ALLOCATION – DEFENSE COSTS
Steadfast Insurance Company v. Greenwich Insurance Company, 922 N.W.2d 71 (Wis. 2019)
Wisconsin Supreme Court concludes that a primary insurer was entitled (through contractual subrogation) to recover a pro rata by limits share of the costs it paid for defense of a common AI against underlying sewage backup claims from another primary found to have breached the duty to defend. Explains that an insurer acts “at its own risk” when it unilaterally rejects an insured’s tender of defense and is responsible for “all damages that naturally flow” from a breach of the duty to defend. Overturns lower court rulings that shifted 100% of the defense costs to the insurer that failed to defend as an unjustified “windfall” to the subrogated insurer: “[T]he financial sanction of an insurer who fails in its duty to defend does not include judicial forgiveness of another insurer’s financial obligation for defense costs.” Authorizes the subrogated insurer to recover its attorney’s fees in the case from the allegedly breaching primary.
BAD FAITH
A unanimous Georgia Supreme Court, in a closely watched case, finds that an insurer did not act unreasonably in failing to accept a valid offer to settle underlying auto liability claims within policy limits before it was abruptly withdrawn and was entitled to summary judgment on the insured’s negligence and “bad faith” claims.* Clarifies that an insurer’s duty to settle arises only when a claimant presents a valid offer within policy limits; and not when, absent such an offer, the insurer “knows or reasonably should know that settlement within the insured’s policy limits is possible.” Explains that interpretation of an offer is a legal issue and rejects the insured’s argument that a jury should decide if the insurer acted prudently in failing to promptly settle the most serious of multiple underlying claims so as to limit the insured’s exposure.
* The court elaborated: “As [the] offer was not a time-limited settlement demand, [the insurer] was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer. And given, especially, that the [claimants] communicated an unequivocal desire…to attend [a] proposed settlement conference, [the insurer] could not have reasonably known that it needed to respond within 41 days or risk that its insured would be subject to a judgment in excess of the policy limits…”
Summit Insurance Company v. Stricklett, 199 A.3d 523 (R.I. 2019)
Rhode Island Supreme Court holds that a liability insurer’s good faith duty regarding settlement did not extend to underlying claimants where there was no assignment from the insured and no demand within policy limits. Describes the relationship between an insurer and a third-party as “adversarial, ‘giving rise to no fiduciary obligation’” and clarifies that any obligation to deal with settlement offers in good faith exists only as to the insured or its assignee. Rejects the trial court’s conclusion that the insurer owed the claimants a duty to “act in a reasonable manner and in good faith in settling the claim”: “[T]his kind of duty on the part of the insurance company to third parties would expand an insurance company’s potential liability…too far and essentially announce a new, judicially-created cause of action.”
BUSINESS RISK EXCLUSIONS
MTI, Inc. v. Employers Insurance Company of Wausau, 913 F.3d 1245 (10th Cir. 2019)
Tenth Circuit, predicting Oklahoma law, finds the phrase “that particular part” in CGL policy exclusions j(5) and (6)* ambiguous in the context of claims that an insured’s faulty work in removing and not promptly replacing anchor bolts on a cooling tower project (or bracing the structure) allowed high winds to damage the tower. According to the court, the phrase is “susceptible to more than one reasonable construction” and could refer to the “distinct component upon which an insured works or to all parts ultimately impacted by that work.” Interprets the exclusion language narrowly to refer to the component and concludes that (1) the “‘particular part’ on which [the insured] was ‘performing operations’ and upon which work ‘was incorrectly performed’ should reasonably be understood as the anchor bolts;” and (2) given the alleged ambiguity, it is “objectively reasonable” for the insured to expect coverage for the cost to replace the entire tower. Dismisses the insurer’s arguments that this converts the policy into a performance bond or that the policy should be read to contain an “implied business risk exclusion.”
* The exclusions apply to property damage to “[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” (j(5)); and “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it” (j(6)).
DEFENSE COUNSEL MALPRACTICE CLAIMS
Florida appeals court rules that an insurer was not in privity with and thus lacked standing to pursue a legal malpractice claim against defense counsel it retained to represent an insured in underlying litigation (allegedly, counsel’s delay in filing a statute of limitations defense resulted in a large settlement). Concludes that the case did not fall within two recognized exceptions to the privity rule and that nothing in the record indicated the insurer was an intended beneficiary of the relationship between the law firm and the insured. Acknowledges the insurer’s public policy arguments that precluding these types of actions would essentially shield law firms from liability resulting from their malpractice, but declines, under the circumstances, to expand existing privity exception precedent.
NON-CUMULATION
Illinois appeals court affirms that the liability policy non-cumulation provisions at issue* were inapplicable to the policyholder’s asbestos coverage claims on the basis that (1) the provisions “only applied where more than one insurer was responsible for paying for the same portion of the loss;” and (2) the parties’ cost sharing agreement (CSA) purportedly allocated losses such that “no policy covered the same portion of the loss as another policy.” According to the court, the parties agreed to allocate the total loss for each claim only among policies in effect during alleged exposure based on time-on-the-risk (with the policyholder absorbing missing or insolvent coverage but not uninsured periods), which “precludes any policy from covering any portion of the loss also covered by another, prior policy.” “[U]nder the agreed-upon allocation, 100% of the claimant’s loss is allocated — either to [the policyholder] or an insurer — and each allocated portion is separate and distinct from the others,” the court said. Rejects insurer arguments that their responsibility under the CSA for loss outside the exposure period or during uninsured years triggered the non-cumulation provisions: “[T]he language of the clauses provides for their application where more than one policy is required to indemnify for the same loss, not where the policy is required to indemnify for a loss that occurred outside its policy period.”
* The provisions include: “It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Insured prior to the inception date hereof the limit of liability hereon as stated in Item 2 of the Declarations shall be reduced by any amounts due to the Insured on account of such loss under such prior insurance.”
POLLUTION EXCLUSION
Eleventh Circuit, applying Georgia law, concludes that an absolute pollution exclusion* in a CGL policy’s “Premier Railroad Liability Coverage Form” (Form) unambiguously barred coverage for an underlying “welder’s lung” claim by a railroad employee. Rejects the insured’s argument that a “broad construction” of the pollution exclusion is at odds with a Federal Employers’ Liability Act (FELA) exception to the Form’s employer’s liability exclusion** and its “reasonable expectations” that its “premier” railroad coverage would include FELA liability. “The parties chose not to place a FELA exception in the pollution exclusion…The Policy contains no language providing that when a claim for coverage survives one exclusion, it is excused from examination under the rest. That the welder’s lung claim withstands the employer’s liability exclusion does not entitle it to avoid scrutiny under the pollution exclusion.”
* The exclusion applies to bodily injury “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” “Pollutants” means “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
** The employer’s liability exclusion bars coverage for bodily injury to an employee of the insured “arising out of and in the course of [e]mployment by the insured,” but “does not apply to…liability imposed on [the insured] by [FELA].” The Form defines the reference to FELA as regarding “injury to ‘employees’ in the course of their employment, including occupational disease.”
VOLUNTARY PAYMENTS
Colony Insurance Company v. First Specialty Insurance Corporation, 262 So.3d 1128 (Miss. 2019)
Mississippi Supreme Court, on certified question from the Fifth Circuit, determines that for purposes of the state’s voluntary payment doctrine* an insurer “does not act under compulsion if it takes the legal position that an entity purporting to be its insured is not covered by its policy but nonetheless pays a settlement demand in good faith to avoid potentially greater liability that could arise from a future coverage determination.” Here, according to the court, when the insurer-plaintiff negotiated a settlement of the underlying death case against an alleged AI, which it sought to recoup in this action from another carrier, it “did not merely dispute that its policy excluded coverage” (based on a pollution exclusion); it maintained that it did not insure the alleged AI at all. “[F]ear that [a party] might be an additional insured under its policy does not amount to compulsion,” the court said. Declines to adopt the settling insurer’s argument that a payment is not voluntary if made under compulsion to protect a party’s own interests, and notes that there was no “immediate and urgent necessity to pay” given the insurer’s pending dec action and the early stage of the underlying case.
* The opinion notes that under Mississippi precedent an insurer may not seek indemnity for a voluntary payment and that, “[i]n order to recover, the indemnitee must prove that it both paid under compulsion and that it was legally liable to the person injured.”
Note: The Fifth Circuit has since affirmed the dismissal of the settling insurer’s claims in this case to recover its underlying settlement payment. 2019 U.S. App. LEXIS 8535 (5th Cir. Mar. 21, 2019).