Wisconsin Court of Appeals (in a divided decision) holds that a “post-loss” assignment of rights under a liability insurance policy is valid despite lack of insurer consent. The majority believed an insurer’s consent to an assignment after “loss” occurs is not required on the basis that the assignment does not increase the insurer’s risk. It referred to Wisconsin’s “longstanding rule” that an anti-assignment clause in an occurrence-based policy is “unenforceable” when the assignment follows the “loss,” which, in this case, was the underlying claimant’s exposure to asbestos. Previously, the court (in Red Arrow Prods. Co. v. Emp’rs Ins., 607 N.W.2d 294 (Wisc. Ct. App. 2000)) rejected claims by a successor under a predecessor’s policies, but the majority distinguished that case as involving an alleged transfer of rights by operation of law (a sale of assets and liabilities) rather than a purported assignment.
The dissenting judge disagreed that Red Arrow was inapposite, explaining that the decision addressed the issue of transfer by operation of law after concluding that the sale agreement at issue did not reference the predecessor’s insurance policies. “We are bound by Red Arrow unless or until our supreme court decides otherwise,” the dissent said.
The insurer petitioned to appeal to the Wisconsin Supreme Court on August 8.
Sixth Circuit holds, under Ohio law, that attorney’s fees awarded against a law firm-insured for allegedly pursuing frivolous claims under the Individuals with Disabilities Education Act (IDEA) are a “sanction” and, therefore, not covered “damages”* under a professional liability policy. Although the policy did not define “sanction,” the “average lawyer” would, in the court’s view, understand it to mean a “penalty or coercive measure that results from failure to comply with a law, rule, or order”. It concluded (1) because the fees were assessed against the law firm under the IDEA’s fee-shifting provision on the grounds that its claims were “frivolous” or for an “improper purpose,” the fees met the ordinary definition of a “sanction” and, therefore, were not “damages” under the policy; and (2) “a court can naturally describe a monetary award as a ‘sanction’ even if it serves a ‘compensatory purpose’” (i.e., a sanction need not be punitive).
The court denied rehearing on July 28.
* The policy states that “damages” do not include (among other things) “civil or criminal fines [or] sanctions.”
Massachusetts Supreme Judicial Court (SJC) holds that attorney’s fees awarded under M.G.L. Chapter 93A (Massachusetts’ Consumer Protection Act), § 9(4)* are not covered “damages because of ‘bodily injury’” or “costs taxed against the insured” under a liability insurance policy. The SJC concluded that, because damages and attorney’s fees are “decoupled and treated differently” under § 9(4), “[c]ourts may . . . award both damages and attorney’s fees, but that does not mean they award attorney’s fees as damages.” It found this distinction was warranted because Chapter 93A was designed to “deter misconduct and recognize the public interest in bringing misconduct to light” rather than to compensate claimants for damages because of bodily injury. The court further reasoned that “costs,” as applied to court proceedings, ordinarily means only legal or taxable costs, and does not include attorney’s fees.
* Section 9(4) provides that, if the court finds the petitioner has been injured by “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce,” the petitioner shall, “in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorney’s fees and costs incurred in connection with said action.”
DUTY TO DEFEND – EXTRINSIC EVIDENCE
New Jersey Supreme Court holds that facts outside the “four corners” of an underlying complaint are relevant to determining whether an exclusion precludes a duty to defend under a liability policy where trial in the underlying action will not resolve a factual issue bearing on coverage. Referring to its seminal decision in Burd v. Sussex Mut. Ins. Co., 267 A.2d 7 (N.J. 1970), the court explained that, “if coverage will not be an issue resolved during trial, it may not be sufficient to look only at the complaint because the duty to defend depends on facts not relevant to the causes of action in the complaint.” Here, the court found it was appropriate to consider facts from discovery concerning the location of the underlying incident because, although the location was relevant to the application of a policy exclusion, it would not be an issue tried in the case. The decision also reviewed the interpretation of certain exclusionary language (e.g., “arising out of”) and whether a casual connection is required between the excluded acts and the injury.
LIMITS OF LIABILITY
Second Circuit, applying California law, holds that full (rather than prorated) aggregate limits are available for liability insurance policies’ “stub” periods (i.e., multi-day extensions of the initial policy periods), and an excess insurer was not obligated to provide insolvency “drop down” coverage. According to the court, because the policy language (assigning limits to “each annual period” or “each policy year”) could reasonably be interpreted to extend the aggregates into the stub periods, or to apply a distinct annual aggregate to those periods, it was appropriate to resolve the “ambiguity” in favor of the insured’s “objectively reasonable expectations.” On the “drop down” issue, the Second Circuit concluded that the excess policy (1) which attached over limits reduced or exhausted “solely by reason of losses paid thereunder,” contemplated underlying exhaustion only by payment, and not upon the primary insurer’s insolvency; and (2) did not, by virtue of its “liberalization clause,”* which the court said “concerns only the scope of coverage,” follow form to the underlying umbrella layer that purportedly provided for drop-down coverage where insurance was not “collectible”.
* The policy’s “liberalization clause” provides that, “in the event of a claim or loss for which insurance is provided by the policies shown in the schedule of underlying insurance, the excess of which would be insured hereunder except for the terms and conditions of this policy which are not inconsistent with the underlying insurance, this policy shall be amended to follow the terms and conditions [of] the applicable underlying insurance in respect to such claim or loss.”
The court denied rehearing on July 22.
California appeals court holds that an insured’s intentional grading and clearing of a neighboring property, based on the mistaken belief it was the insured’s own land, was not a covered “occurrence” under the liability coverage part of a homeowners policy. Finding no duty to defend, the court reasoned that the acts were neither unexpected nor unintended – and, thus, not an accident within the meaning of the policy’s “occurrence” definition – and the insured’s mistake concerning the property’s boundaries was irrelevant to determining whether the acts were intentional. It also rejected the insured’s argument that a cause of action for negligence in the underlying complaint alleged an “occurrence,” explaining that the duty to defend is determined from “the alleged facts or known extrinsic facts,” and not from “the labels given” to a cause of action.
The California Supreme Court denied review on July 27.
Cases to Watch
Ken’s Foods, Inc. v. Steadfast Ins. Co., No. SJC-13303 (Mass.)
Massachusetts Supreme Judicial Court (SJC), on certified question, to decide whether a liability insurer is obligated to pay non-covered costs that an insured allegedly incurred to prevent an “imminent covered loss.” The question certified by the First Circuit is:
To what extent, if any, does Massachusetts recognize a common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss, even if those costs are not covered by the policy?
The costs at issue relate to the insured’s purported effort to prevent further discharges of wastewater from its processing facilities into public waterways. In finding certification appropriate, the First Circuit stated that “whether Massachusetts common law recognizes an extra-contractual duty for insurers raises important questions concerning a significant, regulated industry.”
In its opening brief to the SJC, filed July 25, appellant Ken’s Foods argues, in part, that “insureds should not be penalized in their efforts to mitigate losses and insurers should not be unjustly enriched if they end up avoiding paying larger coverage amounts based upon the mitigation efforts of the insureds.” Steadfast filed its opposition brief on August 25. In it, Steadfast argues, among other things, that “[c]ourts have long recognized the importance of allowing insurers to assess and calculate risk, enter into insurance policies and set appropriate premiums that accurately reflect that risk, which are the most fundamental pillars of the insurance industry.” Thus, Steadfast emphasizes:
If this Court were to declare that Massachusetts courts may impose costs on an insurance company that are undisputedly not covered by an insurance policy, it would undermine insurers’ ability to accurately assess risk, craft policies, and price premiums. Such a precedent would create uncertainty in the industry and would result in increased premiums in the Commonwealth and significant litigation regarding the parameters of such a new common-law right of recovery.
The SJC is scheduled to hear argument this November.