California appeals court holds that a binding arbitration provision in a liability policy applied to a third party whose additional insured (AI) status as respects the underlying claim was disputed by the insurer.* The court reasoned that: (1) the alleged AI was an intended third-party beneficiary and therefore bound by the policy’s requirements; and (2) because the AI had sought to benefit from the policy by tendering the claim at issue, it was “estopped from disclaiming applicable contract burdens such as the arbitration clause.” It also rejected the argument that the insurer was equitably estopped from invoking arbitration because it disputed the third party’s status as an AI in this case.
The opinion was certified for publication on January 28, 2020.
* The arbitration provision states in part: “If [the insurer] and the insured do not agree whether coverage is provided under this Coverage Part for a claim made against the insured, then either party may make a written demand for arbitration.” “Insured” is defined to include “Managers, Landlords, or Lessors of Premises,” as well as those covered “As Required by Contract.” Here, the third party claimed it was an AI “by virtue of it being a manager and a party required by contract to be covered.”
Pennsylvania appeals court, referencing the state’s “bad faith” statute (42 Pa.C.S. § 8731), rules that there is no separate cause of action against an insurer for so-called “institutional bad faith.” Here, the homeowner-insureds sought to prove “bad faith” through evidence (including internal manuals and guidelines) of their insurer’s claims handling policies and procedures. The court explained that Section 8371 requires a finding that “‘the insurer has acted in bad faith toward the insured . . . ,’ not to the world at large,” and that the insureds had failed to establish the necessary “nexus” between the insurer’s business policies and their specific claims of “bad faith.” It also found the insureds’ Unfair Trade Practices Act claim (73 Pa.C.S. §§ 201-1, et seq.) to be legally insufficient, since the statute does not apply to alleged “bad faith” claims handling.
DUTY TO DEFEND
Wisconsin Supreme Court holds, in a case of first impression, that an insurer does not breach the duty to defend if, after initially denying a claim, it promptly proceeds with one of the state’s “judicially preferred methods for determining coverage.”* Here, after disclaiming, the insurer intervened in the underlying action and moved to bifurcate trial of coverage and liability and to stay the liability claims until coverage was determined (one of the “preferred methods”). The trial court granted bifurcation, but denied a stay. The supreme court explained that, if any part of an insurer’s motion to bifurcate and stay is denied, “causing an insured to simultaneously defend the liability suit and litigate coverage against the insurer, an insurer must defend its insured in the liability lawsuit, retroactive to the date of tender, under a reservation of rights, until a court decides the coverage issue.” Since the insurer did that (i.e., defended upon denial of the stay motion and agreed to reimburse the insured’s defense costs back to tender), there was no breach and, therefore, the insured was not entitled to recover its DJ fees. Notably, the court rejected the insured’s claims that the insurer had breached the duty to defend by its “initial outright denial of coverage followed by a delayed decision to defend under a reservation of rights” and alleged delay in paying and failure to reimburse all of the insured’s underlying defense costs. It emphasized that a mere delay in payment does not mean that an insurer breached its defense obligation and that insurers are only obligated to pay reasonable attorney fees.
* The “preferred methods” identified by the court are: (1) defend under an ROR; (2) defend under an ROR and seek a DJ on coverage; (3) enter into a nonwaiver agreement; and (4) move for a bifurcated trial on coverage and liability and a stay of proceedings on liability until coverage is determined.
DUTY TO DEFEND – EXTRINSIC EVIDENCE
Texas Supreme Court, on certified question from the Fifth Circuit, opines that the state’s “eight-corners rule” to determine the duty to defend applied to preclude consideration of an insurer’s extrinsic evidence barring coverage for underlying injury claims, even though the homeowner’s policy at issue did not contain language requiring defense of “groundless, false or fraudulent” suits.* The court expressly recognized, however, that parties are free to contract around the “eight-corners rule” and that insurance policy terms that are inconsistent with the rule would control (the omission of “groundless, false or fraudulent” language here was deemed insufficient to overcome the rule). It also noted but did not pass judgment on an exception to the rule that has been applied by the Fifth Circuit, derived from Northfield Ins, Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), reh’g and reh’g en banc denied, 2004 U.S. App. LEXIS 8706 (Apr. 29, 2004). As described, that exception “allows extrinsic evidence bearing on the duty to defend when (1) ‘it is initially impossible to discern whether coverage is potentially implicated’ and (2) ‘the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.’”
Video of the argument is available here.
* The policy provides for a defense “[i]f a claim is made or a suit is brought against an insured for damages because of bodily injury. . .to which this coverage applies, caused by an occurrence.”
Massachusetts Supreme Court concludes that (1) reference to “the” (and not “an”) insured in the statutory fire insurance policy* imposes several rather than joint rights and obligations on insureds, and does not bar coverage to an “innocent insured” for arson committed by a co-insured; and (2) the amount of recovery is limited to the “innocent insured’s” insurable interest (here, 50% as a tenant in common). According to the court, the homeowner’s policy at issue contained an exclusion that redrafted the statutory fire policy language to bar recovery when any co-insured intentionally causes a loss, and thus was in conflict with the statute. It nevertheless held that the insurer was not liable for unfair claim settlement practices because its disclaimer (which relied on the exclusion) was based on a good faith interpretation of an old Massachusetts case holding that arson by a married insured also voided coverage for an “innocent co-insured” spouse.
Video of the argument is available here.
* The statutory fire policy (G. L. c. 175, § 99, Twelfth) provides in part that coverage is precluded for loss (1) “caused, directly or indirectly, by. . .neglect of the insured to use all reasonable means to save and preserve the property at and after a loss”; and/or (2) “occurring. . .while the hazard is increased by any means within the control or knowledge of the insured.”
Delaware Supreme Court holds that whether an event qualifies as a covered occurrence/accident under a homeowners policy is determined from the standpoint of the insured (and not, as in this case, from the perspective of the claimant-victim whose death following an assault was allegedly unintentional).* To conclude otherwise, the court said, would “distort the ordinary meaning of the word ‘accident’ and subvert the ‘well-established common law principle that an insured should not be allowed to profit, by way of indemnity, from the consequences of his own wrongdoing.’” Here, there was no coverage (defense or indemnity) for the injury and wrongful death claims at issue, since the assault/fight that caused the claimant’s death was not an accident from the viewpoint of the insured. The court dismissed the insured’s suggestion that the extent of injury was relevant (“death, as opposed to minor bruising”): “The Coverage Clause provides that the bodily injury – in this case, [claimant’s] death – must be caused by an accident, not that the nature or extent of the injury itself must be an accident.”**
Video of the argument is available here.
* The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results [in] bodily injury; or property damage.”
** Separately, the court held that a policy exclusion for bodily injury “which is reasonably expected or intended by any insured even if the resulting bodily injury. . .is of a different kind, quality[,] or degree than initially expected or intended” precluded coverage even if the claimant’s death could be considered to have been caused by an “accident.”