Archive for July, 2012

No Duty to Defend Wrongful Death Action Where Death Was Classified as a Homicide

Tuesday, July 31st, 2012

In Galvani v. Tokio Marine and Nichido Fire Ins. Co., Ltd., 2012 WL 2568220 (N.D. Cal. July 2, 2012), the district court entered summary judgment for a homeowner’s insurer on the grounds that it had no duty to defend an underlying wrongful death action arising from a homicide.

In 1982, plaintiff’s wife was found floating in the San Francisco Bay.  Her body was in a sleeping bag, which had been tied with a rope to a cinder block. The wife had suffered a broken vertebra and skull fracture. The coroner concluded the cause of death was asphyxiation and the police classified the death as homicide. Criminal charges against the plaintiff were dropped and the case remains unresolved.  Plaintiff’s daughter was five years old at the time of her mother’s death, and in 2010, she sued her father for wrongful death.

At the time of the wife’s death, plaintiff was the named beneficiary on a homeowner’s policy issued by Tokio Marine. Plaintiff tendered the defense of the lawsuit to Tokio Marine, but Tokio Marine denied coverage, claiming that the policy did not provide coverage for the defense of lawsuits where the alleged bodily injury or damages stemmed from intentional acts. Specifically, Tokio Marine concluded that its duty to defend only extended to suits seeking damages for damage or bodily injury “caused by an occurrence,” and because “occurrence” was defined in the policy as “an accident”, “occurrence” did not include intentional acts. Plaintiff filed an action against Tokio Marine seeking declaratory judgment as to the scope of the duty to defend.  Both parties filed motions for summary judgment on this issue.

The main dispute was whether the “caused by an occurrence” policy language applied only to Tokio Marine’s duty to indemnify, or to both its duty to indemnify and duty to defend.  In arguing that it should only apply to Tokio Marine’s duty to indemnify, plaintiff pointed to the policy language, which required indemnification of “all sums which the Insured shall become legally obligated to pay as damages because of bodily injury or property damages, to which this Insurance applies, caused by an occurrence.” The duty to defend provision, on the other hand, did not include the “caused by an occurrence” language. Instead, Tokio Marine’s duty to defend extended to “any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent.” Plaintiff argued that the omission of “occurrence” showed an intent to broaden Tokio Marine’s duty to defend. Tokio Marine argued the placement of the word “such” before “bodily injury or property damage” served to reference back to the “bodily injury or property damages” mentioned in the first sentence (the duty to indemnify), which are limited to those “caused by an occurrence”.

The court agreed with Tokio Marine’s analysis and found that the word “such” served to reference the “caused by an occurrence” requirement into the duty to defend. The court stated that to hold otherwise would be to read the word “such” out of the policy.

Court Hands Insurers Win in Food Fight Over E. Coli Claims

Monday, July 30th, 2012

In Republic Underwriters Ins. Co. v. Moore, 2012 WL 2948177 (10th Cir. (Okla.) July 20, 2012), the U.S. Court of Appeals for the 10th Circuit, applying Oklahoma law, sided with a restaurant’s insurers and held that multiple food poisoning claims arose out a single occurrence.

The insurance dispute concerned coverage for an E. coli outbreak that killed one person and infected 341 others.  Country Cottage Restaurant prepared and served the suspect E. coli-contaminated food at its restaurant location and at a catered church event.

Country Cottage had primary commercial general liability coverage with Republic Underwriters, with limits of $1 million per occurrence and $2 million in the aggregate and a separate $2 million aggregate limit applicable to products/completed operations.  Country Cottage also had an excess policy with Southern Insurance Company with limits of $2 million per occurrence and in the aggregate.  Both insurers filed an interpleader action and argued that all of the injuries arose out of a single occurrence  and, as such, only $3 million in insurance proceeds were available for the losses (i.e., per occurrence limits of $1 million under Republic’s policy and $2 million under Southern’s policy).  Both policies defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

On cross-motions for summary judgment, the insurers argued that there was only a single occurrence because Country Cottage’s preparation, handling or storage of contaminated food caused the E. coli outbreak during a discrete time period.  The individual claimants, on the other hand, asserted that because multiple persons were injured while consuming different food prepared by different food handlers at different times and at two different locations, there were multiple occurrences.

The district court agreed with the claimants and found that there were two occurrences stemming from the two separate locations where the food was prepared and served. Therefore, the district court held that the policies’ aggregate limits applied rather than the per occurrence limits, and granted summary judgment for the insurers and against the claimants.

The 10th Circuit, however, reversed, finding that there was only one occurrence.  The court cited to its decision in Business Interiors, Inc. v. Aetna Casualty & Surety Co., 751 F.2d 361 (10th Cir. 1984), which held that “an occurrence is determined by the cause or causes of the resulting injury.”  In Business Interiors, a dishonest employee forged and altered 40 separate checks.  The 10th Circuit concluded that the single employee’s “continued dishonesty” caused the insured’s loss and did not amount to multiple independent acts.  Applying the same reasoning, the court concluded that Country Cottage’s “ongoing preparation of contaminated food” caused all of the injuries and thus constituted a single occurrence.  The court found it irrelevant that the food was prepared and served at multiple locations because all the injuries traced back to the ongoing preparation, handling and storage of contaminated food.  Accordingly, the court reversed the summary judgment for the insurers and remanded the case to the district court with instructions that summary judgment be entered for the claimants.

Federal Court Denies Additional Insured’s Request to Stay Coverage Action Arising From “Moonlight Fire” Claims

Monday, July 30th, 2012

When a declaratory judgment action regarding an insurance coverage dispute proceeds while there is a pending underlying action, California insureds frequently move to stay the coverage action, pursuant to Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993).  Applying Montrose, a California federal court recently refused to stay a coverage action brought by an additional insured against its insurer for coverage for underlying lawsuits arising out of a large forest fire, in Sierra Pacific Industries v. American States Insurance Company, 2012 U.S. Dist. LEXIS 87012 (E.D. Cal. June 21, 2012).

In September 2007, a large forest fire, dubbed the “Moonlight Fire,” broke out in Plumas County, California, allegedly caused by Sierra Pacific Industries (Sierra) and its subcontractor’s logging operations.  Various parties brought seven lawsuits against Sierra, with aggregate claims of $1 billion.  Subsequently, Sierra tendered its defense of the lawsuits to American States Insurance Company (American States), per its subcontractor’s commercial general liability policy, which named Sierra as an additional insured.

When American States failed to respond to the tender of defense, Sierra hired its own counsel and sued the insurer in the U.S. District Court for the Eastern District of California, seeking declaratory relief and alleging breach of contract and bad faith.  Subsequently, Sierra moved to stay its declaratory judgment action for six months. 

Relying on Montrose, Sierra argued that the issues in the coverage action overlapped with the issues in the underlying action, and that it was “compelled to fight a two front war on the eve of trial in the underlying action which jeopardizes the defense of the underlying action.”  Sierra further argued that the interests of justice favored a stay.

The court disagreed, finding that none of the Montrose factors favored a stay of the coverage action.  In rejecting Sierra’s motion to stay, the court held that Sierra failed to meet its burden of showing the necessity of a stay.  In this regard, the court noted that Sierra did not show how alternatives to a stay were insufficient to protect it from the potential prejudice in simultaneously preparing for trial in the underlying action.  Significantly, the court also noted that Sierra was the party that initiated the declaratory judgment action.

The court reasoned that staying the coverage would impose an undue hardship on the insurer.  Because American States had not reserved its rights in connection with defending Sierra, a stay would “place on hold” its coverage defenses asserted in the coverage action.  The court further noted that American States’ potential prejudice was great, given the massive defense costs involved in defending the underlying suits.


Eighth Circuit and Supreme Judicial Court of Massachusetts Confirm That Endorsements Should be Limited to Their Express Terms

Monday, July 23rd, 2012

Within the last week, the U.S. Court of Appeals for the Eighth Circuit and the Supreme Judicial Court of Massachusetts issued opinions analyzing the effect of policy endorsements that only amended part of the policies to which they were added.  Both courts ruled, correctly, that the scope of policy endorsements should be limited to what their terms actually provide.

The Eighth Circuit addressed the issue in Grinnell Mutual Reinsurance Co. v. Schweiger, — F.3d —, 2012 WL 2874028 (8th Cir. July 16, 2012).  There, Schweiger Livestock (“Schweiger”) boarded market cattle at a feedlot operated by Voss.  Voss improperly mixed the cattle feed, and hundreds of Schweiger’s cattle either died or became malnourished.  Grinnell insured Voss under a liability policy that precluded coverage for liability arising out of both the care and raising of livestock (the “Livestock Exclusion”), and damage to property in Voss’ care, custody, or control (the “Care, Custody, or Control Exclusion”).  An endorsement to the policy reinstated coverage for liability arising out of the care and raising of livestock, but noted that “[a]ll other terms and provisions of the policy apply.”

Schweiger  sued Voss, and they entered into an agreement under which Voss consented to a judgment entered against him in exchange for Schweiger agreeing to both release Voss from personal liability and seek coverage from Grinnell.  Grinnell then sued Schweiger and Voss seeking a declaration that its policy did not cover the loss of Schweiger’s cattle.  On summary judgment, Grinnell argued that that the Care, Custody, or Control Exclusion precluded coverage; Schweiger and Voss, on the other hand, argued that the endorsement either superseded that exclusion, or created an ambiguity that should be construed against Grinnell.  The district court agreed with Schweiger and Voss that the endorsement superseded the Care, Custody, or Control Exclusion, but the Eighth Circuit reversed.  Specifically, after noting that the policy was not ambiguous, the court reasoned that “the endorsement expressly limits its application to [the Livestock Exclusion] and thus does not alter that portion of the policy which excludes coverage for property within the insured’s care, custody, or control.”

The Supreme Judicial Court of Massachusetts reached the same conclusion interpreting an endorsement to a first-party property policy.  In Surabian Realty Co., Inc. v. NGM Insurance Co., — N.E.2d —, 2012 WL 2819398 (Mass. July 12, 2012), the first floor of a three-story office building owned by Surabian sustained flood damage after a heavy rainfall as a result of a clogged drain in the parking lot surrounding the building.  Surabian’s policy, issued by NGM, precluded coverage for damage caused by surface water (the “Surface Water Exclusion”) and “water that backs up or overflows from a sewer, drain or sump.”  An endorsement to the policy reinstated coverage for loss or damage caused by water that backs up or overflows from a sewer, drain, or sump, but was silent as to its effect on other policy provisions.  The policy also contained an anti-concurrent cause provision stating that loss or damage caused by any excluded peril was “excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

NGM denied Surabian’s claim, and Surabian sued.  The parties cross-moved for summary judgment, and agreed for purposes of the motions that the flood damage was caused by a combination of water that backed up after entering the parking lot drain, and water that never entered the drain because of the blockage.  Because rain that collects on paved surfaces qualifies as surface water under Massachusetts law, the trial court granted summary judgment to NGM based on the anti-concurrent cause provision.  Surabian appealed, arguing that the endorsement either covered all damage caused by water that backed up from the drain, or created a conflict with the Surface Water Exclusion that rendered the policy ambiguous.  Concluding that the anti-concurrent cause provision unambiguously precluded coverage, the Supreme Judicial Court wrote that “by situating the new coverage within the structure of the original policy, NGM clarified that all other provisions of the original policy continued to apply, including the [Surface Water Exclusion] and the anticoncurrent cause provision.”

Wisconsin Court of Appeals Clarifies Insurers’ Duty to Defend

Monday, July 16th, 2012

By Eryk Gettell

Addressing a matter of first impression, the Wisconsin Court of Appeals held that an insurer under Wisconsin law does not have a continuing duty to defend its insured after the only potentially covered claim was settled and dismissed, leaving only uncovered claims.

Society Insurance v. Bodart, No. 2010AP2442, 2012 WL 2036037 (Wis. Ct. App. June 7, 2012), involved an insured, Rich Bodart dba Bodart Landscaping & Lawn Service, who had been sued in a complaint alleging five causes of action.  When Society Insurance commenced a declaratory relief action against Bodart, the circuit court determined that one cause of action was potentially covered, thereby triggering the duty to defend.  Society Insurance defended Bodart, but then settled three of the five causes of action, including the potentially covered cause of action. 

After the settled claims were dismissed, Society Insurance advised Bodart that it intended to withdraw its defense with respect to the two remaining uncovered claims.  Bodart filed a motion for contempt against Society Insurance on the ground that Society’s unilateral decision to withdraw its defense violated the circuit court’s duty-to-defend order.  The circuit court denied Bodart’s motion because it found that Society Insurance no longer had a duty to defend and Bodart appealed.

The Court of Appeals focused on the policy provision that stated, the insurer “will have no duty to defend the insured against any ‘suit’ … to which this insurance does not apply.”  The court found that a reasonable insured would understand this language to mean that Society Insurance has no duty to defend after it becomes clear that the suit does not involve any claim that is even arguably covered.  Relying on persuasive authority from the Seventh Circuit, Lockwood Int’l B.V. v. Volm Bag Co., 273 F.3d 741, 744 (7th Cir. 2001), and the Minnesota Supreme Court, Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411, 417 (Minn. 1997), the court adopted the “general rule” that an insurer’s duty to defend ceases after the potentially covered claims are settled and dismissed.  The Bodart court further noted that this general rule is consistent with Wisconsin’s well-established, duty to defend principles.

The Bodart court observed two exceptions to the rule that an insurer’s duty to defend terminates when potentially covered claims are settled and dismissed.  First, an insurer cannot withdraw from the action if such withdrawal would prejudice the insured’s defense of the remaining claims.  Second, the insurer’s settlement of the covered claims must not be done in bad faith.

Coal Mine Operator Required to Pay Additional Workers’ Compensation Premiums After Failing to Comply With Black Lung Obligations

Tuesday, July 10th, 2012

The Black Lung Benefits Act (BLBA), 30 U.S.C. §§ 801-962, requires coal mine operators to pay compensation benefits, medical benefits, and other benefits to miners suffering disabling occupational lung diseases. In fulfilling their statutory duties to provide these benefits, operators must either self-insure or obtain insurance from a person or company authorized to insure workers’ compensation. Travelers Insurance Company v. Blackstone Mining Company, Inc., Nos. 2007-CA-001610-MR and 2009-CS-000015-DG, 2012 WL 2603623 (Ky. Ct. App. July 6, 2012), addressed the effect of an operator’s partial compliance with the BLBA on a workers’ compensation insurer’s right to additional premium.

In Travelers, Blackstone Mining purchased workers’ compensation insurance from Travelers. Twenty-three of Blackstone Mining’s employees rejected workers’ compensation coverage (as permitted under Kentucky law), and Blackstone Mining provided them with disability insurance. Travelers did not believe that the employees’ rejection of workers’ compensation benefits complied with Kentucky law, and instead believed that it was liable to insure those employees for workers’ compensation while the workers’ compensation program was in effect. Accordingly, Travelers sued Blackstone Mining for unpaid premiums. The trial court concluded that the disability policy covered black lung in accordance with the BLBA, and that Blackstone Mining had overpaid Travelers for both state workers’ compensation premiums and black lung premiums. Modifying that judgment, the Kentucky Court of Appeals wrote:

In this case, Blackstone Mining ostensibly procured the disability policy to insure payment of black lung benefits commensurate with the mandates of the BLBA. However, the disability policy clearly did not provide for payment of medical benefits to the miners. Yet, medical benefits are integral benefits provided under the BLBA. And, the disability policy did not contain a provision to pay benefits corresponding to those benefits available under the BLBA. A review of the disability policy reveals that it was intended to merely provide replacement income for disabled miners rather than provide those miners the full panoply of benefits found under the BLBA.

In short, we conclude that the disability policy did not provide benefits commensurate with the benefits provided under the BLBA. Effectively, Travelers continued to provide black lung coverage under the BLBA for the twenty-three miners who rejected state workers’ compensation coverage while employed by Blackstone Mining. Thus, we hold that Blackstone Mining owes Travelers additional premiums in the amount of $42,279.99, and that the circuit court erred by rendering judgment in favor of Blackstone Mining upon this issue….

Travelers demonstrates the importance – in any type of insurance policy – of exercising due diligence in auditing programs subject to premium adjustments post-expiration. By closely scrutinizing Blackstone Mining’s employment records, Travelers learned that it was entitled to additional premium under the terms of its insurance policy.

Fifth Circuit Rejects Expansive Reading of Texas Law Regarding an Insured’s Right to Independent Counsel

Monday, July 9th, 2012

Under Texas law, “when the facts to be adjudicated in [a] liability lawsuit are the same facts upon which coverage depends, the conflict of interest will prevent the insurer from conducting the defense.” N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004). In Unauthorized Practice of Law v. American Home Assurance Company, the Texas Supreme Court observed that “the most common conflict between an insurer and an insured” is whether a claim falls within the policy, and that “coverage issues may … depend on facts developed in the litigation.” 261 S.W.3d 24, 40 (Tex. 2008). Does Unauthorized Practice suggest that an insured is entitled to independent counsel any time an insurer issues a reservation of rights letter? Not according to the U.S. Court of Appeal for the Fifth Circuit.

In Downhole Navigator, L.L.C. v. Nautilus Insurance Company, — F.3d —, 2012 WL 2477846 (5th Cir. June 27, 2012), Downhole was hired by an oil well operator (“Sedona”) to help redirect an oil well into a reservoir. Downhole negligently executed the redirection plan, and Sedona sued Downhole. Downhole tendered the lawsuit to Nautilus, which had issued Downhole a one-year commercial general liability insurance policy. Nautilus offered to defend Downhole subject to a reservation of rights, but Downhole rejected Nautilus’ defense offer, claiming that Nautilus’ offer to defend under a reservation of rights “created a material conflict with respect to the selection of counsel.” After Nautilus refused to reimburse Downhole for defense costs incurred by its independent counsel, Downhole filed an action against Nautilus in the U.S. District Court for the Southern District of Texas seeking a declaration that Nautilus was obligated to reimburse Downhole for those costs.

The magistrate judge determined that Nautilus did not have a duty to reimburse Downhole’s independent counsel fees, and Downhole appealed. On appeal, Downhole argued that the Texas Supreme Court’s statement in Unauthorized Practice that “coverage issues may … depend on facts developed in [underlying] litigation” meant that a conflict of interest arises any time facts that could be developed in an underlying litigation are the same facts upon which coverage depends. Specifically, Downhole claimed that if an insurer defended its insured under a reservation of rights, the insurer-appointed counsel could develop facts in the underlying litigation to bolster the insurer’s coverage defenses. Rejecting Downhole’s “strained reading” of this “[o]ne inconsequential line of dicta” in Unauthorized Practice, the Fifth Circuit held that Davalos permitted Nautilus to defend Downhole under a reservation of rights, writing:

Applying the principle from Davalos to this case, we agree … that “the facts to be adjudicated” in the underlying Sedona litigation are not the same “facts upon which coverage depends.” The underlying Sedona litigation concerns whether Downhole negligently performed its deviation work. If the insurance policy between Downhole and Nautilus excluded coverage for Downhole’s negligent conduct, and Nautilus accordingly reserved its right to disclaim coverage based on whether Downhole had negligently performed its work, then the “facts to be adjudicated” in the [underlying] litigation would be equivalent to the “facts upon which coverage depends.” But no such equivalency exists, as Downhole’s negligence is not a coverage issue between Downhole and Nautilus.


… Neither in Unauthorized Practice nor elsewhere has the Texas Supreme Court ever held that a conflict arises any time the attorney offered by the insurer could be tempted – in violation of his duty of loyalty to the insured – to develop facts in the underlying lawsuit that could be used to exclude coverage. The mere observation that coverage issues may turn on facts developed in the litigation does not necessarily entail that a conflict of interest will arise if the facts that could be developed in the underlying litigation are the same facts upon which coverage depends. Proceeding from the former observation to the latter conclusion requires an illogical leap.

If Downhole had been correct in arguing that the mere fact that coverage issues may turn on facts developed in an underlying litigation required an insurer to retain independent counsel on behalf of the insured, it would have functionally eviscerated an insurer’s rights to conduct its insured’s defense of an underlying action. Through its opinion in Downhole, the Fifth Circuit correctly limited the need to retain independent counsel to situations where liability and coverage issues so overlap that deciding liability issues practically resolved coverage issues. Defending insurers, therefore, need not fear having to permit an insured to retain independent counsel every time an insurer offers to defend the insured subject to a reservation of rights, but should be mindful of the possibility of a conflict of interest.

California Court Rules on Work Product Protection for Witness Statements

Friday, July 6th, 2012

By Alex E. Potente, Sedgwick San Francisco

In Coito v. Super Ct. (Cal. 2012), – Cal. 4th –, –  P.3d –, 2012 WL 2369186, 2012 Daily3 Journal D.A.R. 871, the California Supreme Court held that at least qualified, if not absolute, opinion work product protection applies to recorded witness statements, but the protection does not necessarily apply to the identities of the witnesses who gave the statements.

In Coito, a thirteen-year-old boy drowned in the Tuolumne River. His mother sued, among others, the State of California for wrongful death. The decedent and six other minors had allegedly been committing criminal activities immediately prior to the boy’s death, and state investigators interviewed four of the minors using questions the state’s counsel had drafted. The interviews were audio-recorded, and the state used the contents of the recordings in the deposition of one of the minors.

Plaintiff sought to discover the records and the identity of the witnesses, and the state asserted the work product privilege. The trial court held that the work-product protection applied except to the extent that the recordings had been used at the deposition, relying on Nacht & Lewis Architects, Inc. v. Sup. Ct. (1996) 47 Cal.App.4th 214, 217. The Court of Appeal granted a writ of mandate, based on Greyhound Corp. v. Sup. Ct. (1961) 56 Cal.2d 355. The California Supreme Court granted review and reversed the Court of Appeal.

The Coito court explained that, in California, the civil work product protection is codified in C.C.P. § 2018.30, which provides “absolute” and “qualified” protection for, respectively, mental impression and other work product. An attorney’s mental impressions are never discoverable, but other work product is upon a showing that production denial would cause unfair prejudice or injustice. The statute does not define work product.

After reviewing the history of the work product protection in California, modeled after the federal work product protection first enunciated in Hickman v. Taylor (1947) 329 U.S. 495, the Coito court held that attorney-authorized witness statements constitute work product, reasoning that the statement “would not exist but for the attorney’s initiative, decision, and effort to obtain it.” The court further held that witness interviews generally constitute absolute attorney work product, particularly if they “disclose important tactical or evaluative information.” The Coito court noted that absolute protection is not always available to witness statements; however, it noted that, where the statements are limited to the witness’s testimony, the statement may not be subject to the work product protection, and the attorney seeking to resist discovery on this ground must make a foundational showing that his or her mental impressions would be revealed to trigger absolute protection.

The Coito court held that witness statements that an attorney procures are – at a minimum – entitled to qualified protection in order to protect the discovering attorney from “free-riding on the industry and efforts of opposing counsel,” and allow attorneys to prepare their cases without fear of disclosure. The Coito court rejected the approach taken by earlier California courts that witness interviews can be wholly evidentiary in nature, as witness statements contain both evidence and “derivative,” or work-product, characteristics of “thought and planning.”

Finally, the Coito court held that the identity of interviewed witnesses were only potentially subject to qualified or absolute work product protection upon a showing triggering the privilege. The court reasoned that an example of disclosure triggering the work product protection would include a bus accident involving 50 survivors, but might not include a “typical automobile accident” where the police report disclosed the identity of the witnesses. Similarly, when an attorney has taken statements from all or almost all known witnesses, compelling identification of the witnesses is not likely to violate the work product privilege, as that identification “would have revealed nothing of consequence” nor “implicated any time or effort” by the attorney authorizing the interviews.

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