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

July 23rd, 2012

By Aaron F. Mandel 

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or Control Exclusion precluded coverage; Schweiger and Voss, on the other hand, argued that the endorsement either superseded that exclusion, or created an ambiguity that should be construed against Grinnell.  The district court agreed with Schweiger and Voss that the endorsement superseded the Care, Custody, or Control Exclusion, but the Eighth Circuit reversed.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

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

July 10th, 2012

By Aaron F. Mandel

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

July 9th, 2012

By Aaron F. Mandel

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

July 6th, 2012

Alex E. Potente

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.

Move Over Subprime? Financial Institutions and Brokers Face Increasing Concerns Over Allegation of Improper Libor Manipulation

July 4th, 2012

The business press in the U.S. and the U.K. is abuzz over the resignation of Barclays’ CEO after the Financial Services Authority’s investigation of the bank for attempting to rig the London Interbank Offered Rates (Libor) and the additional investigations of other banks by financial regulatory authorities in the U.S. and Europe. As this story grows, we wanted to share an article that Chicago partners Jennifer Broda and Eric Scheiner wrote in May – before the Barclays settlement was announced – that provides background on Libor, the ongoing criminal and regulatory investigations and the impact those investigations and ongoing antitrust litigation will have on the companies and their insurers.

Please click here to see the full article.  

Sedgwick attorneys, including the article’s co-authors, will also be speaking on Libor, the state of the investigations and the surrounding issues for insurers at Xchanging’s Learn at Lunchtime seminar on September 13th.

Affordable Care Act

June 29th, 2012

Yesterday was a historic day as the US Supreme Court ruled 5-4 to uphold the Affordable Care Act.  As political pundits and news outlets continue to parse through the opinion and  dissents, we wanted to share this link to an annotated version of the decision that highlights various sections from the majority opinions and dissents.

Click here to see more of an inside look at the health care ruling.

Liability Insurers Owe No Duty To Defend Insureds Alleged To Have Engaged In A Corrupt Scheme To Incarcerate Youth Offenders For Money

June 27th, 2012

By James Mirro

In a pair of opinions filed on June 20 and 21, 2012, the Third Circuit Court of Appeals emphasized Pennsylvania’s “firmly established” public policy against providing insurance coverage for criminal and other intentional acts. In Travelers v. Mericle, et al., 2012 WL 2335984 (3d Cir. 2012) and Colony Insurance Co. v. Mid-Atlantic Youth Services, 2012 WL 2354435 (3d Cir. 2012), the Circuit Court affirmed the lower court’s opinions holding that the insurers owed no duty to defend or indemnify the insureds.

Both cases arose from a scheme in which two county judges, in Luzerne County, Pennsylvania, accepted money from the owner of two private juvenile facilities. In exchange, the judges imposed harsh sentences on juveniles in cases before them, in order to ensure that the facilities would be used. When the scheme was uncovered, the aggrieved juveniles sued various defendants including the insureds.

The defendant-insureds were a construction company and its owner (in Mericle), and a company that managed the juvenile detention facilities and its owner (in Mid-Atlantic). Each tendered the tort complaint against him to his general liability insurer, seeking defense and indemnity. The insurers filed declaratory judgment actions, asking the Court for declarations that they owed no duty to defend or indemnify the insureds in the underlying actions. In each case, the District Court granted the insurers’ motions for summary judgment, relieving them of liability under the policies.

The Third Circuit held that, under Pennsylvania law, the duty to defend is determined solely by the allegations contained within the four corners of the complaint, with a focus on the facts alleged in the complaint rather than the causes of action pled. On this basis, the Circuit Court held that the allegations of the underlying complaints included only claims of intentional conduct by the insureds for their financial benefit, not negligence, thereby not triggering any duty on the part of the insurer to defend. Next, the Court held that there was no “accident” or “occurrence” alleged that might trigger coverage under the policies.  It agreed with the lower court that “[r]eckless, malicious, or purposeful conspiratorial activities are not ‘negligent’ and cannot be considered ‘accidents’ under the plain language of an occurrence-based [policy].”

The Circuit Court then held that coverage was excluded under two separate policy exclusions: first, coverage was excluded for any personal injury “arising out of the willful violation of a penal statute or ordinance committed by or with the consent of the insured.” The Court emphasized Pennsylvania’s public policy against providing insurance coverage for intentional acts and added that “Mericle ‘should not be able to avoid financial responsibility by shifting the penalty for his criminal act to an insurance carrier.’” The Court reached the same result as to the insureds in the companion case. Second, coverage was excluded as to injuries “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another,” because the tort complaints alleged that the insureds knowingly violated the juveniles’ rights.

On this basis, the Circuit Court affirmed the District Court’s decisions denying a defense and indemnity to each of the insureds under their general liability policies.

Premature Exhaustion Leaves Insured Feeling Unsatisfied

June 22nd, 2012

 By Aaron F. Mandel and Stevi A. Raab

In JP Morgan Chase v. Indian Harbor Insurance Company, No. 603766/08, 2012 N.Y. Slip Op. 04702 (June 12, 2012), the First Department of New York’s Appellate Division recently held that, under Illinois law, an excess insurer is not obligated to provide coverage when an insured settles with an underlying insurer for less than the underlying insurer’s policy limits.  The First Department’s decision is consistent with recent case law addressing the issue of whether an excess insurer must pay when the primary settles for less than policy limits in the wake of the California Court of Appeal’s decision in Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (2008).

Click here to read a detailed discussion of the case.

Ninth Circuit Rules on Insurer’s Duty to Settle Within Policy Limits

June 21st, 2012

By Sean R. Simpson

In Yan Fang Du v. Allstate Insurance Co., No. 10-56422, 2012 U.S. App. LEXIS 11755 (9th Cir. June 11, 2012), a panel of the U.S. Court of Appeals for the Ninth Circuit held that, under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.  However, there must be a reasonable opportunity to settle within policy limits. 

The claimant, Yang Fang Du, filed suit for bad faith after having received an assignment of insured Joon Hak Kim’s rights against Allstate and its subsidiary, Deerbrook Insurance Co. (collectively, “Deerbrook”).  The policy at issue had a limit of liability of $100,000 per person and an aggregate limit of $300,000 per accident.  Du argued that Deerbrook did not attempt to reach a settlement of Du’s claim after Kim’s liability in excess of that policy limit became reasonably clear, resulting in a verdict against Kim in the amount of $4,126,714.46. 

In ruling on the propriety of the district court’s rejection of Du’s proposed jury instructions, the Ninth Circuit concluded that an insurer has a duty to effectuate settlement when liability is reasonably clear, even in the absence of a settlement demand.  The court held, however, that there must be “a reasonable opportunity to settle within those limits.”  In this case, prior to litigation, Du’s counsel had made an early demand of $300,000 to settle all four injured parties’ claims, but did not provide any of the documents that would reasonably be necessary to evaluate that demand.  The Ninth Circuit held that Deerbrook could not settle within limits in those early stages because Deerbrook lacked corroborating proof of the extent of Du’s injuries and medical expenses.  Deerbrook also had no proof of the injuries of the other three individuals who were injured in the incident.  After the documentary evidence was provided respecting Du’s claim, Deerbrook offered the $100,000 individual limit to Du, which was rejected as “too little, too late.”  In finding for Deerbrook, the Ninth Circuit held that there was no evidence that Deerbrook should or could have made an earlier settlement offer to Du.

The Ninth Circuit’s ruling in this case is not binding on California courts, which have made several statements in the past reflecting that a settlement demand within policy limits is a requirement for bad faith exposure.  See Coe v. State Farm Mutual Automobile Ins. Co., 66 Cal.App.3d 981 (1977) (“actionable ‘bad faith’ arises not from an insurance carrier’s obligation ‘to settle,’ but from unwarranted failure to accept a reasonable settlement offer”); Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858 (1973) (a conflict of interest “only develops when an offer to settle an excess claim is made within policy limits”).  In its ruling, the Ninth Circuit distinguishes these prior statements of law as “dicta.”   Whether California courts ultimately agree with the Ninth Circuit on this issue is uncertain at best.

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