DUTY TO DEFEND – EXTRINSIC EVIDENCE
Third Circuit questions, but declines to decide, whether Pennsylvania’s “four corners” rule permits an insurer under a claims-made professional liability insurance policy to terminate its defense of the insured based on extrinsic evidence unrelated to the merits of the underlying liability case. Quoting Erie Ins. Exch. v. Moore, 228 A.3d 258 (Pa. 2020), the court explained that, although Pennsylvania law provides that an insurer’s duty to defend terminates when the underlying claim against the insured “is narrowed to one patently outside the policy coverage,” what it means to so “narrow” a claim is unclear. According to the Third Circuit, it is possible to interpret that phrase without “crafting a currently unrecognized exception to Pennsylvania’s four corners rule,” such as by construing it to mean that “the plaintiff drops or the court dismisses the only claims that would trigger coverage under a policy.” Ultimately, the court found it unnecessary to predict whether Pennsylvania would adopt the insurer’s proposed exception to the “four corners” rule, reasoning that the exception would not apply because the proffered extrinsic evidence related to the merits of the underlying liability case (regarding the insured’s knowledge of a “wrongful act”).
Fifth Circuit, applying Mississippi law, holds that, despite advancing claims of negligence, an underlying complaint that accused an insured of intentionally dumping wastewater from production of animal food into public sewers did not allege an “occurrence”* under a pollution liability insurance policy. The court cited what it referred to as “well-settled law” that the existence of a duty to defend depends on the tortious conduct alleged rather than the particular legal theories being pursued. It further explained that, to decide whether there was an “accident” (i.e., “an ‘unanticipated’ action that ‘takes place without the insured’s foresight’” vs. a “deliberate act” in which the insured “‘intended the underlying action’”), it is necessary to look to the insured’s alleged actions, and not the resulting damages. Here, although the underlying complaint purported to advance negligence theories, it alleged among other things that the insured “breached its duty to the City by recklessly, wantonly, and intentionally disposing of its corrosive, low-pH wastewater into the City’s sewer system on a consistent basis. . .” “Drive-by or conclusory use[s] of the word ‘negligence,’” the court said, “[do not] transform the character of the factual allegations of intentional conduct against [the insured] into allegations of accidental conduct constituting an ‘occurrence.’” Even if the insured did not intend the resulting damage to the sewer, it is alleged to have acted deliberately and no duty to defend was found to exist.
* “Occurrence” is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
REASONABLE EXPECTATIONS DOCTRINE
Third Circuit, applying Pennsylvania law, holds that an insured under a professional liability insurance policy did not have a reasonable expectation of coverage for an underlying claim based on the insurer’s prior defense (under a reservation of rights) of a similar but unrelated lawsuit. The court explained that (1) in most cases, the language of the insurance policy is the best indicator of the parties’ reasonable expectations; and (2) an insured’s reasonable expectations may occasionally prevail over express contract terms, but only in “‘very limited circumstances’ to protect non-commercial insureds from policy terms not readily apparent and from insurer deception.” Noting that the insured did not argue the policy language was unclear or that the insurer had engaged in “deceptive tactics,” the Third Circuit found “[n]o authority” to support a duty to defend when the insured’s expectation derives from the insurer’s conduct in “another, unrelated transaction.” Nor could the prior defense have created a reasonable expectation of coverage given it was subject to a complete reservation of rights.
Second Circuit, applying English law, concludes that a reinsurer’s obligations under a facultative reinsurance policy as respects an underlying environmental settlement are co-extensive with those of the cedent-umbrella insurer and a proffered late notice defense to the reinsurance claim is unavailing. The court explained that English law embodies a “strong presumption” that a facultative reinsurance policy provides “back-to-back coverage” with the underlying policy issued by the cedent. Here, although English law would have supported proration of liability for environmental pollution claims, the reinsurer was obligated to provide co-extensive coverage for the cedent-insurer’s settlement of those claims on an “all sums” basis following California law. In addition, the Second Circuit declined to allow the reinsurer to “fully repudiate” the reinsurance policy for failure to provide timely notice of the claim, since (1) such notice is not a condition precedent to coverage under the policy and English law “rejects the defense of partial repudiation – that is, an insurer’s ability to reject a claim for coverage” in those circumstances; and (2) the facts alleged, including that notice occurred some 6 years after the cedent became aware a reinsurance claim was likely, were considered insufficient to show “serious prejudice.”
Seventh Circuit holds, under Illinois law, that a property insurer satisfied its coverage obligations for a fire loss when it delivered settlement checks to the insured’s public adjuster, which is said to have unilaterally endorsed the checks and kept the proceeds. According to the court, the public adjuster acted within the scope of its authority when it negotiated, settled and received the checks, which were issued to the insured, its mortgagee, and the public adjuster as co-payees. Relying on case law interpreting Illinois’ version of the Uniform Commercial Code, it explained that the insurer’s performance obligation regarding the fire loss was discharged when its bank accepted the checks endorsed by the public adjuster, and that the insured’s remedies were limited to suing the public adjuster or the bank. “It would be odd if a wronged insured could pursue the insurer—who had no participation in the selection of the public adjuster/agent—for the agent’s alleged wrongs. It would be stranger still if an insurer would bear a drawee bank’s possible negligence in disbursing funds without ascertaining proper endorsement by joint co-payees,” the court said.
WARLIKE ACTION EXCLUSION
New Jersey appeals court holds that a “Hostile/Warlike Action” exclusion* in commercial property insurance policies did not apply to claimed losses from the “NotPetya” malware/cyberattack which was introduced into the insured’s systems through tax software used in its Ukraine office. The court acknowledged no precedent considering the exclusion and no cases that involve a cyberattack, and interpreted it as requiring the “involvement of military action.” It also referred in part to certain cases construing “similar exclusions” which it said “demonstrate a long and common understanding that terms similar to ‘hostile or warlike action’ by a sovereign power are intended to relate to actions clearly connected to war or, at least, to a military action or objective.” Here, according to the court, the exclusion did not apply even though Russian Federation actors were thought to have orchestrated the attack: “We agree with the trial court that the plain language of the exclusion did not include a cyberattack on a non-military company that provided accounting software for commercial purposes to non-military consumers, regardless of whether the attack was instigated by a private actor or a ‘government or sovereign power.’”
* The exclusion provides “[t]his policy does not insure” against:
Loss or damage caused by hostile or warlike action in time of peace or war, including action in hindering, combating, or defending against an actual, impending, or expected attack:
(a) by any government or sovereign power (de jure or de facto) or by any authority maintaining or using military, naval, or air forces;
(b) or by military, naval, or air forces;
(c) or by an agent of such government, power, authority, or forces[.]