, which would convert the original Scheme into a valuation Scheme of Arrangement. This would accelerate the resolution of pending claims but extinguish claims not presented by a yet-to-be-determined bar date.
