Third Circuit rules that state-law negligence claims by underlying asbestos plaintiffs against a debtor’s liability insurers are within the scope of a Bankruptcy Code §524(g) channeling injunction entered under the debtor’s confirmed reorganization plan.* Remands to the bankruptcy court to determine whether the claims may permissibly be enjoined under §524(g)(4), which applies where the alleged liability (1) is “derivative” of the debtor (i.e., in this case, whether the asbestos claimants seek to hold the insurers “directly or indirectly liable for the conduct of, claims against, or demands on” the debtor-insured); and (2) “arises by reason of” a “statutory relationship” with the debtor (here, the insurer-insured relationship). “[T]hat a third party is alleged to have engaged in some wrongdoing is not enough to render a claim against it independent if its liability depends on the debtor’s liability.” Explains that on remand the bankruptcy court is to determine whether, based on applicable legal requirements for the claims at issue, the insurers’ alleged liability is “wholly separate from the debtor’s liability or instead depends on it” and whether the insurance relationship is “legally relevant” to those claims.
* The underlying claims at issue allegedly relate to the insurers’ own conduct and breach of duty of care in providing industrial hygiene services and inspections in connection with the debtor-insured’s operations.
DEFENSE COST REIMBURSEMENT
Delaware Superior Court concludes that, under Tennessee law, an insurer may seek reimbursement of defense costs following a determination of no duty to defend, provided that it issues a timely and explicit reservation of the right to reimbursement. Relies on existing authority (Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145 (E.D. Tenn. 2007)) that an insurer’s reservation of rights letter creates a quasi-contract or a contract implied in law based on unjust enrichment. Rejects insured’s arguments against reimbursement based on the recently-adopted Restatement of the Law of Liability Insurance: “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”
Note: This is at least the second time that a court has declined to follow the Restatement given existing law. See also Catlin Specialty Ins. Co. v. J.J. White, Inc., 309 F. Supp. 3d 345, 362-63 (E.D. Pa. 2018) (addressing loss of coverage defenses for breach of duty to defend).
DUTY TO DEFEND
New Jersey Appellate Division concludes that the trial court prematurely ordered a liability insurer to defend an underlying toxic exposure suit since it was unclear, based on “anti-concurrent and anti-sequential” language of a fungi exclusion in the commercial umbrella/business owners policy at issue, whether any claims would be covered.* Reaffirms the Burd doctrine** and explains that an insurer “is not always required to provide a defense” if it believes from the evidence that a claim is not covered and that a “good-faith challenge to coverage is not a breach of an obligation to defend.” Finds that the insurer was entitled to dispute coverage based on the exclusion and that, since the insurer did not breach the duty to defend, the trial court had incorrectly applied Griggs v. Bertram, 443 A. 2d 163 (N.J. 1982) to the enforcement of the policyholder’s underlying settlement. Holds that the duty to defend should thus be converted to a duty to reimburse pending resolution of the coverage action.
* The exclusion provides, in part, that it applies “regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.” Wear cites property insurance authority for the principle that “[i]n a situation where ‘two or more identifiable causes — one a covered event and one excluded — may contribute to a single property loss,’ there is coverage absent an anti-concurrent or anti-sequential clause in the policy.” Last year, the Washington Supreme Court addressed similar issues in its controversial decision in Xia v. ProBuilders (discussed here) which applied the “efficient proximate cause” rule from first-party cases to claims under a GL policy.
** Wear explains that, under Burd v. Sussex Mut. Ins. Co., 267 A.2d 7 (N.J. 1970), an insurer may “fulfill its defense obligations by reserving rights and disputing coverage, thereby translating its obligation into one for reimbursement if it is later adjudged that the claims were within the policy covenant to pay.”
Illinois appeals court (in an unpublished opinion) holds that a GL insurer that breached the duty to defend was estopped from denying coverage for a default judgment against its insured in an underlying faulty construction work suit. Emphasizes the “minimal pleading threshold to trigger a duty to defend” and that, if the duty is triggered (which is the first step in the estoppel analysis), an insurer that intends to dispute coverage must either defend under a reservation of rights or file a declaratory judgment action before the underlying proceeding is resolved (here, the insurer did not do so until days after the default judgment). Concludes that the underlying allegations raised at least the potential for coverage and gave rise to a duty to defend even though the complaint did not specify (1) what particular property was damaged (the insured’s negligent work was said to have caused “property damages, including water damage”); or (2) when damage occurred (but did reference a “wide time frame [that] undoubtedly overlaps with the policy period”). Rejects arguments by the insurer that the application of estoppel in this context is limited to “policy defenses” and that it “creates coverage” here for property damage that may have occurred outside the policy period.
Delaware Supreme Court applying Michigan law upholds application of pro rata allocation to asbestos coverage claims under “occurrence”-based (pre-1972) excess policies, which follow form and contain “all sums” language. “While Michigan will apply all sums allocation where there is policy language leading to that result, as in [Dow Corning Co. v. Continental Cas. Co., Inc., 1999 Mich. App. LEXIS 2920 (Mich. Ct. App. Oct. 12, 1999)],* it applies pro rata allocation to policy language like that contained in the policies involved in this case.” Rejects arguments by the insured’s assignee that subsequent (post-1971) excess policies, including some that contain “occurrence”-based language, were required to respond to claims that did not “trigger” the underlying primary insurance which had shifted to claims-made coverage (and applied to occurrences reported during the policy period). Cites the trial court’s analysis that the occurrence language “must give way” to other policy provisions** and concludes that “any policy language requiring excess policies to respond to claims not triggered under the primary insurance should be clear and unambiguous, and none is present here.”
* The trial court in Motors Liquidation Co. explained that Dow “rel[ied] heavily on policy language explicitly extending coverage outside the policy period.” Dow is an unpublished, non-precedential opinion. The policy at issue in that case provided, in part, that “[i]n the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of termination of this policy, The Company will continue to protect the Insured for liability in respect of such personal injury or property damage without payment of additional premium.”
** The court notes that “no express language has been identified which would require an excess policy to respond to claims excluded from coverage under the primary policies.”
Kentucky Supreme Court rules that trespass and conversion claims against a mining company-insured for unauthorized removal of coal (from the wrong property allegedly due to a mistake) did not allege an accident/occurrence under the GL policy at issue.* Explains that the accident analysis focuses on the doctrine of fortuity which requires evaluation of the insured’s intent and control regarding its excavation and conversion of the coal: “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. . .’” Finds that since the claims are inherently intentional torts, and the insured intended to mine/sell the coal it extracted and had complete control over its employees and any subcontractors, the intentional removal and conversion was not an accident, regardless of whether the trespass was willful or innocent.
* The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Ohio appeals court rules that claims by the insured-former operator of a closed coal mine to recover the cost of building and operating a treatment plant to prevent additional acid mine drainage did not qualify as damages caused by a covered “occurrence” under the liability policies at issue. Recognizes that (1) acid mine drainage is a “common occurrence in mining” that the insured was required by permit to manage; (2) the flooding of drainage onto nearby properties after the mine closed that led regulators to demand construction of the plant was “not unexpected” and not an “occurrence;” (3) costs to prevent future harm are generally not covered by insurance; and (4) the cost of dealing with acid mine drainage (here, to build and operate the plant as legally required and not to remediate any past damage) is “part of the cost of doing business in the mining industry.” “Routine business expenses differ from damages caused by an occurrence in that business expenses are expected and damages caused by an occurrence are not,” the court said.
Fifth Circuit applying Texas law determines that a GC-insured’s settlements with subcontractors over a “construction project [that] went awry” qualified as “other insurance” and ultimately precluded recovery under an excess policy.* Rejects insured’s argument that the subcontractor indemnity agreements at issue were principally meant to fill gaps in insurance (i.e., would apply to mold remediation, an attorney’s fees award, and other non-covered damages in the case). Places the burden of proof on the insured to show that it properly allocated the subcontractor settlements between covered and non-covered damages. “Although [the insurer] agreed that [the insured] could reasonably settle its claims with the subcontractors, that does not mean [the insurer] granted. . .permission to allocate all of those settlement proceeds to noncovered damages.” Concludes that insofar as the insured cannot meet its burden (it admitted it “did not provide a detailed allocation”), “we must assume that all of the settlement proceeds went first to satisfy the covered damages under [the] policy.”
* The excess policy defined “Other Insurance” as “any type of Self-Insurance or other mechanism by which an Insured arranges for funding of legal liability for which this policy also provides coverage.”