Connecticut Supreme Court in a highly-anticipated decision addresses “unavailability” and other key coverage issues in the context of asbestos-related disease claims. Among other things, the Court affirmed and adopted rulings by an intermediate appeals court that (1) the so-called “unavailability of insurance” exception to time-on-risk pro rata allocation applies, and that damages and defense costs should not be allocated to any period where insurance was “unavailable” in the market; (2) the underlying claims are subject to a “continuous trigger;” and (3) the “sudden and accidental” and “absolute” pollution exclusions only apply to “traditional environmental pollution,” and not to claims for occupational disease caused by exposure to asbestos. In a case of first impression nationally, it also ruled that two occupational disease exclusions* preclude coverage for claims of occupational disease regardless of whether the claimant was employed by the policyholder or a third party.
* The exclusions at issue provide that (1) “this policy shall not apply . . . to personal injury (fatal or nonfatal) by occupational disease;” and (2) “[t]his policy does not apply to any liability arising out of: Occupational Disease.” The term “occupational disease” is not defined in the policies.
Washington Supreme Court in a 5-4 decision holds that employee claims adjusters are not personally liable for “bad faith” or Consumer Protection Act (CPA) claims based on alleged violations of the state’s Insurance Fair Conduct Act (IFCA) [RCW 48.01.030*] and administrative code. The court concluded that the IFCA does not create a private right of action for “bad faith” damages against adjusters:
If we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured, and the providers and representatives of both insurer and insured would face potential liability for alleged bad faith “in all insurance matters.” [T]he provision of such a broad inferred cause of action subjecting every person and entity listed in RCW 48.01.030 to liability would not be consistent with the legislature’s purpose in enacting the statue. . .
The dissent agreed as to the interpretation of the IFCA, but argued that the policyholder should still be able to pursue claims against the adjuster under the CPA and for common law “bad faith.” It acknowledged, however, that the majority of courts which have considered the issue do not recognize a common law duty of good faith on the part of a claims adjuster to the insured.
Video of the argument is available here.
* RCW 48.01.030 (Public interest) provides: “The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance.”
LATE NOTICE – PREJUDICE
California Supreme Court concludes that the state’s common law “notice-prejudice rule”* is a “fundamental public policy” in the insurance context and also generally applies to consent provisions in first-party policies. Thus, even though the environmental pollution policy in Pitzer had a choice of law provision** requiring application of New York law — which does not require an insurer to prove prejudice for late notice of claims under policies issued and delivered outside of New York — that provision could be overridden by California’s public policy of requiring insurers to prove prejudice after late notice of a claim. The court distinguished “no voluntary payment” provisions in third-party liability policies: “Because the insurer’s right to control the defense and settlement of claims is paramount in the third party context, California appellate courts have generally refused to find the notice-prejudice rule applicable to consent provisions in third party policies.”
* According to the court, the rule “generally allows insureds to proceed with their insurance policy claims even if they give their insurer late notice of a claim, provided that the late notice does not substantially prejudice the insurer.”
** “Under section 187 [of the Restatement (Second) of Conflict of Laws], the parties’ choice of law generally governs unless (1) it conflicts with a state’s fundamental public policy, and (2) that state has a materially greater interest in the determination of the issue than the contractually chosen state.”
OCCURRENCE – BUILDING CONDITIONS
Pennsylvania appeals court concludes that claims against a commercial landlord-insured for storm water damage to a tenant’s inventory due to the insured’s failure to properly maintain and repair a roof alleged an “occurrence” potentially within the scope of coverage of the CGL policy at issue.* The tenant argued that the lease required the insured to keep the roof “in serviceable condition and repair;” it advanced a single cause of action for breach of contract but also alleged the insured was negligent. The Superior Court distinguished cases like Kvaerner and Gambone saying they “do not hold that the fact that liability is based on failure to properly perform contractual duties precludes the existence of an ‘occurrence’ where the claim is for damage to property not supplied by the insured and unrelated to what the insured contracted to provide.” It found the claim for damages to the tenant’s inventory “caused by a distinct event, flooding,” comparable to Indalex. According to the opinion, this interpretation does not provide coverage for loss of the value of the insured’s contractual performance or treat it as an “occurrence” (which it indicated here was the “flooding of a building”): “Because the Underlying Action alleges damage to other property, not property that [the] Insured contracted to provide, and that the damage was caused by an accident, a flood, it includes claims for property damage caused by an ‘occurrence.’”
* The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
SETTLEMENT – CONSENT
Massachusetts Supreme Court in an auto insurance case concludes that an insurer defending under a reservation of rights is bound by the amount of a judgment arising from an insured’s unauthorized (not consented to)* settlement/assignment agreement with the underlying claimant where (1) the insurer is given notice of the agreement and an opportunity to be heard by the court before judgment enters; (2) the insurer contests the judgment; and (3) the insured, after hearing, meets his or her burden of showing that the settlement is reasonable in amount. A court examining the totality of the circumstances at a reasonableness hearing is to determine whether the amount of the prejudgment settlement/assignment is reasonable in light of “the facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial.” Concerns about collusion may be considered in evaluating reasonableness. Where an insurer challenges an agreement prior to judgment and the court finds the settlement amount is not reasonable, it may decline to enter judgment in that amount and invite the parties to renegotiate. According to the opinion, a reasonable settlement amount may not exceed the limits of the insured’s potential coverage.
* The auto policy at issue provides that “[i]f any person covered under this policy settles a claim without our consent, we will not be bound by that settlement.”
Note: The court also found that it was not an abuse of discretion for the trial judge to deny the insurer’s motions to stay or intervene in the underlying wrongful death action. It noted that the insurer was protected from prejudice since it was allowed to challenge whether the issue of the accidental nature of the claims was fairly litigated in the underlying case (the insurer argued neither side had an incentive to offer evidence that might jeopardize coverage) and was not bound by the parties’ stipulation of negligence.
Cases to Watch
DEFENSE COST REIMBURSEMENT
Ninth Circuit asks the Nevada Supreme Court to decide whether an insurer can recover underlying defense costs from its insured pursuant to a reservation of rights letter. The question certified by the Ninth Circuit is:
Is an insurer entitled to reimbursement of costs already expended in defense of its insureds where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?
The certification order notes that courts following the majority rule find it to be in the parties’ best interests to permit insurers to recoup their defense costs under a reservation of rights: “Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed” (quoting Buss v. Superior Court, 939 P.2d 766, 778 (Cal. 1997)).
The Nevada Supreme Court accepted the certified question on September 20, 2019 (Case No. 19-39310).
DUTY TO DEFEND – EXTRINSIC EVIDENCE
Fifth Circuit asks the Texas Supreme Court to decide whether under the state’s “eight corners rule” an insurer was properly allowed to rely on extrinsic evidence to prove that an exclusion applies where the policy does not include “groundless, false or fraudulent” language.* The question certified by the Fifth Circuit is:
Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634 (N.D. Tex. 2006), a permissible exception under Texas law?**
The certification opinion notes that it had been suggested in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004) that if the Texas Supreme Court were to recognize an extrinsic evidence exception, it would do so only “when it is initially impossible to discern whether coverage is potentially implicated and when 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.”
The Texas Supreme Court accepted the certified question on September 13, 2019 (Case No. 19-0802). The case is set for argument on January 8, 2020.
* The policy at issue 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.”
** According to the court in B. Hall Contracting, the “groundless, false or fraudulent” language is “assumed to exist under the eight-corners rule” and is “what causes the insurance company’s duty to defend to be broader than its duty to indemnify.” Since the policy at issue there did not contain that language, the court concluded that the rule did not apply.