Archive for January, 2014

Highway Data Breach Dump – Who are You Going to Call to Recover $6 million?

Monday, January 27th, 2014

By Carol J. Gerner, Sedgwick Chicago

In Recall Total Info. Mgmt., Inc. v. Fed. Ins. Co., No. AC34716 (Conn. Ct. App. Jan.14, 2014), the Connecticut Court of Appeals held that Federal Insurance Company (“Federal”) and Scottsdale Insurance Company (“Scottsdale”) did not have a duty to defend “negotiations” that took place following a data breach incident, and did not waive their coverage defenses.  Furthermore, losses associated with the data breach were not “personal injuries” under Federal’s comprehensive general liability policy or Scottsdale’s commercial liability umbrella policy.

According to the stipulated facts in this breach of contract insurance dispute, Recall Total Information Management (“Recall”) agreed to transport and store various electronic media belonging to IBM.  Recall subcontracted the transportation of IBM’s electronic media to Ex Log, which named Recall as an additional insured under insurance policies issued to it by Federal and Scottsdale.

During Ex Log’s transport of IBM’s computer tapes, a cart containing some the tapes fell out of the back of the van near a highway exit ramp.  Approximately130 tapes containing employment-related data, including social security numbers, birth dates, and contract information were removed from the roadside by an unknown person and never recovered.  Upon being notified of the incident, IBM notified the potentially affected individuals, established a call center, and provided credit monitoring.  Although the parties ultimately agreed that no identify theft incident could be traced to the lost tapes, IBM incurred more than $6 million in expenses.  Recall agreed to reimburse IBM for the full amount of its costs and sought reimbursement from Ex Log, who in turn sought coverage from Federal and Scottsdale.  Litigation ensued following Federal’s and Scottsdale’s denials of coverage.

Generally, the Federal and Scottsdale policies provided that Federal and Scottsdale had the right and duty to defend their insureds against “suits” even if the suits were false, fraudulent, or groundless.  The policies defined “suit” to mean civil proceedings seeking damages to which the policies applied, and arbitration or other dispute resolution proceedings to which insureds must submit or do submit with Federal’s and Scottsdale’s consent.  The appellate court concluded that IBM’s initial demand for reimbursement of costs it incurred in connection with the lost tapes, followed by two years of negotiations, did not constitute a “suit” under the policies. Thus, the court found that Federal and Scottsdale did not waive their coverage defenses because they did not breach their duty to defend.

Because there was no waiver, the court next addressed whether there was coverage under the Federal and Scottsdale policies.  According to the court, the dispositive issue was not the loss of the physical tapes themselves; rather, it was whether the information in them had been “published.”  Because Recall and Ex Log failed to prove that anyone accessed the information on the tapes, the court concluded there was no publication.  Absent publication, the court determined there could be no “personal injury.” Significantly, the court also concluded that, merely triggering the requirements of a state’s notification statute after a data breach, is not a substitute for a “personal injury” and does not constitute a “presumptive invasion of privacy.”

Recall is instructive on at least two grounds.  The first is that an insurer may suffer potentially adverse consequences (including waiver of coverage defenses) if the insurer breaches its duty to defend.  Although the policies happened to restrict Federal’s and Scottsdales’ duties to defend to “suits,” the results may have been different had the duty to defend been more expansive.  Insurers, therefore, should be mindful of their specific policy language when confronted with a data breach issue in order to avoid arguments that they either waived or are estopped from raising various coverage defenses.

The second ground is that, at least in Connecticut, data loss incidents will not automatically trigger “personal injury” coverage under commercial general liability policies.  Indeed, the court’s rejection of Recall’s and Ex Log’s arguments that a data breach results in a presumptive invasion of privacy confirms that insureds will have to come forward with evidence proving that lost data was published in order to trigger coverage under commercial general liability policies.

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

When Eight Corners Is Just Not Enough: Fifth Circuit Offers Latest Interpretation of Exception to the Eight Corners Rule

Tuesday, January 21st, 2014

On January 8, 2014, the Fifth Circuit announced its latest guidance on an issue of great importance to insurance carriers doing business in Texas.  In Star-Tex Resources, L.L.C. v. Granite State Ins. Co., 2014 WL 60192 (5th Cir. 2014) (Tex.), the Circuit reaffirmed its view that there is an exception to the “eight corners” rule, the standard by which Texas insurers must determine whether they owe a duty to defend lawsuits against their insureds.  The Star-Tex decision provides new hope for insurers faced with ambiguous pleadings, as it adopts one of the more expansive views of the exception in the past few years.

By way of background, Texas has long adhered to the “eight corners” rule for determining an insurer’s duty to defend.  GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006).  Under the “eight corners” rule, an insurer’s duty to defend is determined by comparing the factual allegations of the petition with the insurance policy.  Id.  Ordinarily, nothing outside of the four corners of the petition and the four corners of the policy can be considered.  Id.  Although the Texas Supreme Court has not expressly recognized an exception to the “eight corners” rule, it also has not foreclosed the possibility that one exists. See Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009).  The Fifth Circuit has on several occasions opined that the Texas Supreme Court would recognize an exception to the rule in certain circumstances.  See, e.g., Colony Nat. Ins. Co. v. Unique Indus. Prod. Co., 487 Fed.Appx. 888, 892 (5th Cir. 2012) (Tex.); GuideOne Specialty Mut. Ins. Co. v. Missionary Church of Disciples of Jesus Christ, 687 F.3d 676, 686 (5th Cir. 2012) (Tex.).

 Star-Tex Resources reaffirms the Fifth Circuit’s prior opinions that an exception to the “eight corners” rule exists.  In Star-Tex, the plaintiff brought a personal injury lawsuit against Star-Tex, a staffing company, for an auto accident involving one of Star-Tex’s employees.  Star-Tex, 2014 WL 60192 at *1.  Star-Tex notified its commercial general liability insurer, Granite State, and requested a defense.  Id.  In its written claim notice, Star-Tex acknowledged that its employee was driving the car.  Id.  The Granite State policy did not cover auto accidents involving cars driven by insured employees because it contained an “auto exclusion” that precluded coverage for bodily injury liability arising out of the use of any automobile operated by an insured, which included Star-Tex employees while performing their duties.  Id. at *2.   The petition, however, did not allege that the employee was driving the vehicle.  Id. at *4.  It only indicated that the accident was “caused by the negligence” of the employee.  Id.  Applying the “eight corners” rule, the panel could not determine that the employee was driving the car based solely on the petition.  Id.  Although it was reasonable to infer that the employee was driving, there were other reasonable inferences that could be drawn.  Id. 

This uncertainty in the petition often works in the favor of the insured.  However, in Star-Tex, the duty to defend analysis did not end there.  The court recognized that there is an exception to the “eight corners” rule which allows a court to look beyond the pleadings “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.”  Id. at *5.  The court also observed that the exception is more likely to be applicable when a policy exclusion is at issue.  Id.  Based on the undisputed evidence that the employee was driving the vehicle, the court held that Granite State owed no duty to defend the lawsuit.  Id.  In addition, the court held that Granite State did not have to pay any judgment or settlement arising from the lawsuit because the same facts that precluded a duty to defend also foreclosed any possible duty to indemnify.  Id.

The Star-Tex ruling is significant because it takes a relatively broad view of the type of evidence that may be considered when determining an insurer’s duty to defend.  The court’s interpretation – that any fact that does not establish (or undermine) the plaintiff’s right to recover does not “overlap with the merits . . . of any facts alleged in the underlying case” – may broaden the application of the exception for future cases.  However, the decision may be limited by the fact that coverage turned on an exclusion.  In addition, the Fifth Circuit’s case law on this issue has been inconsistent on the issue, and it will be interesting to see how the courts reconcile the Star-Tex decision with other Fifth Circuit decisions that have taken a more restrictive view of the exception.  Nonetheless, the Star-Tex decision is a tool that can be used by insurers to examine the duty to defend in Texas. 

Straight Talking in Texas: The Contractual Liability Exclusion Means What It Says and Says What It Means

Friday, January 17th, 2014

By Kimberly Steele, Sedgwick Dallas

According to prominent insurance commentator, Randy Maniloff, Ewing Construction Co., Inc. v. Amerisure Insurance Co. was “probably the most closely watched coverage case in the country” in 2013.  This is no longer, as the Texas Supreme Court issued its opinion today, reversing the Southern District of Texas’ 2011 decision and holding that the contractual liability exclusion found within the standard CGL policy does not apply to a general contractor’s contractual promise to perform its work in a good and workmanlike manner. Ewing Const. Co., Inc. v. Amerisure Ins. Co., — S.W.3d —- (Tex. Jan 17, 2014) (NO. 12-0661).

Ewing was the general contractor hired by the Tuloso-Midway Independent School District to renovate and build additions to a school in Corpus Christi, Texas, including the construction of tennis courts at the school.  Shortly after Ewing’s completion of the tennis courts, the District complained that the courts were flaking crumbling and cracking.  It eventually sued Ewing for faulty construction, asserting claims for breach of contract and negligence, among others. Ewing tendered the lawsuit to its CGL carrier, Amerisure, seeking a defense and indemnity. Amerisure denied any duty to defend arguing, in part, that coverage was precluded by the “contractual liability” exclusion in its policy because Ewing had agreed in its contract with the District to build the tennis courts in a good and workmanlike manner, and failed to do so.  As a result, Ewing filed suit against Amerisure seeking a declaration that it had an obligation to defend Ewing, and in failing to do so Amerisure breached its duty to defend and violated Texas’ Prompt Payment of Claims Act. Amerisure counterclaimed, seeking a declaration that it had no duty to defend or indemnify Ewing.

Judge Janis Graham Jack of the Southern District of Texas broadly construed the Texas Supreme Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and held that the contractual liability exclusion applied to preclude coverage for the claims against Ewing because “Ewing assumed liability with respect to its own work on the subject matter of the contract, the tennis courts, such that it would be liable for failure to perform under the contract if that work was deficient.” Ewing appealed that decision to the Fifth Circuit Court of Appeals which initially affirmed, but then on rehearing changed course, and withdrew its opinion and certified two questions to the Supreme Court of Texas:

1. Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.

2. If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Supreme Court answered “no” to the first question, thereby mooting the second.

The contractual liability exclusion in the Amerisure policy excluded claims for damage premised upon an insured’s contractual assumption of liability except when: (1) the insured’s liability would exist absent the contract, and (2) the contract is an “insured contract.”  Ewing maintained that its agreement to construct the tennis courts in a good and workmanlike manner did not add anything to its general obligation to comply with the contract’s terms and exercise ordinary care in doing so.  As a result, it argued that its express agreement to perform the construction in a good and workmanlike manner was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion.  The Supreme Court agreed, concluding that the allegations that Ewing failed to perform in a good and workmanlike manner were substantively the same as its claims that it negligently performed under the contract. The court ultimately held that “[a] general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the contractual liability exclusion.”

The Supreme Court’s message in the Ewing decision is clear: the contractual liability exclusion will not apply to exclude coverage for a contractor’s violation of duties generally owed to its clients, irrespective of its contract.  Rather, it will only apply in cases where the contractor assumed atypical liabilities more akin to the contractual duties at issue in Gilbert.

Insurer “Waives” Goodbye to Coverage Defense in Illinois

Wednesday, January 15th, 2014

In Pekin Ins. Co. v. Skender Constr. Co., 2013 IL App. (1st) 123532-U (Ill. App. Ct. Dec. 27, 2013) (Unpublished), the Illinois Appellate Court recently affirmed a trial court’s finding that an insurer waived a coverage defense when it waited to first assert that defense in its summary judgment motion.  As a result of the waiver, Pekin Insurance Company (“Pekin”) had a duty to defend Skender Construction Company (“Skender”) because Skender was an additional insured under the policy.  The Pekin decision serves as a useful reminder that insurers should not wait to assert coverage defenses or risk waiving those defenses.

Pekin arises out of an action by an individual who was injured at a construction site operated by Skender.  The individual fell into a trench dug by Everest Excavating, Inc. (“Everest”), a subcontractor at the site.  The individual sued both Everest and Skender.  Skender eventually tendered its defense to Pekin, which had issued a policy to Everest, and asserted that Pekin had a duty to defend Skender because it was an additional insured under the policy.

In its denial letter to Skender, Pekin did not assert the coverage defense that Skender was not an additional insured under the policy.  Pekin eventually filed a complaint for declaratory judgment but did not include a count asserting that Skender was not an additional insured.  Pekin first raised the coverage defense in its motion for summary judgment.  Skender argued that Pekin waived the coverage defense because Pekin had only raised it in its summary judgment motion.  The trial court agreed, granted summary judgment in favor of Skender, and found that Pekin had a duty to defend Skender.  Pekin appealed.

In affirming the trial court’s decision, the appellate court focused on Pekin’s omission of the coverage defense from both its initial denial letter and its complaint for declaratory judgment.  The court held that Pekin’s actions were inconsistent with Pekin’s assertion of the additional insured defense in its summary judgment motion.  Therefore, Pekin had waived consideration of the issue.

The Pekin decision provides helpful insight regarding how an insurer may avoid waiving coverage defenses. An insurer’s denial letter should include all known defenses, along with cautionary language reserving all rights under the applicable law and policy and advising that the letter should not be construed as waiver or estoppel of any other possible coverage defenses.  The insurer also should supplement its denial as it discovers new coverage defenses.  Finally, if the matter is in litigation, the insurer should add coverage defenses as soon as they are discovered, either as a count to the complaint or as an affirmative defense, whichever is applicable.

What’s in Store for New Jersey in 2014? Super Bowl XLVIII and Legislation Addressing the “Occurrence” Issue in the Construction Defect Context

Friday, January 3rd, 2014

The New Year might bring more to New Jersey than just the Super Bowl.  Indeed, on November 25, 2013, the legislature introduced a bill before the New Jersey State Assembly, which, if enacted, would require general liability policies (in policies issued, renewed, or delivered in New Jersey) to contain a definition of “occurrence” which includes damages resulting from faulty workmanship.  The introduction of A4510 is part of a growing trend in state legislatures that seek to resolve the “occurrence” issue by passing laws in a purported effort to clarify the term “occurrence” when determining coverage for construction defect claims.

A4510 provides that a commercial liability insurance policy delivered, issued, executed, or renewed in New Jersey must contain a definition of “occurrence” that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship.

As we’ve previously explained (Is Defective Construction an “Occurrence”?  The Answer Isn’t So Concrete), the definition of “occurrence” in the construction defect context is a thorny issue.  Courts have varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore an “occurrence.”  See, e.g., Penn. Nat’l Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 403 Fed. App’x. 770 (3d Cir. 2010) (holding that a subcontractor’s faulty work that resulted in damage to the insured general contractor’s work was not an “occurrence”); Westfield Ins. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269 (Ohio 2012) (holding that defective construction work itself is not covered because it is not the result of an “occurrence,” but that the resulting damage may be covered because it was fortuitous and unintended); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (finding coverage for damage to a building’s foundation, sheetrock, and stone veneer allegedly caused by the builder’s defective construction of a house’s foundation).  By requiring a definition of “occurrence” that addresses both accidents and faulty workmanship, A4510 intends to reduce confusion by resolving coverage issues arising from courts’ varying interpretations of those issues.

Keep in mind, however, that if enacted, A4510 would not necessarily obligate insurers to provide coverage for construction defects.  As the bill notes, it is not intended to restrict or limit the business risk exclusions commonly found in general liability policies (e.g., “your work” and “your product” exclusions), which might preclude coverage for faulty workmanship on other grounds.

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