Developments in the Hydraulic Fracturing Industry

March 5th, 2014

For our readers who are keeping tabs on developments in the hydraulic fracturing (“fracking”) industry, you may be interested in our recent “news flashes” concerning the fracking industry in California.

The first is regarding a bill, introduced last Thursday, February 27th, that would halt all types of fracturing both on- and off-shore California until the completion of a multiagency review of the economic, environmental and public health impacts. SB 1132 would not only halt the use of high pressure injection of water and fracturing fluids into oil and gas reservoirs, the process most often thought of as “fracking” by the public, but would also prevent the use of acids to enhance permeability in “pay zones” to increase the flow of oil and gas into wells until the report is finished. To view a PDF copy the news flash, click here. 

Just one day later, on February 28th, the Los Angeles City Council’s unanimously voted to draft a new municipal ordinance banning hydraulic fracturing and other well-stimulation activities, such as acidizing, within the city confines. The ordinance would place a moratorium on “all activity associated with well stimulation, including, but not limited to, hydraulic fracturing, gravel packing, and acidizing, or any combination thereof, and the use of waste disposal injection wells.”  The ordinance would make Los Angeles the only oil-producing city in California to ban hydraulic fracturing. The moratorium would remain in place until the city verifies that hydraulic fracturing will not harm public safety or compromise drinking water.  The ordinance must still be drafted and is subject to additional public input before being presented to the City Council for a final vote. To view a PDF copy of this news flash, click here.

5th Circuit Says the Issue is Liability, Not Damages

March 4th, 2014

By Daniel Pickett, Sedgwick New York

In Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co.,  2014 WL 535726, No. 12–60561 (5th Cir. Feb. 11, 2014)  the 5th Circuit Court of Appeals held that, when analyzing coverage under an additional insured endorsement that excludes completed operations, the focus of the inquiry is when the additional insured’s liability arose, not when the damage occurred.

In Woodward, Pass Marianne contracted with a general contractor, Woodward, for the construction of condominiums on the Mississippi Gulf Coast.  Woodward subcontracted with DCM for the concrete work.  Pass Marianne sold the condominiums to Lemon Drop Properties and, a year after purchasing the condominiums, Lemon Drop brought suit against Pass Marianne and Woodward asserting claims for rescission, breach of contract and gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction of the condominiums.

The claims were eventually arbitrated and one of the significant issues in the arbitration was the fault of DCM.  After Pass Marianne asserted its cross-claims, Woodward demanded that DCM’s commercial general liability carrier, Acceptance Indemnity Corporation, provide a defense and indemnity.  Acceptance denied the tender.  As a result, Woodward and its insurer filed suit against Acceptance.  The Acceptance policy provided that Woodward was an additional insured, but only with respect to liability arising out of DCM’s ongoing operations performed for Woodward. Additionally, the additional insured endorsement excluded coverage for property damage occurring after all work to be performed by or on behalf of Woodward at the site had been completed.

Woodward and its insurer moved for summary judgment. The district court held that Acceptance had a duty to defend and Acceptance appealed.  On appeal, the 5th Circuit focused on the portion of the additional insured endorsement that excluded coverage for property damage occurring after all work had been completed.  While noting that Mississippi’s highest court had not addressed the issue, the 5th Circuit concluded that, under the terms of the endorsement, claims for liability can be brought after ongoing operations are complete, but the underlying liability cannot be due to the completed operations. The court explained “that liability for construction defects, while created during ongoing operations, legally arises from completed operations.”  Accordingly, the court reasoned that the issue was not whether DCM failed to comply with plans and specifications during ongoing operations, but whether Woodward’s liability arose out of those ongoing operations. “It did not. Woodward’s liability for breach of contract, if any, flows from defects in the completed construction project.”

Accordingly, the court held that, even if it accepted the district court’s factual finding that damage had occurred during ongoing operations, the liability for such damages arose out of completed operations for which Woodward was not an additional insured under the policy.  As a result, Acceptance had no duty to defend Woodward.

 

Could an Insurer’s Declaratory Judgment Action Waive the Right to Participate in Settlement in Illinois?

February 21st, 2014

By Kirk C. Jenkins, Sedgwick Chicago

An insurer offers its insured a defense under a reservation of rights and files a complaint seeking a declaratory judgment determining coverage.  This is not an uncommon sequence of events, either in Illinois or anywhere else.  But does the insured then have the right to settle the case on its own, without the insurer’s consent?

Until recently, the answer under Illinois law has been clear: No.  But in a decision published in the last days of January, the Appellate Court for the Fourth District cast doubt on that conclusion.

Standard Mutual Insurance Company v. Lay was one of the Illinois Supreme Court’s major decisions of last year.  Our coverage of the decision is here.  Our report on the oral argument before the Supreme Court is here.

The defendant was a small real estate agency in Girard, Illinois.  The defendant hired a fax broadcaster to send a “blast fax” advertising a particular listing to thousands of fax machines.  The broadcaster claimed that each potential recipient had consented to receiving the faxes, and the defendant trusted the broadcaster’s word.  The problem was apparently it wasn’t true.

Enter the Telephone Consumer Protection Act of 1991, 47 U.S.C. § 227.  The statute imposes a penalty of $500 for each unsolicited fax sent, which is trebled for willful violations.  So the defendant was hit with a putative class action complaint, alleging willful violations of the TCPA, conversion and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2.

The defendant tendered to its insurer, which accepted under a reservation of rights.  The insurer offered the defendant a defense (while noting its potential coverage defenses and the arguable conflict of interest).  The defendant signed the waiver of the conflict proferred by the insurer and accepted the attorney.

In mid-July 2009, the putative class action was removed to Federal court.  Not long after, the owner of the defendant real estate agency died, and his widow received letters of office.  In late October, at the widow’s behest, a new lawyer wrote to the lawyer hired by the insurer, explaining in great detail the conflict between the insurer and the insured (which the insured had waived) and asking the lawyer to withdraw.  The lawyer hired by the insurer never withdrew, but a few weeks later, the new attorney and the insured signed a settlement agreement.

In 2010, the settlement agreement was filed and ultimately approved.  It provided for a payment of $1,739,000: $500 per fax for each and every one of alleged 3,478 recipients.  Given that a finding of willful conduct – the necessary prerequisite to trebling – would have vitiated insurance coverage, this “settlement” amounted to the insured voluntarily paying 100 cents on the dollar on the case.  In return, the class representative agreed not to execute on any of the defendant’s assets, and seek to recover solely from the insurer (the covenant not to execute remained valid whether or not the insurer’s policy was adjudicated to cover the policy).

In mid-2011, the trial court granted the insurer summary judgment in the declaratory judgment action, finding that TCPA damages were in the nature of punitive damages and thus uninsurable.  The Supreme Court allowed a petition for leave to appeal and reversed on that point.  The Court remanded back to the Fourth District for consideration of the remaining issues – including whether the insured had breached the policy by settling without the insurer’s consent.

The Fourth District originally issued its opinion reversing the Circuit Court in late November 2013, but later granted a motion for publication.  The published opinion appeared January 25, 2013.

The court found that all three policies at issue covered the defendant’s “settlement.”  One expressly related to the real estate business.  The two remaining policies related to rental premises or vacant lots owned by the insured, but neither included “designated premises” limitations.

The insurer argued that the settlement was excluded from coverage by the professional services exclusion, but the Appellate Court disagreed.  The real estate agency was not a professional advertiser, the court pointed out.  The court specifically held that the TCPA damages were covered by both the property damage coverage and the advertising injury coverage.

But the most important part of the ruling came in two paragraphs on the final page of the opinion.  The court noted that where an insurer had provided an attorney pursuant to a reservation of rights, noting the potential conflict of interest, “the insured is entitled to assume control of the defense.”  At that point, the court held, the insurer lost the right to prevent the insured from unilaterally settling: “When an insurer surrenders control of the defense, it also surrenders its right to control the settlement of the action and to rely on a policy provision requiring consent to settle.”  The court cited Myoda Computer Center v. American Family Mutual Insurance Co. in support of its holding.  The insured’s liability was “clear,” the court commented, the settlement amount “was supported by simple math,” and “[a]bsent the settlement, the result would have been the same.”  Therefore, the court held, the insurer was liable for the full amount.

The insurer has petitioned the Supreme Court for leave to appeal the case once again.  A copy of the insurer’s petition is here.  There, the insurer pointed out the grave implications of the Appellate Court’s holding approving of the insured’s behavior: “The Appellate Court’s decision sanctions an insured rolling over on its insurer anytime a defending insurer reserves its rights and files a declaratory judgment action.”  The Appellate Court had simply gotten the law wrong, the insurer argues.  Myoda involved an entirely different situation, where the insurer had allowed the insured to choose its own counsel from the outset, merely reimbursing costs.  The insurer had been told of a prospective settlement and flatly refused to participate – something which never happened in Standard Mutual.  The insurer argued that pursuant to long-settled Illinois law, absent a breach of the duty to defend, an insurer has every right to insist on the right to approve of and participate in settlement.

The insurer offers this powerful argument for the potential for abuse of TCPA litigation inherent in the Fourth District’s decision:

[T]arget a defendant, ensure that it carries insurance coverage, offer the defendant a deal where it can walk away unscathed and in the process obviate the need for any proof that offending faxes were ever received, and cash in on the defendant’s insurance policies.  This game of ‘gotcha’ prejudices insurers which seek to honor their obligations while at the same time exercising their right to walk into court and seek a judicial declaration of their coverage.

The Fourth District’s holding on remand in Standard Mutual is a significant potential threat to insurers operating in Illinois.  The insurer in Standard Mutual appears to have done everything right pursuant to a policy which expressly barred settlement without its consent: it provided (and paid for) counsel, carefully noted and reserved its coverage defenses and explained the potential conflict of interest, and offered the insured the opportunity to waive the conflict – which it did.  The insurer then exercised its clear right to seek a judicial determination of coverage.  As a result, the insurer was held liable for a 100-cents-on-the-dollar “settlement” entered into unilaterally by the insured.

The Supreme Court should allow this new petition for leave to appeal in Standard Mutual Insurance Co. v. Lay and hold that insurers do not authorize collusive settlements by their insured simply by virtue of proceeding pursuant to their rights under the policy.

 

New York’s Highest Court Rappels Down From Possible Major Shift in Insurance Law in K2 Decision

February 18th, 2014

By Katelin O’Rourke Gorman and Greg Lahr, Sedgwick New York

Today, the New York Court of Appeals elected to adhere to precedent in holding that an insurer is indeed allowed to rely on its policy exclusions when faced with a request for indemnity, even if the insurer was not correct in deciding that it did not have a duty to defend. K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., — N.Y.3d –, 2014 WL 590662 (N.Y. Feb. 18, 2014) (“K2-II”). The K2-II decision follows reargument of an earlier decision by the Court of Appeals issued on June 13, 2013. 21 N.Y.3d 384, 971 N.Y.S.2d 229 (N.Y. June 11, 2013) (“K2-I”).

As background, legal malpractice claims had been brought against American Guarantee & Liability Insurance Company’s insured, Jeffrey Daniels. American Guarantee determined that its legal malpractice policy did not cover the claim and, therefore, it did not owe a defense to Daniels, although the court decided otherwise. K2-II at 2. In the underlying malpractice action, the court entered a default judgment against Daniels. Daniels then assigned his rights under the American Guarantee policy to plaintiffs. Plaintiffs, in turn, brought suit against American Guarantee seeking coverage for the judgment entered against Daniels. American Guarantee maintained it had no obligation to provide indemnification for the judgment because “the loss sought was not covered[.]” K2-II at 2. The trial court disagreed with American Guarantee’s position, and granted plaintiffs’ motion for summary judgment. This determination was affirmed on two appeals, the latest under K2-I, on the basis that “American Guarantee’s breach of its duty to defend barred it from relying on policy exclusions.” K2-II at 2.

American Guarantee requested a re-hearing of the K2-I decision, which the Court of Appeals granted on September 3, 2013. Upon rehearing, the court agreed with American Guarantee, noting that the court had failed to “take account of a controlling precedent, Servidone Const. Corp. v. Security Ins. Co. of Hartford (64 NY2d 419 [1985]).” K2-II at 1-2. As a result, the Court of Appeals vacated its decision in K2-I, and reversed the Appellate Division’s order.

The Court of Appeals’ decision in K2-II is largely tied to Servidone. At issue in Servidone was whether an insurer that had breached its duty to defend would be barred from raising coverage defenses to a request for indemnification of a subsequent, reasonable settlement. There, the answer was no; the insurer would not be barred from raising potentially applicable coverage defenses. See K2-II at 2-3. In K2-I, the Court of Appeals had held that, “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” K2-II at 3 (citations omitted). In reaching today’s decision, the Court of Appeals stated that, “[t]he Servidone and K2-I holdings cannot be reconciled.” K2-II at 3. The Court of Appeals also: (1) rejected plaintiffs’ attempt to distinguish Servidone because it involved a settlement, rather than a judgment as was the case in K2; (2) stated that Lang v. Hanover Ins. Co., in which the Court of Appeals held that, “when an insurer has refused to defend its insured, it may litigate only the validity of the disclaimer,” did not apply because “the issue we now face was not presented in Lang,” i.e., “we did not consider any defense based on policy exclusions;” (3) pointed to various other jurisdictions that follow the Servidone approach; and (4) invoked the rule of stare decisis, stating that it is “strong enough” to govern this case. K2-II at 3-6 (citations omitted).

The K2-II decision will come as a relief to insurers, as the Court of Appeals potentially was going to blaze a new path for New York insurance law and significantly restrict an insurer’s ability to deny coverage under an applicable policy exclusion. The court aptly noted: “When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.” K2-II, at 6. However, insurers should be mindful that the rule still exists in New York that, if it does not provide a defense to its insured, it may not relitigate the issues in the underlying action.

It’s All in the Delivery – Proper Renewal Saves Millions

February 14th, 2014

By Carol Gerner, Sedgwick Chicago

In Windmill Nursing Pavilion Ltd. v. Cincinnati Ins. Co., (No. 1-12-2431), the Illinois Court of Appeals concluded that under Ohio law, Cincinnati Insurance Company (“Cincinnati”) provided sufficient notice to its insured, Unitherm, Inc. (“Unitherm”), of renewal terms that added an exclusion for alleged violations of the Telephone Consumer Protection Act of 1991 (“TCPA”). Accordingly, the court affirmed the trial court’s decision granting partial summary judgment in favor of Cincinnati on the validity of the TCPA exclusion. As a result, Cincinnati did not have to pay $4 million out of a $7 million consent judgment.

Windmill Nursing Pavilion, Ltd. (“Windmill”) filed a class action complaint alleging that Unitherm violated the TCPA by sending unsolicited fax advertisements to it in November 2005 and in late April 2006. At the time Unitherm sent the faxes, it carried commercial general liability and umbrella liability coverage through Cincinnati. The original policy expired before the April 2006 faxes were sent. The renewal policy contained a modification that excluded coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any act or omission” that violated the TCPA.

Windmill, Unitherm, and Cincinnati entered into a settlement agreement resolving the class action. The parties agreed to a $7 million consent judgment against Unitherm, which was collectible from Cincinnati under the insurance policies. Cincinnati agreed to provide an initial settlement fund of $3 million, which represented the combined general aggregate and umbrella limits under the original policy. The settlement agreement also provided that Cincinnati’s obligation to pay any further portion of the judgment balance would depend on the outcome of two “carved-out” issues. One of those issues was whether Cincinnati’s notice of reduction in coverage to Unitherm regarding the TCPA exclusion (added to the renewal policy) was sufficient.

The appellate court agreed with the trial court’s ruling that Ohio law applied in the case, and Cincinnati’s notice of a coverage exclusion complied with that state’s insurance law, defeating Windmill’s request to have Cincinnati pay the remaining $4 million of the settlement.

The decision is instructive on several levels. First, when issues of coverage are involved at the time of settlement of the underlying litigation, a settlement may be negotiated which reserves the right to address certain “carved-out” issues as was done in this case. In Windmill, the court found that the release did not preclude the parties from litigating the “carved-out” issues. Second, insurers should be mindful of any differences in statutory requirements for “renewal” as compared to “nonrenewal” situations. In this case, the court held that the notice provided with the renewal policy complied with Ohio law: it was on a separate page, attached to the policy, and was clearly worded regarding the change in coverage. In addition, because the underlying and umbrella policies were “bound together and share[d] the same policy number, the notice was sufficient for both.”

Windmill serves as a reminder that, when limiting coverage on renewal, an insurer should confirm which state’s law will apply to policy interpretation and ensure that it is complying with those specific statutory renewal requirements. As the decision demonstrates, doing the right thing can result in significant savings.

With Tax Season Looming, Appellate Division Refuses to Find Duty to Defend Against IRS Action

February 5th, 2014

By Daniel E. Bryer, Sedgwick New York

In William B. Kessler Memorial Hosp., Inc. v. North River Ins. Co., 2013 WL 6036678 (N.J. Super. Nov. 15, 2013), the Superior Court of New Jersey, Appellate Division, rejected the notion that an insurer’s promise to “defend any Claim” included a duty to defend against an Internal Revenue Service (“IRS”) action seeking taxes and penalties where taxes and penalties were excluded by the policy.

Defendant North River Insurance Company (“North River”) issued a one-year claims-made “Platinum Management Protection” liability insurance policy to plaintiffs William B. Kessler Memorial Hospital, Inc. and Foundation of William B. Kessler Memorial Hospital.  Nine trustees of the Kessler entities were “Insured Persons” under the policy, and plaintiffs in the action against North River.

Beginning in 2009, the IRS sought to collect unpaid section 941 employment taxes from plaintiffs.  Plaintiffs requested that North River defend and indemnify them pursuant to the policy.  North River denied coverage because the IRS action sought taxes and penalties, which were excluded under the policy.  Plaintiffs initiated a declaratory judgment action, claiming North River owed a defense even if taxes and penalties were excluded under the policy because the IRS action fell within the definition of “Insured Person Claim” and North River agreed to “defend any Claim.”

The Court ruled that plaintiffs’ potential exposure to the IRS’s “effort to impose responsibility for section 941 liabilities is undoubtedly either a tax or a penalty” and, therefore, excluded under the policy.  Id. at *3.  The Court rejected plaintiffs’ argument that the “General Conditions” section of the policy created an independent duty to defend against an “Insured Person Claim” regardless of whether the loss was contemplated by the policy.  The Court ruled that plaintiffs’ “universal-right-to-a-defense contention” failed because it “fundamentally change[d] the nature of the policy that was purchased” by transforming the policy “into a contract for unlimited legal services.”  Accordingly, the Court maintained that, “[w]hen a claim is one that ‘even if successful, would not be within the policy coverage,’ there is no duty to defend.”  Id. at *4 citing Danek v. Hommer, 28 N.J. Super. 68, 77 (App. Div. 1953), aff’d, o.b., 15 N.J. 573 (1954).

Wisconsin Supreme Court Declares No Vacancy for Insured in Asbestos Coverage Dispute

February 5th, 2014

By Martin L. Eide, Sedgwick New York

In Phillips, et al. v. Parmelee, et al., – N.W.2d –, 2013 WL 6818145 (Wis. Dec. 27, 2013), the Supreme Court of Wisconsin affirmed trial and appellate court decisions in favor of an insurer arguing that an asbestos exclusion in a Business Owners policy precluded coverage for an accidental release of asbestos in an apartment building.

Phillips arises out of a real property transaction in which the sellers did not disclose the presence of asbestos in the subject property.  The buyer’s pre-sale inspection report, however, indicated that certain heating ducts likely contained asbestos.  Following the sale, the buyers commenced renovations resulting in an accidental release and dispersal of asbestos throughout the building.  As a result, the building was rendered uninhabitable and ultimately lost in foreclosure.

The buyers filed an action against the sellers in Wisconsin state court seeking damages for, among other things, breach of contract and warranty and non-disclosure of defective conditions – including failure to disclose the presence of asbestos.  American Family Mutual Insurance Company (“American Family”) intervened seeking a declaration of no coverage based on an asbestos exclusion in the defendants’ Business Owners policy.

The lone issue on appeal was whether the asbestos exclusion in the policy precluded coverage for the damages sought by the buyers.  The buyers argued that the exclusion was ambiguous because asbestos is not defined in the policy, and the exclusion’s “arising out of” language should be interpreted broadly to require a causal connection between the damages and the release of asbestos.  The buyers argued that a prior appellate court decision was controlling, where the court had found that an asbestos exclusion did not preclude coverage for damages arising out of an accidental release of asbestos, because the exclusion did not provide that coverage was excluded for damages arising out of the “unknowing or accidental” release of or dispersal of asbestos.

The court agreed that a causal connection was required, but contrary to the buyer’s argument, the court found that the loss arose out of the dispersal of asbestos.  The court also rejected the buyer’s ambiguity argument as to the word asbestos – because asbestos in any form is asbestos.  Moreover, the court distinguished the prior appellate court decision, finding that the exclusion at issue in that case was narrower that the American Family exclusion, which included “broad, comprehensive language including a wide range of asbestos related losses.”

California Senate Introduces Bills to Expand Abuse Claims

February 4th, 2014

By Alex Potente, Sedgwick San Francisco

For our readers who are involved in insuring public and private entities against sexual abuse claims, you may be interested to know that legislation to reform the civil and criminal statute of limitations for childhood sexual abuse claims was recently introduced in the California State Senate by Senator Jim Beall, D-San Jose, and Senator Ricardo Lara, D-Long Beach. The two legislative bills seek to prohibit childhood sex offenders from leveraging the statute of limitations to escape civil damages or criminal prosecution.

One of the new bills, SB 924, proposes to reform the statute of limitations for civil lawsuits by increasing the age for when victims of sexual abuse can sue private and public organizations that they allege failed to protect them from sexual abuse offenders. The bill would raise the age deadline from 26 to 40 years old. The bill would also increase the length of time for a person to file suit after he or she claims to have discovered that the molestation caused them psychological harm. Currently, a suit can be filed within three years of such a realization, even after the age-related statute of limitations is already expired. SB 924 would increase this standard to five years.

Additionally, the bill more specifically defines the term “discovery” than does current law, identifying it as the time in which a physician, psychologist or clinical psychologist first informs the victim of the link between their adult psychological injuries and the childhood sexual abuse.

The other bill, SB 926, would raise the age at which an adult survivor of childhood sexual abuse can seek criminal prosecution against his or her offender from 28 to 40 years old. The bill would affect sex crimes against children including lewd or lascivious acts, continuous sexual abuse of a child, and other offenses.

In an attempt to avoid the stumbling blocks of SB 131 – a similar bill that was vetoed by Governor Jerry Brown last fall – SB 924 will apply to both public and private entities and both bills will be applied prospectively on January 1, 2015, if passed and signed into law. However, there are some details that still need to be finalized. For one, it is uncertain as to whether the extension of time from three to five years which a victim has to file suit under SB 924 will be applied only to future discoveries of harm, or also to victims who already have been informed (but where the current three-year limitations period has not expired). Additionally, opponents criticize that SB 924 requires a mental health specialist’s opinion to trigger the date of discovery of harm. Bill opponents argue that victims often know that they have been harmed before they receive an opinion from a mental health specialist. Finally, despite the provision that the bills will be applied prospectively, opponents continue to raise the specter of retroactive application to invalidate the previous statute of limitations and concomitant due process issues.

We will monitor these bills as they work their way through the legislature and provide follow up reports.

 

Eye on Insurance: A Look Back at 2013 and Forward to 2014

February 3rd, 2014

2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.

To view and download a PDF copy, click here.

Slow Down, WA Court Taps the Brakes on Insurer’s Duty to Defend

January 30th, 2014

By Eliot M. Harris, Sedgwick Seattle

On January 28, 2014, the Washington Court of Appeals held that an insurer had no duty to defend a motorist under either his homeowners or auto insurance policies when the unambiguous allegations made against the insured motorist established that the claim was not an “accident” as defined under the policies.

The case is United States Auto. Assoc. v. Speed, No 43728-7-II, arises from a deliberate assault at a traffic stop during a road rage incident.  The claimant, aptly named Robert Speed, and the insured motorist were involved in an altercation at a stop light after they had been driving aggressively towards each other for a period of time.  According to witnesses, the insured motorist got out of his vehicle, opened the door of claimant’s car and beat him with his fists and a metal thermos, pulling the claimant from his vehicle before driving away leaving the claimant bleeding and unconscious in the street.  The State later charged the insured motorist with second degree assault with a deadly weapon.  The insured motorist was convicted of third degree assault after he testified at his criminal trial that he intentionally hit the claimant, but claimed self-defense.

The claimant’s attorney later sent a demand letter to the insured motorist seeking compensation for injuries caused by the “intentional conduct.”  The attorney pointed out that, “were this a case of negligence that was covered by insurance,” the settlement demand would be much higher.  The insured motorist tendered the claim to his homeowners and auto insurer, USAA, which investigated the claim but later denied coverage because the claimant’s injuries were not caused by an accident or an auto accident, and the policies excluded coverage for an intentional or purposeful act.  Subsequently, the claimant and insured motorist agreed to a stipulated judgment of $1.4 million and an assignment of rights and covenant not to execute.

USAA filed a complaint for declaratory judgment and moved for summary judgment on coverage under both policies, as well as the claimant’s extra-contractual claims for bad faith.  The Court granted USAA’s summary judgment motion.

On appeal, the Washington Court of Appeals affirmed the trial court’s finding that USAA did not owe a duty to defend as a matter of law.  Despite recent rulings from Washington courts finding a broad duty to defend even if it appears that the claim may not be covered the court in Speed found that USAA owed no duty to defend under the circumstances.  The Speed court noted that, “insurers do not have an unlimited duty to defend” under Washington law, and the duty to defend “is not triggered by claims that clearly fall outside the policy.”  The court went on to note that, because Washington courts repeatedly have held that an insured’s deliberate conduct does not constitute an accident, and the demand letter unambiguously described the insured’s motorists’ actions as “deliberate,” there could be no coverage for the claim even after interpreting the allegations liberally and  resolving all doubts in favor of a duty to defend.

This is a significant ruling out of Washington, whose courts rarely find no duty to defend as a matter of law.  Although this case does not signal a dramatic shift by Washington courts to narrow the scope of the duty to defend, it does indicate a willingness to set limits on this duty.

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