Top Developments – February 2018

ATTORNEY’S FEES – DECLARATORY JUDGMENT ACTION

JP Energy Marketing, LLC v. Commerce & Industry Insurance Company, et al., No. 115285, 2018 Okla. LEXIS 11 (Okla. Feb. 5, 2018)

Oklahoma Supreme Court in a case of first impression authorizes an award of appeal-related attorney’s fees to an insured as the prevailing party in a declaratory judgment action seeking liability insurance coverage. Relies on 36 Okl. St. § 3629 (Furnishing of Proof of Loss Forms – Submitting Written Offer of Settlement or Rejection of Claim to Insured)** and interpretations by the Tenth Circuit that the statute does not only apply to first-party actions and that “notification to Insurers of the existence of the [underlying lawsuits], followed by the institution of the declaratory judgment action when coverage. . .was denied, would be all that was necessary to satisfy a ‘proof of loss’ requirement.”

** The statute provides in part that “[a]n insurer shall furnish, upon written request of any insured claiming to have a loss under an insurance contract issued by such insurer, forms of proof of loss for completion by such person” and that “[i]t shall be the duty of the insurer, receiving a proof of loss, to submit a written offer of settlement or rejection of the claim to the insured within ninety (90) days of receipt of that proof of loss. Upon a judgment rendered to either party, costs and attorney fees shall be allowable to the prevailing party.”


BAD FAITH

B&F Jacobson Lumber & Hardware, L.L.P. v. Acuity, No. 16-1134, 2017 Iowa App. LEXIS 1256 (Iowa Ct. App. Dec. 20, 2017)

Iowa appeals court rules in the first-party property “bad faith” context that evidence of an insurer’s post-filing of litigation conduct may be admissible where the probative value is not substantially outweighed by the danger of unfair prejudice. “If adjusting conduct contrary to the [Unfair Trade Practices Act] continued post-petition, the ‘conduct may bear on the reasonableness of the insurer’s decision and its state of mind when it evaluated and denied the underlying claim’ and be probative of bad faith.” According to the court, evidence of litigation strategy and tactics would be unfairly prejudicial, but proofs “clearly related to adjusting decisions required of the contractual relationship” would be admissible under the balancing analysis. “Evidence of conduct between those two extremes would require a closer weighing or examination of probative value versus unfair prejudice and may result in exclusion.” Also finds that the insurer’s reasoning for certain post-suit claims decisions (e.g., declining appraisal) was not protected from discovery by the attorney-client privilege and that the insurer “placed the communications with its counsel at issue when stating it relied upon counsel’s advice in reaching every decision made after the litigation was filed.” An application for further review is pending before the appeals court.


CONSTRUCTION DEFECT

Lyda Swinerton Builders, Inc. v. Oklahoma Surety Company, 877 F.3d 600 (5th Cir. 2017)

Fifth Circuit applying Texas law concludes that the liability insurer for a roofing subcontractor had a duty to defend a GC as an additional insured (AI) in a breach of contract action alleging material deficiencies in a construction project even though (1) the GC did not countersign the subcontract at issue and the sub unilaterally changed the indemnification provision; and (2) the suit did not expressly attribute any of the claimed property damage to the sub. Explains that a party may qualify as an AI even if the “insured contract” is unenforceable provided the named insured “agreed to ‘assume the tort liability of another party.’” Dismisses the insurer’s argument that the GC “selected” another insurer to provide a “complete defense” and should not be allowed to stack policies. Even if anti-stacking rules apply to defense, enforcing them here would “reward [the insurer] for shirking its legal duty” if the selection occurred after it denied the GC’s defense request, the court said. Applying USAA Tex. Lloyds Co. v. Menchaca, No. 14-0721, 2017 Tex. LEXIS 361 (Tex. Apr. 7, 2017), reh’g granted, finds that the GC can recover its defense costs as damages under Tex. Ins. Code § 541 (regulating “unfair methods of competition” and “unfair or deceptive acts or practices”) if it proves it was deprived of a defense because of a statutory violation.

Note: Further proceedings in the Fifth Circuit have been stayed pending rehearing by the Texas Supreme Court in Menchaca. Sean Mahoney recently covered Menchaca in an article available here.

West Side Salvage, Inc. v. RSUI Indemnity Company, 878 F.3d 219 (7th Cir. 2017)

Seventh Circuit applying Illinois law holds that damage-to-property exclusions j(5) and (6)** in an excess liability policy broadly preclude coverage for property damage caused by poor workmanship (i.e., are not limited to the precise area of the property being worked on). To find otherwise would, in the words of the court, undermine the basic premise of the exclusions that GL policies are not intended to protect against faulty workmanship or products, which are normal risks associated with an insured’s business. Concludes that the excess insurer had no duty to settle the underlying claim since the damage caused by the insured in this case (to a “hot” grain bin – a bin with rising grain temperatures that poses an explosion and fire risk – the insured was hired to fix that exploded while the insured was working, because the insured “performed its work [on the grain] incorrectly”) was such an uncovered risk.

** The exclusions apply to property damage to “(5) [t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations” and “(6) [t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

Black & Veatch Corporation v. Aspen Insurance (UK) Ltd., et al., No. 16-3359, 2018 U.S. App. LEXIS 3342 (10th Cir. Feb. 13, 2018)

A divided Tenth Circuit panel (2-1) predicts that the New York Court of Appeals would find that damages to an insured’s work from a subcontractor’s faulty workmanship are an “occurrence” under the GL policy at issue which contains a “subcontractor exception” to the “Your Work” exclusion.** Concludes that the damages here were “accidental” (i.e., the insured “neither intended nor expected that its [sub] would perform faulty work”) and “harmed a third party’s property” and that the “subcontractor exception” would be meaningless if damage to the insured’s work/project by a sub could never be covered. Calling the majority’s approach “a bridge too far,” the dissent (Judge Briscoe) emphasizes that New York law “forecloses” coverage under a GL policy with a “standard definition of ‘occurrence’” for damage to the insured’s work product (citing, e.g., George A. Fuller Co. v. United States Fidelity & Guar. Co., 613 N.Y.S.2d 152 (N.Y. App. Div., 1st Dept. 1994)). “[T]he majority concludes the Fuller rule only applies where the CGL policy does not include a Subcontractor Exception, even though no New York court has limited the rule in this way.”

** “Occurrence” is defined as an “accident. . .that results in. . .‘Property Damage’ that is not expected or not intended by the ‘Insured’.” The policy’s “Your Work” exclusion (“Exclusion F”) provides that the policy “does not apply to. . .‘Property Damage’ to ‘Your Work’ arising out of it or any part of it and included in the ‘Products/Completed Operations Hazard.’’’ The “subcontractor exception” states that the “Your Work” exclusion “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”


INDEPENDENT COUNSEL

Centex Homes v. St. Paul Fire & Marine Insurance Company, No. C081266, 2018 Cal. App. LEXIS 45 (Cal. Ct. App., 3rd Dist., Jan. 22, 2018)

California appeals court rejects claims by a developer that any possible or potential conflict is sufficient to require its subcontractor’s insurer to provide so-called “independent (Cumis) counsel” under Cal. Civil Code § 2860. The insurer agreed to defend the developer in underlying construction defect litigation as an additional insured subject to a reservation of rights including as to damage caused by other subs. The mere possibility of an unspecified conflict is not enough, the court explained. “The conflict must be significant, not merely theoretical, actual, not merely potential.” Emphasizes that a conflict does not arise whenever an insurer proposes to defend under a reservation of rights and that there must be evidence that appointed defense counsel can control the outcome of a coverage issue. “It is only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case that a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise.” Concludes that the developer failed to establish a triable issue as to the ability of defense counsel to influence the coverage issue of causation, which would not necessarily be litigated in the underlying case since the developer is strictly liable for construction defects. The California Supreme Court denied Petition for Review on February 16, 2018.

Bean Products, Inc. v. Scottsdale Insurance Company, No. 1-17-0421, 2018 Ill. App. Unpub. LEXIS 89 (Ill. App. Ct. Jan. 22, 2018)

Illinois appeals court rules that an insurer’s limited reservation of rights under a GL policy (as to punitive damages) and non-waiver of other grounds to disclaim coverage for an underlying copyright infringement suit based on new information did not trigger a right to so-called “independent counsel.” Finds that the underlying demand for unspecified punitive damages and the insurer’s “boilerplate reservation. . .premised on generalized concerns” did not present a conflict of interest. “Illinois courts are clear that only ‘actual’ and not merely ‘potential’ conflicts entitle an insured to independent counsel.” Declines to establish a per se rule that any punitive damages reservation automatically gives rise to a right to independent counsel: “Considering the frequency of general punitive damages demands in litigation, such a trigger would eviscerate an insurer’s right to control the defense of its insured.” Citing the policy’s voluntary payments provision, rejects the insured’s separate claim that, even absent a right to independent counsel, it should be reimbursed for legal fees it incurred without the insurer’s consent to settle the underlying case.


POLLUTION EXCLUSION

Brownlee, et al. v. Liberty Mutual Fire Insurance Company, et al., Misc. No. 1, 2017 Md. LEXIS 819 (Md. Dec. 18, 2017)

Court of Appeals holds in the context of Maryland toxic exposure claims that application of Georgia precedent (under the law of the place of contracting) on the absolute pollution exclusion** as precluding coverage for bodily injury from ingestion of lead-based paint does not violate Maryland public policy. Determines that Maryland’s legislative policies reflect an effort to abate lead-based paint poisoning and that excluding coverage for such claims is permissible. “Application of Georgia law. . .does not clearly offend Maryland’s public policy because the General Assembly has not expressly dictated that lead-based paint cannot be excluded from insurance policies as pollutants, and because pollution exclusion clauses are not an evolving area of public policy. In fact, the General Assembly has explicitly expressed that insurers ‘may include in the policy a lead hazard coverage exclusion’ [Maryland Code, § 19-704].” Concludes that Georgia’s interpretation of the pollution exclusion therefore governs the claims at issue.

** The GL policies at issue define pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemical or waste.”

GrafTech International, Ltd., et al. v. Pacific Employers Insurance Company, et al., No. 105258, 2017 Ohio App. LEXIS 5814 (Ohio Ct. App. Dec. 28, 2017)

Ohio appeals court rules that a liability policy’s absolute pollution exclusion bars coverage for workplace exposure claims involving coal-tar pitch. Rejects the policyholder’s argument based on Andersen v. Highland House Co., 93 Ohio St.3d 547 (Ohio 2001) (carbon monoxide from malfunctioning residential heater not a “pollutant” unless specifically enumerated as such) that “localized” releases of pollution in part of a manufacturing plant fell outside the exclusion. “The alleged toxic exposure in this case occurred in an industrial setting that would be a prime example of a ‘traditional’ case of environmental pollution,” the court said.

Note: Complex Insurance Coverage Reporter recently covered the GrafTech decision in an article available here. White and Williams represents Pacific Employers Insurance Company in the case.