By Chen Foley
In Ace European Group & Ors v Standard Life Assurance Limited,  EWCA Civ 1713, the English Court of Appeal reaffirmed the principle that where a loss has multiple causes, the insured’s entitlement to an indemnity in respect of an insured cause is unaffected by the fact that there also exist equally effective uninsured causes. Liability insurers are therefore not entitled to an apportionment by reference to the insured and uninsured causes of the loss.
A copy of the judgment/opinion can be found here.
Standard Life marketed a fund as a temporary and secure home for short-term investments. In fact, investors’ money was placed in risky asset-backed securities.
Standard Life revalued the fund resulting in an immediate, one-off fall in the fund’s value. It was obvious to Standard Life that this would give rise to claims against it. To preempt these, and in an attempt to avoid further reputational damage, it made a lump sum payment into the fund and compensated a number of investors directly at a cost of UK£101,862,048.
Standard Life sought to recover the sum under its professional liability policy arguing it was a “Mitigation Cost”. Insurers denied the claim, arguing the sum (i) was paid with the dominant purpose of avoiding reputational damage and (ii) was not required to avoid or reduce prospective third party claims. Both arguments were rejected at first instance.
On appeal, although the insurers did not challenge the finding of coverage for Mitigation Costs, they argued that they were entitled to an apportionment of the Mitigation Costs between that portion which was insured (i.e. used to preempt third party claims) and that portion which was uninsured (i.e. intended to protect Standard Life’s reputation).
The appeal was dismissed. The court reasoned that concepts such as averaging and underinsurance, which insurers had sought to rely upon, were of no application to liability insurance. Accordingly, the rationale underlying the principle of apportionment was irrelevant and inapplicable in the liability context.
It was suggested at first instance that the insurers could have limited the recoverable Mitigation Costs by requiring them to relate “solely” or “exclusively” to a specific purpose. The Court of Appeal did not address this point specifically although it noted that apportionment in the liability context could produce significant uncertainty because the very nature of the liabilities that insurers will seek to carve out are often impossible to quantify. If insurers do wish to cover mitigation costs, they might also seek to control their exposure through the imposition of a sub-limit or strict provisions requiring insurer consent to any settlements.
The new year will surely bring more news and developments stemming from Pres. Obama’s signing of the Patient Protect and Affordable Care Act (“PPACA”). The mandated state insurance exchanges must begin operation by an October 1, 2013 open enrollment period for health coverage with a January 1, 2014 effective date. So, we thought our readers would be interested in this recent article by San Francisco partner Hilary Rowen discussing the Act’s insurance exchange provisions and deadlines, the impact of the exchanges on the marketplace, and the impact on employer-based health coverage. The article originally appeared in the December 2012 issue of the ABA Health eSource.
By Kelly Nugent
In Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange, Case No. B239145 (Dec. 18, 2012; certified for publication), the Second Division of the California Court of Appeal affirmed the lower court’s ruling that an exclusion in a first-party property insurance policy precluding coverage for damages caused directly or indirectly by “water that backs up or overflows from a sewer, drain or sump” was unambiguous and barred coverage for flood damage to the insured’s property caused by a malfunctioning toilet that overflowed due to a blockage in a connecting sewer line.
On appeal, the insured (“Cardio”) made three arguments as to why the exclusion should not preclude coverage for the damage to its property. First, Cardio argued that the phrase “backs up or overflows from” meant that water must come out of the sewer or drain and does not include water unable to proceed down an interior drain. Second, Cardio argued that the exclusion should be limited to water damage from large-scale disasters because it was listed among other exclusions precluding coverage for damage caused by such disasters. Third, Cardio argued that the exclusion did not apply because the damage was caused by water overflowing out of a toilet as opposed to water overflowing out of a drain.
The Appellate Court disagreed, finding the inclusion of the word “or ” in the exclusion critical to the interpretation of the exclusion. Applying the fundamental principle that policy language must be construed so as to give effect to every term, the Appellate Court concluded that the exclusion unambiguously applied both to water which “backs up,” and to water that “overflows from” a sewer or drain. Additionally, the Court rejected Cardio’s argument that the exclusion’s placement among other exclusions related to large-scale disasters warranted limiting its application to those types of events because the wording of the exclusion was not so limited. Finally, the Court rejected Cardio’s attempt to negate the exclusion because the overflow resulted from a toilet and not a “drain,” finding the distinction immaterial given that the toilet was connected to a drain.
By Greg Lahr
For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, we thought you would be interested in Sedgwick’s latest Hydraulic Fracturing News Flash regarding a recent proposal in California to regulate fracking, which can be viewed here.
Here are some recent developments that we are following in other states:
In New York, the Department of Environmental Conservation (“DEC”) has prepared a Revised Draft Supplemental Generic Environmental Impact Statement (“SGEIS”) on the Oil, Gas and Solution Mining Regulatory Program. The SGEIS pertains to issuing well permits for horizontal drilling and high-volume hydraulic fracturing for extracting oil and natural gas from the Marcellus Shale and other low-permeability gas reservoirs. Since making the SGEIS available for public review in September 2011, the DEC has drafted proposed regulations, which are available for comments from December 12, 2012 to January 11, 2013. At least until the regulations are finalized, it appears that the DEC’s moratorium on issuing well permits for horizontal drilling and fracking will continue.
In Pennsylvania, appellate review of the constitutionality of Act 13 of 2012 (“Act 13”), 58 Pa. C.S. §§ 2301 et seq. (signed into law on February 14, 2012), continues with the filing of appellate briefs to the Pennsylvania Supreme Court in September 2012. According to the General Assembly, Act 13 broadly reformed the laws that govern the development of oil and gas resources in Pennsylvania by establishing uniformity and promoting growth in the industry though the pre-emption of local ordinances that impose conditions or limitations on oil and gas operations. The General Assembly intended to allow oil and gas development as a permitted use in any zoning district, and mandate that restrictions placed on oil and gas development by municipalities be no greater than those placed on other industrial uses. A number of municipalities sought a declaratory judgment that Act 13 is unconstitutional, and requested that the Act be permanently enjoined. After the Pennsylvania Attorney General filed preliminary objections based primarily on standing and justiciability grounds, the municipalities filed a motion for summary judgment. On July 12, 2012, the Commonwealth Court issued a decision that granted in part and denied in part the summary judgment motion, and in part sustained the Attorney General’s objections. Significantly, the court declared a section of Act 13, which provides for uniformity of local ordinances, to be unconstitutional. Cross-appeals were filed by the municipalities and the Attorney General.
In New Jersey, a one-year moratorium on fracking signed by Governor Christie is set to expire in January 2013. However, a New Jersey assemblyman is currently sponsoring legislation that would extend the ban on fracking until the state Department of Environmental Protection reviews the federal Environmental Protection Agency’s study on the effects of fracking, which may not be out in final form until 2014.
The onset of the new year brings lists of all types: holiday gift lists, the best movies of 2012, New Year’s resolutions. The Sedgwick Insurance Law Blog has made a list of the insurance cases to watch in 2013. Some are just getting off the ground and we will be watching to see how they move through the courts, while others are ongoing and we are watching for decisions from the appellate courts. Our list crosses various lines of insurance coverage and issues, but we know it is far from complete. Please vote for your pick(s) and/or tell us what case you are watching.
Survey can be found here.
Please look out for the post in early January with the results.
UBS, Switzerland’s largest bank, is set to become the second financial institution to enter into a settlement arising out of the Libor rate-fixing scandal. The potential agreement would reportedly allow UBS to pay approximately $1 billion to settle allegations that it attempted to rig various interbank interest rates to increase trading profits. The deal would resolve investigations conducted by certain U.S., British and Swiss regulators, including the U.S. Department of Justice, the U.S. Commodities Futures Trading Commission, and the U.K. Financial Services Authority. UBS is expected to make the announcement next week, as early as Monday.
Although UBS was granted leniency for cooperating with investigators, this fine is more than double the $450 million paid by Barclays earlier this year to settle its role in the Libor scandal. The Libor rate is used to set borrowing rates for over $350 trillion worth of lending contracts worldwide. The Libor probe has involved approximately 20 of the biggest banks across three continents, involving regulators from the U.S., Canada, Europe, and Japan. Recently, British prosecutors arrested several individuals as part of a criminal investigation into rate manipulation. One of these individuals, Thomas Hayes, is a former UBS trader employed with the bank from 2006 to 2009. UBS is also facing investigations from the Canadian Competition Bureau, the Attorneys General of Connecticut and New York, and the Monetary Authority of Singapore. It was not immediately clear whether the Canadian Libor probe would be part of the imminent settlement.
The Libor settlement is just one of the problems encountered by UBS over the past year. Earlier this year, a rogue UBS trader cost the company $377 million before being jailed, and UBS reportedly had some involvement in issues arising out of the Facebook IPO. More recently, the company announced that it would lay off 10,000 employees as part of its efforts to wind down a significant part of the investment bank. (“UBS faces $1bn fine over Libor allegations,” CNN.com, December 14, 2012; “UBS in Talks Over $1 Billion Penalty,” The Wall Street Journal, December 13, 2012; “UBS faces $1 billion fine for Libor rigging,” Reuters, December 13, 2012).
We thought our readers would be interested in an article by Lisa Henderson from the Fall 2012 issue of newsletter by the Alternative Dispute Resolution Committee of the Tort Trial & Insurance Practice Section of the American Bar Association. Lisa discusses appraisal clauses commonly found in property insurance contracts and the dispute over the appraisal process in Texas over the past few years.
Pennsylvania Court Finds No Coverage for Construction Defect Claims Under General Liability PoliciesDecember 11th, 2012
By Stevi Raab
In the case of American Home Assurance Co. v. Trumbull Corp., No. GD-11-006886 (Ct. Com. Pl. Allegheny County, Oct. 10, 2012), the court granted summary judgment in favor of two excess general liability insurers on a matter of first impression relating to coverage for damages caused by alleged faulty workmanship. The court held that, under Pennsylvania law, general liability policies do not cover such claims.
In 2007, Trumbull Corporation completed construction of a reinforced soil slope and foundation pad for a new J.C. Penney store in southwestern Pennsylvania. Shortly after the store opened, cracks began appearing in the J.C. Penney store and two additional buildings due to soil settlement. Three commercial tenants moved out of the shopping center because of the cracks and sued Trumbull for faulty workmanship. Trumbull submitted the claim to its primary and excess general liability insurers.
Trumbull’s primary insurer agreed to defend it under a reservation of rights, but Trumbull’s excess insurers filed an action against Trumbull seeking a declaration that they were not obligated to provide coverage. The excess insurers moved for summary judgment, arguing that, under Pennsylvania law, damage to buildings resulting from faulty workmanship does not constitute an “occurrence” under general liability policies.
In considering the excess insurers’ summary judgment motion, the court noted that Pennsylvania courts had previously considered coverage for construction defect claims under three fact scenarios: (1) where the work itself was damaged; (2) where there was damage to portions of the project and the work was performed under a contract between the insured and property owner; and (3) where there was damage to other portions of the project and there was no contract between the insured and property owner.
Although Pennsylvania courts had consistently agreed that an insurer may properly deny coverage for damage to the faulty work itself, the court noted that the last two situations could be analyzed under two inconsistent lines of reasoning: the first finding coverage for ancillary damage, and the second concluding that damage resulting from faulty workmanship is never covered because “faulty workmanship can never constitute an accident.” According to the court, Trumbull presented a fourth situation – i.e., where the faulty workmanship damages the property of a third party who was not involved in the project and had no relationship with the insured. However, because it concluded that Pennsylvania’s appellate courts have adopted the second of the lines of reasoning described above, the court held that the excess insurers were not obligated to provide coverage to Trumbull.
Trumbull indicates that Pennsylvania courts have adopted a blanket rule that general liability policies do not cover damages resulting from faulty workmanship. If appealed, the Trumbull decision will provide Pennsylvania’s appellate court with the opportunity to clarify Pennsylvania law regarding coverage for construction defect claims under general liability policies.