Top Developments – July 2018


Continental Insurance Company, et al. v. Honeywell International, Inc., et al., 2018 N.J. LEXIS 832 (N.J. June 27, 2018)

New Jersey Supreme Court concludes that (1) under Restatement §§188 and 6, New Jersey allocation law applies to claims by a New Jersey policyholder for coverage under a predecessor’s excess policies (that were issued in Michigan) in connection with its nationwide liabilities for underlying bodily injury claims alleging exposure to asbestos in the predecessor’s products; and (2) the so-called “unavailability exception” to allocation under Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994) was correctly applied on these facts, thus absolving the policyholder of responsibility for uninsured periods after coverage allegedly became unavailable in 1987 even though its predecessor continued to manufacture asbestos-containing products until 2001. Notes that New Jersey is the “longstanding domicile” of the insured (since 1983 after the subject policies were issued) and that the claims at issue only involve alleged pre-1987 first exposures. Declines on these facts to reconsider the “unavailability exception” or to “create a novel equitable exception to that exception that would retroactively deprive parties of paid-for insurance coverage due to their post-coverage-period conduct.” In a partial dissent, Justice Albin criticized the majority decision as giving a “free pass” and “windfall bailout” to companies that continue to manufacture dangerous products without insurance: “By diluting [the insured’s corporate accountability] as a self-insurer, the majority’s decision fails not only to deter corporate risk-taking at the expense of public health, but rather gives an incentive to such risk-taking because there is no full financial reckoning for continued bad behavior.”


Pending New Jersey Legislation

New Jersey State Senate passes bill no. S2144 (the “New Jersey Insurance Fair Conduct Act”) on June 7, 2018. If enacted, the bill (which is now before the state assembly under no. A3850) would establish a private statutory cause of action by a claimant* against its insurer** for (1) an “unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy”; or (2) any violation of N.J.S.A. §17:29B-4 (defining certain activities as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance). As currently drafted, upon establishing a violation of the act, the claimant/plaintiff shall be entitled to (1) actual damages caused by the violation; (2) pre-judgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and (3) treble damages. Proof that the insurer’s actions were of “such a frequency as to indicate a general business practice” is not required.

* “First-party claimant” or “claimant” is defined as an “individual, corporation, association, partnership or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.”

** “Insurer” is defined in part as any “individual, corporation, association, partnership or other legal entity which issues, executes, renews or delivers an insurance policy in this State, or which is responsible for determining claims made under the policy.”

Note: The Senate Commerce Committee Statement to S2144 (dated April 5, 2018) indicates that the bill “establishes a private cause of action for first-party claimants regarding certain unfair or unreasonable practices by their insurer.” As noted, among other things, the legislation would create a new private right of action for violations of the insurance statute (§17:29B-4).


Sentry Select Insurance Company v. Maybank Law Firm, LLC, et al., 2018 S.C. LEXIS 67 (S.C. May 30, 2018)

In a 3-2 decision, South Carolina Supreme Court rules that an insurer that has a duty to defend may bring a direct malpractice action against counsel it hired to represent an insured. Declines to specifically identify a theory of recovery but holds that the insurer (1) may recover only for the attorney’s breach of duty to the client-insured when the insurer proves that the breach is the proximate cause of its damages; and (2) must prove its case by clear and convincing evidence. Emphasizes that the cause of action is based on the attorney’s duty to the client-insured (i.e., no separate duty is owed to the insurer) and that no “intrusion into the sanctity of the attorney-client relationship” will be permitted. “If the interests of the client are the slightest bit inconsistent with the insurer’s interests, there can be no liability of the attorney to the insurer, for we will not permit the attorney’s duty to the client to be affected by the interests of the insurance company,” the court said.

Note: According to the opinion, the majority of states that have considered the issue (at least 24) allow these claims in appropriate circumstances. Two states do not. The court also declined to decide if a legal malpractice claim can be assigned to a third-party that is responsible for paying the legal fees and any judgment in the action in which the claim arose.


Sapa Extrusions, Inc. v. Liberty Mutual Insurance Company, et al., 2018 U.S. Dist. LEXIS 73162 (M.D. Pa. May 1, 2018)

Pennsylvania federal court holds that underlying breach of contract, breach of warranty, and fraud claims against a window manufacturer-insured were not a covered “occurrence” triggering a duty to defend or indemnify under the liability policies at issue.* The underlying complaint primarily alleged that the insured’s metal window fittings/extrusions failed to conform to agreed-upon standards (and, as a result, began to bubble and crack, causing its window manufacturer customer to undertake an extensive, costly repair and replacement project). The insured alleged that the bubbling and crackling was an active malfunction that resulted in property damage to the interior of homes due to water intrusion. Relying on Kvaerner Metals v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) and Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., Inc., 941 A.2d 706 (Pa. Super. 2007), the court rejected the insured’s argument, holding that “[c]ontractual claims of poor workmanship [do] not constitute the active malfunction needed to establish coverage.” In distinguishing Indalex Inc. v. National Union Fire Ins. Co., 83 A.3d 418 (Pa. Super. 2013), the court reasoned: “Since the failed window extrusions were initially caused by the [insured’s] faulty workmanship, the mere fact that additional damages subsequently flowed from the costly and disruptive repair process does not suddenly transform this non-occurrence into an occurrence.” The court also dismissed any suggestion that the policies’ “products-completed operations” and “insured contract” provisions could grant coverage independent of the “occurrence” requirement, which is “paramount” and “illuminates the remainder of the [policy] language.”

* The policies define “occurrence” as “an accident, including continuous or repeated exposure to. . .conditions” or as “injurious exposure, including continuous or repeated exposure to conditions.”

Note: White and Williams represents Gerling-Konzern, one of the insurers that obtained summary judgment in the case. The insured filed a notice of appeal on May 30, 2018.

Liberty Surplus Insurance Corporation, et al. v. Ledesma & Meyer Construction Company, Inc., et al., 2018 Cal. LEXIS 4063 (Cal. June 4, 2018)

In a highly-anticipated decision, California Supreme Court rules in the context of the duty to defend that claims against an employer-insured for negligent hiring, retention and supervision of an employee who intentionally injures a third-party (which in this case involved alleged molestation) can be considered “accidental” and therefore an “occurrence” under a GL policy.* Explains that the term accident refers to an “unexpected, unforeseen, or undesigned happening or consequence from either a known or an unknown cause” and is “more comprehensive than the term ‘negligence’ and this includes negligence.” According to the opinion, (1) coverage turns on whether the insured’s liability resulted under tort law from covered causes (i.e., the focus of the analysis is on the alleged negligence of the employer-insured); and (2) the molestation by the employee may be deemed an “unexpected consequence” of the insured’s allegedly negligent employment practices which were “independently tortious acts.” Concludes that it would be inconsistent with California law for employer-insureds to be left without coverage for negligent hiring, retention or supervision claims whenever an employee’s conduct is deliberate: “Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence.”

The policy at issue defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Note: In Talley v. Mustafa, et al., 2018 Wisc. LEXIS 224 (Wis. May 11, 2018), the Wisconsin Supreme Court recently held that negligent supervision claims against an employer-insured based solely on an employee’s intentional and unlawful act of assault and battery (i.e., where there are no facts in the complaint (or in any extrinsic evidence) alleging any specific separate acts of negligence by the employer that accidentally caused the injuries claimed) did not qualify as a covered “occurrence” under a business-owners liability policy. The opinion emphasizes that in determining whether an occurrence took place, courts must focus on the incident or injury that gives rise to the claim and not the plaintiff’s theory of liability or “attempts at creative pleading”: “Merely inserting negligence into a complaint that alleges only injuries caused by an intentional assault and battery will not create an occurrence (defined as an accident) under an insurance policy.”

Martin/Elias Properties, LLC v. Acuity, 2018 Ky. LEXIS 188 (Ky. Apr. 26, 2018)

Kentucky Supreme Court holds that faulty workmanship on the basement and foundation of a townhouse (the only areas where the insured was contracted to work) that resulted in extensive damage to the entire structure was not an accident/occurrence under the contractor-insured’s GL policy.* Clarifies that the accident analysis focuses on the doctrine of fortuity which encompasses intent (i.e., whether the insured intended the event to occur) and control (i.e., whether it was a “chance event” beyond the insured’s control): “If the insured did not intend the event or result to occur, and the event or result that occurred was a chance event beyond the control of the insured, then CGL coverage covering accidents will apply to the benefit of the insured.” According to the court, for an event to be fortuitous and therefore an accident, it “must be ‘beyond the power of any human being to bring. . .to pass, [or is]. . . within the control of third persons. . .’” Concludes that since the insured had complete control over the work and fully intended his actions on the project, it cannot be said that the resulting damage throughout the property (including areas where the insured did not work) from his poor workmanship in failing to adequately support the foundation before excavating was fortuitous/an accident.

* The policy at issue defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

View Home Owners Association v. Burlington Insurance Company, 2018 Mo. App. LEXIS 428 (Mo. Ct. App. May 1, 2018)

Missouri appeals court rules that claims by a condo association against the building owner for various defects and poor workmanship due to its negligence in overseeing renovations that redeveloped the property into condominiums did not allege a covered “occurrence” under the owner’s GL policy.* Rejects arguments by the association (as assignee of the owner-insured) that the underlying breach of contract and negligence claims gave rise to a duty to defend as effectively seeking to extend the scope of coverage beyond the generally accepted parameters of traditional GL policies (i.e., would improperly convert the policy into a performance bond or general warranty of the quality of the renovation work). Focuses on the owner-insured’s control and management over the property during renovations including its ability to resolve construction deficiencies and remediate substandard work. “Because the ability to resolve these construction deficiencies was within [the owner’s] control and management, its failure to address them cannot be described as an ‘undesigned or unexpected event,’ and thus there was no ‘accident,’” the court said.

* The policy at issue defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Note: The condo association filed an appeal on June 12, 2018.


Lamorak Insurance Company v. Kone, Inc., et al., 2018 Ill. App. LEXIS 279 (Ill. App. Ct. May 15, 2018)

Illinois appeals court holds in asbestos coverage action that certain liability policies issued subject to a self-insured retention (SIR) are primary (and not excess) even though they contain language (1) making them “excess insurance, applicable excess of the retained limit;” and (2) indicating that “[i]n consideration of the reduced premium for which this policy is issued, it is agreed that the company’s obligation to pay. . .is in excess of the retained limit.”* Rejects the argument that any policy that refers to a SIR should be treated as excess insurance. Finds that the policies exhibit some “notable characteristics of primary insurance” in that they (1) require the insured to notify the insurer of every “occurrence” regardless of the amount of potential liability; (2) impose a duty on the insurer to defend if liability appears likely to exceed the SIR; (3) do not give the insured discretion to decide if liability will likely exceed the SIR; and (4) had premiums that were much higher than the cost of concurrent umbrella coverage that the insurer also issued to the insured (and which “covered much greater dollar amounts of liability for a wider group of risks”). Looks to extrinsic materials including charts produced by the insurer that identify the coverage as “Primary” to resolve any ambiguity introduced by the policies’ excess language.

* The policies at issue follow several years of primary insurance written by the insurer subject to a deductible and use the same form except as modified by the SIR endorsement.