THE COMPLEX INSURANCE COVERAGE REPORTER – 2021 YEAR IN REVIEW

Welcome to CICR’s annual recap of insurance cases you should know about — and others in the pipeline to watch. You can read about our selections for “Cases to Know” and “Cases to Watch” below.

In the last year, we saw COVID-related business interruption disputes continue to dominate the insurance coverage landscape. According to the University of Pennsylvania’s COVID Coverage Litigation Tracker, trial courts have already issued 750+ merits rulings on motions in these cases. The results have overwhelmingly favored insurers. As one court put it, there is “[a]n ‘avalanche of authority’. . .that COVID-19 does not qualify as ‘physical loss or damage’ for insurance coverage.”

Federal and state appeals courts have also been weighing in. So far, insurers have found themselves on the winning end in these cases. That is not to say though that courts have been unsympathetic to the economic challenges insureds have experienced, but as the Sixth Circuit recently explained in Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021), insurance is not a “general safety net for all dangers”:

Fair pricing of insurance turns on correctly accounting for the likelihood of the occurrence of each defined peril and the cost of covering it. Efforts to push coverage beyond its terms creates a mismatch, an insurance product that covers something no one paid for and, worse, runs the risk of leaving insufficient funds to pay for perils that insureds did pay for. That is why courts must honor the coverage the parties did—and did not—provide for in their written contracts of insurance.

While COVID may have been the headliner, there was more going on in 2021, as our “Cases to Know” picks (listed alphabetically below) indicate. Retained defense counsel malpractice, whether costs incurred to comply with an injunction are covered “damages for which the ‘insured’ is legally liable,” and defense cost reimbursement are just some of the insurance-related issues in our featured cases.

Looking ahead, the state high courts in our “Cases to Watch” are poised to address appeals involving among other issues liability coverage for opioid-related suits by governmental entities, whether tort claimants are intended beneficiaries of liability insurance policies, and who counts as an “employee” under the Texas Anti-Indemnity Act.

We hope you enjoy this special issue and appreciate your interest in our publication.


Cases to Know

Arch Ins. Co. v. Kubicki Draper, LLP, 318 So. 3d 1249 (Fla. 2021) (Defense Counsel Malpractice Claims)

Florida Supreme Court holds that a liability insurer has standing to pursue a malpractice action against the law firm it hired to defend its insured in an underlying lawsuit where the insurer is contractually subrogated to the insured’s rights under the policy. The court agreed that only the insured was in privity with the firm, but found that the policy’s subrogation provision allowed the insurer to sue:

The language of the subrogation provision is clear—Arch is contractually subrogated to the rights of [its insured], which would include claims for legal malpractice against counsel retained to defend the insured. . .Where an insurer has a duty to defend and counsel breaches the duty owed to the client insured, contractual subrogation permits the insurer, who—on behalf of the insured—pays the damage, to step into the shoes of its insured and pursue the same claim the insured could have pursued.

For additional information, see When Can Liability Insurers Sue Appointed Underlying Defense Counsel for Malpractice?


Business Interruption – COVID-19 Appeals

The wave of COVID-related business interruption coverage decisions continued in 2021, as cases in federal and state courts around the country moved to the appeals phase.

To date, as reported by the University of Pennsylvania’s COVID Coverage Litigation Tracker, over 200 federal appeals have been filed. More than 120 appeals were taken in the Third and Ninth Circuits alone.

Multiple federal appeals courts have already weighed in on COVID-related business interruption coverage issues. While a handful of decisions addressed the application of virus or other exclusions, the focus in most of these cases has been on whether the insured’s property sustained “direct physical loss or damage.”

The Eighth Circuit, the first federal appeals court to substantively address these issues, explained that, under Iowa law, “physical loss” requires “some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.” Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021). It concluded that the insured’s complaint was properly dismissed because it alleged “no facts” that the insured had suspended activities due to physical loss or physical damage, “regardless of the precise definitions of the terms ‘loss’ or ‘damage.’” Other decisions followed.

In one of the more recent decisions, the Fifth Circuit, agreeing with the insurer, concluded that “physical loss” could not “reasonably be interpreted” under Texas law to mean mere “loss of use,” since such an interpretation “would render the adjective ‘physical’ meaningless. By including ‘physical,’ the policy necessarily contemplates a loss that is nonphysical (and thus excluded).” Aggie Invs., L.L.C. v. Cont’l Cas. Co., 2022 U.S. App. LEXIS 393, at *5-6 (5th Cir. Jan. 6, 2022).

At the state level, three intermediate appeals courts (in California, Indiana and Ohio) have handed down decisions addressing “direct physical loss.” Expect more to come, as 70+ other appeals are pending, including several before high courts (in Delaware, Iowa, Ohio, Oklahoma, Vermont, Washington and Wisconsin).


In re Farmers Tex. Cty. Mut. Ins. Co., 621 S.W.3d 261 (Tex. 2021) (Stowers Doctrine)

Texas Supreme Court (in a partially divided decision) declines to recognize a Stowers “failure to settle” claim against an insurer where an underlying settlement, which included a contribution from the insured, did not exceed policy limits. “We have consistently recognized the requirement that an insured be liable in excess of policy limits—whether as a result of judgment or settlement—in order to bring a Stowers claim,” the majority said. It concluded that the insured may (subject to any coverage and other issues) nevertheless pursue a non-Stowers contract claim against the insurer for alleged breach of its indemnity obligation.

On that point, three justices disagreed (based on the policy language and the settlement agreement), explaining in part:

“[F]acts actually established in the underlying suit control the duty to indemnify.” Thus, only those settlements in which the insured admits to facts establishing her legal responsibility for the accident can possibly trigger an insurer’s duty to indemnify. When the insured disclaims all liability for the accident (as happens in the vast majority of settlements), the settlement does not establish any facts, and the insurer therefore has no duty to indemnify. That is what [the insured] did.


Nautilus Ins. Co. v. Access Med., LLC, 482 P.3d 683 (Nev. 2021) (Defense Cost Reimbursement)

Nevada Supreme Court (in a 4-3 decision), on certified question from the Ninth Circuit, concludes that a CGL insurer that had no duty to defend was entitled to recoup its defense costs from an insured that had accepted a defense subject to the insurer’s reservation of its right to reimbursement. The majority grounded its decision in principles of unjust enrichment and restitution: “When a court determines that an insurer never owed a duty to defend, the insurer expressly reserved its right to seek reimbursement in writing after defense was tendered, and the policyholder accepted the defense from the insurer, then the insurer is entitled to that reimbursement.”

It disagreed with courts that have characterized an insurer’s reservation of the right to seek reimbursement as a “unilateral amendment to the insurance contract”:

. . .when a court holds that there never was a duty to defend, it is holding that the claims were never even potentially covered by the policy. Therefore, when the insurer reserved its right to seek reimbursement, it was not extracting an amendment to a contract that would otherwise govern its defense. No contract governed its defense. In these circumstances, there is no reason it cannot reserve a right it has, not pursuant to the contract, but pursuant to the law of restitution.

The majority also noted that the ALI Restatement of Liability Insurance justified departure from “the usual rule” (permitting reimbursement) based on “special considerations of insurance law” that are inconsistent with Nevada precedent holding that “legal principles applicable to contracts generally are applicable to insurance policies.”


Sapienza v. Liberty Mut. Fire Ins. Co., 960 N.W.2d 829 (S.D. 2021) (Damages)

A divided South Dakota Supreme Court, on certified question, finds that costs incurred by insureds to comply with an injunction (requiring them to bring their newly constructed residence into compliance with regulations or rebuild it) are covered “damages for which the ‘insured’ is legally liable” under their homeowners/excess liability policies. The injunction was issued in an underlying lawsuit brought by neighboring property owners who alleged diminished value and other harm from the construction and sought various forms of relief, including money damages. According to the majority, “damages” (undefined in the policies) is “fairly susceptible to more than one interpretation” and the policy language, when liberally construed, could reasonably be interpreted to include the injunction costs. “Such costs are predicated on [the insureds’] legal liability for what would otherwise be assessed as money damages had the court [in the underlying case] determined that a monetary payment to the [claimants] would have been adequate to remedy the harm,” the majority said. It contrasted, as “more narrow,” policies with “legally obligated to pay as damages” language and likened the case to environmental coverage scenarios.

The dissent criticized the majority for an approach that “exalts any possible meaning for an undefined term, over its plain and ordinary one.”


Also Noted

Owners Ins. Co. v. Dockstader, 2021 U.S. App. LEXIS 19369 (10th Cir. June 29, 2021) (Settlement Demands)

Tenth Circuit (in a 2-1 decision) concludes, under Utah law, that an insurer defending an insured under a reservation of rights had no duty to accept a settlement demand within policy limits where the trial court ultimately found no coverage in the insurer’s declaratory judgment (DJ) action. In this case, the claimant intervened in the insurer’s DJ action against the insured, and argued that the insurer had a duty to settle within policy limits while the action was pending on the grounds that the insured faced “a significant likelihood” of an excess judgment. The majority concluded that the claimant’s position, if accepted, would “undermine Utah law by making the insurer’s right to seek a [DJ] action illusory.” It explained:

. . .Utah recognizes that it would be unreasonable to require an insurer “to accept any offer below the policy limits, regardless of circumstances, and however questionable the issues of liability and damage may be.” Instead, Utah gives an insurer “a reasonable latitude of discretion to decide whether it will accept a proposed settlement.” When making this determination an insurer may consider “the certainty or uncertainty as to the issues of liability, injuries, and damages.”

In sum, “Utah law requires reasonableness,” the majority said, and here the reasonableness of the insurer’s position — that it would pay the policy limit if coverage existed — was confirmed by the trial court’s “uncontested determination” that a policy exclusion barred coverage.


Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., 497 P.3d 625 (Nev. 2021) (Burden of Proof; Exclusions; Extrinsic Evidence)

A unanimous Nevada Supreme Court, on certified question from the Ninth Circuit, holds that an insured under a liability policy: (1) has the burden of proving the applicability of an exception to an exclusion (which, in this case, involved application of a “Continuous or Progressive Injury or Damage Exclusion” to underlying construction defect claims); and (2) may rely on extrinsic facts available to the insurer at the time of tender “to prove there was a potential for coverage under the policy and, therefore, a duty to defend.” The court looked to authority in the “sudden and accidental” pollution exclusion context and adopted what it described as the “majority rule,” concluding that the insured has the burden of proving “the potential that an exception to an exclusion applies when determining whether the insurer owes a duty to defend.”


Cases to Watch

Acuity v. Masters Pharm., Inc., No. 2020-1134 (Ohio) (Opioid Suits; Duty to Defend)

Ohio Supreme Court to decide whether government lawsuits against a pharmaceutical distributor (MPI) for claimed costs of responding to the “opioid epidemic” (e.g., for increased police patrols, judicial expenditures, prison and public-works expenditures, substance-abuse treatment, and emergency and medical-care services) give rise to a duty to defend under CGL policies. The underlying suits, brought by cities and counties in West Virginia, Michigan, and Nevada, allege that MPI was negligent in “failing to maintain effective controls against the diversion of prescription opioids into ‘other than legitimate medical, scientific, and industrial channels’ in violation of federal and state laws.” The trial court found no duty to defend (or indemnify) on the basis that: (1) the suits seek recovery for economic losses, not damages “because of bodily injury”; and (2) prior to policy inception, MPI knew of the epidemic yet allegedly filled “suspicious orders,” thus invoking the “loss-in-progress” provision. The intermediate appeals court disagreed, holding in part that the policies potentially cover some of the claims and damages at issue and noting that some of the alleged economic losses (e.g., medical expenses and treatment costs) are “arguably ‘because of’ bodily injury.”

The insurer’s Propositions of Law on appeal are:

1. Commercial general liability policies cover an insured’s liability for an “occurrence” causing “bodily injury” to specific persons. They do not cover an insured’s liability for corporate practices that allegedly cause governmental entities to sustain economic losses for increased governmental services.

2. The “loss in progress” provision is a general condition precedent clarifying that coverages do not apply to “bodily injury” that the insured knows has occurred, in whole or in part, before the policy period. Knowledge of the nature and scope of any damages resulting from the “bodily injury” is unnecessary.

Note: On January 10, 2022, a nearly unanimous Delaware Supreme Court held that a liability insurer had no duty to defend a national drugstore company against suits in which Ohio counties seek damages for the company’s “alleged contribution to a ‘public health crisis’ of opioid addiction.” ACE Am. Ins. Co. v. Rite Aid Corp., 2020 Del. LEXIS 9 (Del. Jan. 10, 2022). Specifically disagreeing with the intermediate appeals court’s decision in Acuity, the Rite Aid court stated that the phrase “because of personal injury” in the policies requires that damages be “connected to the personal injury, independently proven, and shown to be caused by the insured.” The underlying suits did not meet this requirement, the Rite Aid court concluded, because they “seek compensation for [the counties’] economic losses, not derivatively for the bodily injuries suffered by Ohioans in the opioid crisis.” White and Williams LLP is co-counsel for the insurers.


CX Reins. Co. Ltd. v. Johnson, COA-PET-0283-2021 (Md.) (Third-Party Beneficiary)

Maryland’s highest court (Court of Appeals) grants certiorari petition in an action to determine the existence of liability coverage for underlying lead paint exposure claims under policies that were the subject of “Rescission Settlement Agreements.” The intermediate appeals court (the Court of Special Appeals, or CSA) previously held that injured tort claimants were “intended third-party beneficiaries” of a tortfeasor’s liability policy and that their rights (1) vested at the time of injury; and (2) could not be modified by later settlement agreements between the insured and its insurer that eliminated or reduced coverage. It rejected an argument that to be an intended third-party beneficiary of an insurance policy, the claimant must first obtain a judgment or execute a settlement agreement with a covered insured.

The issues as identified on the Maryland Court of Appeals website are:

1. Did CSA err in refusing to interpret insurance policies like other contracts, concluding that “sound public policy dictates that liability insurance policies should be construed to protect injured tort claimants” notwithstanding their terms?

2. Did CSA err in holding that all claimants who have asserted or will assert claims are intended beneficiaries of insurance policies, with vested interests in those policies from the date of their alleged injuries, and have the same rights under those policies as claimants who have obtained judgments or entered into settlements?

3. Did CSA err in holding that an insured and its insurer cannot resolve litigation by entering a settlement, in good faith, that modifies or reduces insurance coverage without the consent of all current and future tort claimants?


Ky. State Univ. v. Darwin Nat’l Assur. Co., No. 2021-SC-0130-D (Ky.) (Late Notice; Prejudice; Claims Made Coverage)

Kentucky Supreme Court grants discretionary review of an intermediate appeals court decision finding (among other things) that an insurer was not required to show substantial prejudice to deny coverage for a late reported claim under a claims-made-and-reported policy since the “notice-prejudice rule” did not apply. According to the insured, the questions presented are:

1. As a matter of first impression, does Kentucky’s notice-prejudice rule apply to claims-made-and-reported insurance policies? Did the Court of Appeals err by not applying Kentucky’s existing authority on the notice-prejudice rule?

2. Did the Court of Appeals err by not applying 806 ICAR 12:095 § (4)(3), which requires [the insurer] to have proven a breach of the duty to cooperate by KSU before denying coverage based on late notice?

3. Did the Court of Appeals err by not applying the substantial compliance doctrine? Regardless of whether the notice-prejudice rule applies, the substantial compliance doctrine would still have allowed for coverage because KSU substantially complied with the Policy’s notice provisions by providing notice within the time the Policy allowed for receipt of the notice through U.S. Mail.


Maxim Crane Works, L.P. v. Zurich Am. Ins. Co., No. 21-0727 (Tex.) (Texas Anti-Indemnity Act; Employee)

Texas Supreme Court, on certified question from the Fifth Circuit, to determine the meaning of “employee” under the Texas Anti-Indemnity Act (TAIA). At issue is whether additional insured (AI) coverage is permitted by the TAIA’s “employee exception”* where an injured construction worker and a subcontractor (indemnitor) were deemed co-employees under the project’s general contractor (GC) for purposes of the Texas Workers’ Compensation Act and the worker sued an AI (indemnitee) under the subcontractors’ CGL policy for those injuries. A federal district court ruled that, since the worker was employed by the GC (and not the subcontractor), the TAIA barred AI coverage. On appeal, the Fifth Circuit certified the following question to the Texas Supreme Court:

Whether the employee exception to the TAIA. . .allows additional insured coverage when an injured worker brings a personal injury claim against the additional insured (indemnitee), and the worker and the indemnitee are deemed “co-employees” of the indemnitor [sic] for purposes of the [Texas Workers’ Compensation Act].

Video of the argument is available here.

* The exception (Tex. Ins. Code § 151.103) provides that the TAIA’s anti-indemnity provisions “[do] not apply to a provision in a construction contract that requires a person to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.”


Omega Protein Inc. v. Evanston Ins. Co., No. 2020-CA-01097 (Miss.) (Pollution Exclusion)

Mississippi Supreme Court, in a case of first impression, is asked to interpret an absolute pollution exclusion (APE) in an excess liability policy as applied to worker injury and death claims. The claims arise from an explosion at a fish processing plant that occurred when flammable gases from “stickwater” — a liquid composed of water, fish oil and fish solids — were ignited by welding work on a storage tank. The trial court adopted the recommendation of a special master, who considered a Fifth Circuit decision (E. Concrete Materials, Inc. v. ACE Am. Ins. Co., 948 F.3d 289 (5th Cir. 2020)) and concluded that coverage was barred because the loss was, at least, contributed to by “migration” of a “pollutant” (“stickwater”) within the meaning of the APE. The putative additional insured (Omega) claims that, even if the gases were a “pollutant,” the injuries were caused by explosion of the gases within the tank, and not by their “migration” or other movement. The Supreme Court could potentially bypass the APE issue by holding that either the underlying policy was not properly exhausted or Omega did not qualify as an additional insured.

Video of the argument is available here.