Insurance Law Hawaii

Reinsurer's Obligation to Provide Coverage Determined Under English Law

    The Second Circuit turned to English law to determine the obligations of the reinsurer. Ins. Co. of the State of Pa. v. Equitas Ins. Ltd., 2023 U.S. App. LEXIS 12461 (2nd Cir. May 22, 2023).

    Insurance Company of the State of Pennsylvania (ICSOP) provided an umbrella policy to a predecessor of Dole Food Company for a policy period from October 1968 to October er 1971. Equitas then reinsured part of ICSOP's exposure for the same three-year period. English law governed the reinsurance policy.

    In 2009, homeowners in Carson, California sued Dole for polluting their soil and groundwater. Dole and ICSOP settled these claims and allocated $20 million of the settlement liability to the ICSOP-Dole policy, even thought the homeowners' property damage and personal injuries continued to accrue after the ICSOP-Dole policy period ended. In doing so, the settlement followed The California law for allocation, known as the "all sums rule." This rule treated any insurer whose policy was in effect during any portion of the time during which the continuing harm occurred as jointly and severally liability for all property damages or personal injuries caused by a pollutant. 

    ICSOP then sought reinsurance coverage from Equitas for its liability. Equitas denied the claim on the basis that English law, which governed the reinsurance policy, would not have allocated ICSOP's liability on an all sums basis. Equates asserted that English law would have prorated ICSOP's liability based on the number of years it provided coverage to Dole. Therefore, Equitas contended that its reinsurance obligations were similarly limited. 

    ICSOP sued, claims that Equitas was liable on the policy for the reinsured portion of ICSOP's settlement liability. The district court granted summary judgment to ICSOP.

    On appeal, Equitas did not dispute ICSOP's liability to Dole under the ICSOP-Dole policy or the settlement's apportionment of damages. The Eighth Circuit noted that English law had followed a version of the all sums rule, albeit in circumstances that were not present here. The court concluded that English law would construe the reinsurance policy as co-extensive with the ICSOP-Dole policy. English law recognised a strong presumption that liability under reinsurance was co-extensive with the underlying insurance. This was described as the back-to-back nature of reinsurance. Therefore, the back-to-back presumption applied to the reinsurance policy, thus rendering the parties' obligations co-extensive.

    The district court was therefore affirmed. 

 

Umbrella Carrier Must Drop Down to Fill Gap in Coverage

    The umbrella insurer was required to drop down when the primary carrier's policy only covered the additional insured when it was vicariously liable for the named insured's operations. Am. States Ins. Co. v. Ins. Co. of the State of Pa., 2020 U.S. App. LEXIS 585 (9th Cir. Jan. 7, 2020).

    Sierra Pacific Industries and Howell's Forest Harvesting were sued for damages caused by the Moonlight Fires. Howell was insured by American States. Sierra was an additional insured under the American States policy, but only to the extent that Sierra was vicariously liable for Howell's operations. Sierra was insured under an excess and umbrella policy issued by Insurance Company of the State of Pennsylvania (ICSOP). 

    Because American's policy did not extend to Sierra's potential non-vicarious liability for the property damage caused by the fire, there was a gap in the scope of American's defense obligation in the underlying suits. The district court noted that when claims were covered by an umbrella policy but not by the underlying primary policy, the umbrella insurer dropped down to provide primary coverage.

    Further, because American and ICSOP shared the same level of obligation on the same risk for the same insured, and American undertook its defense duty while ICSOP did not, the district court correctly held American was entitled to equitable contribution of defense costs from ICSOP. 

    In addition to providing excess coverage, the ICSOP policy included an umbrella clause providing that ICSOP would cover "the total of all damages" resulting from property damage "covered by the [ICSOP] policy but not covered by an underlying policy." The ICSOP policy also created both excess and umbrella defense obligations. Its umbrella defense obligation provided that ICSOP had a "duty to defend any claim or suit seeking damages covered by" the ICSOP policy "but not covered by any underlying insurance."  Since the American policy provided for a duty to defend only with respect to Sierra's vicarious liability, the district court correctly determined that the ICSOP had a duty to drop down and defend the underlying suits in a co-primary capacity with American.

   In apportioning defense costs, the district court determined that the most equitable approach was to split costs equally between American and ICSOP. This was not an abuse of discretion. 

    Finally, the district court should have awarded prejudgment interest to American. The case was remanded with an instruction to award prejudgment interest to American. 

    

Insurer's Summary Judgment Motion for Rescission or Reformation of Umbrella Policy Fails

    The insurer was unsuccessful in seeking rescission or reformation of an umbrella policy. Great Am. Ins. Co. v. Zelik, 2020 U.S. District. LEXIS 5229 (S.D. N. Y. Jan. 6, 2020). 

    Kim Hodges tripped and fell in front of vacant lot owned by Joseph Zelik, a real estate investor. Zelik tendered to Great American under the umbrella policy he had covering the lot. Zelik obtained the policy through Secure Insure, an insurance broker. 

    As part of the application process for the umbrella policy, Zelik sent Secure a spreadsheet of twenty-seven properties Zelik wanted insured under the policy,. The spreadsheet included descriptions of the properties as well as the underlying carrier and policy number per location. Secure provided Great American with the same spreadsheet. The spreadsheet indicated that the underlying carrier for a number of the properties was Allstate. All properties for which the underlying insurance policy was listed as "Allstate" had an underlying homeowner's policy.

    The application, which was signed by Secure on Zelik's behalf, stated that underlying insurance for each property was a CGL policy with a limit of no less than $1 million per occurrence. Neither Zelik nor Secure altered the Allstate homeowner's insurance underlying some of the properties before binding the umbrella policy. 

    Great American offered $5 million of commercial coverage under the umbrella policy, The policy covered all properties listed in the spreadsheet, including those covered under the Allstate homeowner's policy. 

    One of the properties listed as covered in the umbrella policy was a vacant lot at 467 Bushwick Avenue, where Hodges tripped and fell. Allstate provided Zelik with a defense in the suit filed by Hodges. Allstate notified Great American of the suit. Allstate tendered the one million dollar limit of its primary policy to contribute to the Hodges' lawsuit for the settlement demand  in excess of the Allstate limit.  Allstate advised Great American of the tender. 

    When Great American investigated, it learned that the underlying policy for 467 Bushwick Avenue was a homeowner's policy. Great American advised Zelik that based on material misrepresentations made in the application for the umbrella policy, Great American would seek to rescind the policy. Great American then filed suit against Zelik. Zelik filed a counter-claim and a third-party complaint against Secure.

    Great American moved for summary judgment seeking to rescind or reform the policy. The court determined that the evidence on whether there was a misrepresentation was not clear and substantially uncontradicted on the question of materiality, so it remained a question for the jury. Provisions in the policy suggested that the nature of the underlying insurance was immaterial to Great American's decision to issue the policy. The policy stated that if the insured failed to maintain compliant underlying coverage, Great American would only be liable to the same extent that it would have been had the insured fully complied with the policy requirements. 

    Great American also asked that the policy be reformed to remove the properties that were not properly insured by CGL coverage. While Great American showed that it entered the policy under the mistaken belief that all the properties had underlying CGL policies, it did not show that this mistake was mutual. Nor did Great American show that Secure, Zelik's agent, believed that the six properties were covered by CGL policies. Therefore, Great American's motion for summary judgment was denied,. 

    Secure's motion for summary judgment against Zelik also failed. Zelik adduced evidence that it asked Secure to obtain umbrella coverage for all of his properties, including 467 Bushwich Avenue. If Great American succeeded on any of its claims that the umbrella policy did not cover the Hodges incident, Secure would have failed to do just that. Therefore, Secure's motion for summary judgment in the negligence and malpractice claim failed. 

Negligent Misrepresentation Not Covered by Homeowner's Policy

    The seller's alleged negligent misrepresentation about the condition of the house was not covered by the homeowner's and umbrella policies. Allstate Ins. Co. v. Swaminathan, 2017 U.S. Dist. LEXIS 211931 (D. Conn. Dec. 27, 2017).

    The insureds owned a home insured by Allstate under both a homeowner's and umbrella policy. They sold the house to Kristin Cole. Thereafter, Cole discovered that concrete in the home had been deteriorating for years and would need to be replaced. 

    Cole sued the insureds, alleging they knew or should have known about the condition of the concrete and that the concrete houses in the area had been deteriorating. Further, the insureds used a sealer to conceal the problem and failed to disclose it.  

    Allstate denied the claim and filed suit for a declaratory judgment that it had no duty to defend or indemnify. Allstate then moved for summary judgment. 

    The homeowner's policy provided coverage for claims "because of bodily injury or property damage arising from any occurrence to which this policy applies." The underlying lawsuit did not hinge on the deteriorating concrete itself, but rather on the insureds' intentional or negligent misrepresentations about the condition of the concrete. None of the allegations in the complaint asserted property damage or bodily injury covered by the homeowner's policy. Instead, Cole sought damages related to the insureds' fraudulent or negligent misrepresentation of the condition of the concrete supporting the house. Therefore, Cole's injury stemmed from the insureds' alleged deception, not from the property damages that preceded the misrepresentations. Allstate had no duty to defend the insureds under the homeowner's policy based upon the alleged misrepresentation.

    Nor was there coverage under the umbrella policy. The policy did not cover intentional acts or damage that the insured could have reasonably expected to result from an insured's intentional conduct. 

 

No Coverage for Medical Malpractice Claims

    The court determined there was no coverage for 150 underlying lawsuits which alleged that injections for back pain caused bodily injury and death. Westfield Ins. Co. v. Orthopedic & Sports Med. Ctr. of N. Ind., 2017 U.S. Dist. LEXIS 46119 (N. Ind. March 28, 2017).

    NECC made preservative-free methylprednisolone acetate (MPA). MPA was an epidural steroid medication that was administered by injection for pain management. Defendants Orthopedic and Sports Medicine Center of Northern Indiana, Inc. (OSMC) and its affiliate, ASC Surgical Ventures, LLC (ASC), purchased MPA from NECC to treat patients with back pain. In September 2012, a multistate outbreak of fungal meningitis, lumbar fungal infections and related injuries arose as a result of patients receiving injections of contaminated MPA.

    Over 150 patients and personal representatives sued OSMC ASC, and their physicians (OSMC Physicians) in state court. Most of the patients also filed complaints with the Indiana Department of Insurance. (Malpractice Complaints).

    Westfield issued CGL and umbrella policies to the OSMC defendants.The defendants requested that Westfield defend and indemnify against the lawsuits and Malpractice Complaints. Westfield refused, and filed an action for declaratory judgment in federal court against the OSMC defendants and the patients.

    Indiana law controlled the coverage dispute. The court first determined that there was no duty to defend the Malpractice Complaints which were addressed by a medical review panel. The panel had the sole duty to express its expert opinion as to whether or not the evidence supported the conclusion that the defendants acted or failed to act within the appropriated standards of care as charged in the complaint. The panel did not have jurisdiction to award damages against the OSMC Defendants, eliminating the possibility of coverage under the Westfield policies.

    Nor was there a duty to defend and/or indemnify insureds in the lawsuits. There was a difference under Indiana law between an accident/occurrence and a professional error or omission. An accident/occurrence was covered by CGL insurance, while a professional error or omission was covered by E&O insurance.

    The lawsuits alleged a professional relationship between the OSMC Defendants, who were "engaged in the business of providing health care," and the patients to whom they administered the epidural MPA injections. The failure to meet a standard of care under a contractually assumed duty was not an "accident." Although the OSMC Defendants did not intentionally commit wrongdoing, this failure did not convert their actions into an "accident." The lawsuits' claims that the OSMC Defendants were negligent in selecting NECC as a supplier of MPA and in managing the supplier relationship did not allege an "accident" under the policies.

    Even if there was an accident, the exclusions barred coverage. For example, the umbrella policies had a Professional Services Exclusion. It provided that the insurance did not apply to bodily injury "due to rendering . . . any professional service," which included "medical . . . or nursing service or treatment, any health or therapeutic service or treatment and service in the practice of pharmacy." Westfield contended this exclusion eliminated coverage because the negligence claims were based on acts taken by the OSMC Defendants in the course of providing professional services. The insureds contended that the term "treatment" in the exclusion was ambiguous, and should be construed against Westfield. The court disagreed, Because the injections constituted the rendering of a medical service or "treatment," the lawsuits' negligence claims were excluded under the Professional Services Exclusion.

    Therefore, no coverage existed and no duty to defend or to indemnify arose.

No Bad Faith Failure to Indemnify for Punitive Damages

    The court determined the insurer did not act in bad faith when it failed to indemnify the insured for an award of punitive damages. Bensalem Racing Ass/n v. Ace Prop. & Cas. Ins. Co., 2017 Phila. Ct. Com. Pl. LEXIS 11 (Pa. D. Jan. 20, 2017).

    The insured, Parx Racing, operated a racetrack. Mario Ramiro Calderon was injured in an accident while he was exercising a horse at the track. The accident was allegedly caused when a chicken on the racetrack spooked the horse on which Calderon was riding, causing Calderon to fall, suffer injury and die. A wrongful death suit was filed against Parx and its related entities, alleging negligence in allowing chickens to roam freely on the racetrack. No Parx employees were identified as defendants. An amended complaint was filed to add a claim for punitive damages, alleging that Parx knew that the presence of chickens posed a serious damage to horse riders, yet Parx took no action to ban the chickens from the racetrack.

    Parx had a commercial umbrella liability policy with Ace. The policy did not contain an exclusion for punitive damages. Ace associated with the insured in the defense of the Calderon action, as permitted by the policy, but issued a reservation of rights letter disclaiming coverage for any punitive damages.

    The jury returned a verdict against Parx and awarded $7,764,429 in damages. Of this amount, $5,000,000 was attributable to punitive damages. The underlying case eventually settled for $5.5 million, with $2,647,374 attributable to punitive damages. Ace paid the judgment with the exception of the punitive damages.

    Parx sued Ace for breach of contract and bad faith for failing to pay the punitive damages portion of the judgment. Ace argued it was a violation of Pennsylvania law and its public policy to allow coverage for punitive damages. An exception existed, however, where the insured's liability stemmed solely from vicarious liability. Allowing one who is only vicariously liable for punitive damages to shift the burden of satisfying the judgment to his insurer did not conflict with the rule that otherwise disallowed coverage for punitive damages.

    The court found that the limited exception for vicarious liability did not apply to Parx. The record was filled with evidence of Parx's own direct negligence based on its knowledge of the chickens' presence and the company's failure to address the problem. For example, Parx's chief of security was informed about the chickens spooking horses and responded there was nothing they could do to solve the problem. Therefore, the evidence was persuasive that the jury's punitive damages award was against Parx for its own direct negligence The company failed to maintain a safe racetrack even when it was aware of the risks.  

Umbrella Policy Must Drop Down to Assist with Defense

       The court determined that an umbrella carrier was obligated to assist the general liability insurer in defending the insured. Am. States Ins. Co. v. Insurance Company of the State of Pennsylvania, 2016 U.S. Dist LEXIS 38128 (E.D. Cal. March 23, 2016). 

       Sierra Pacific Industries obtained rights to timber harvesting operation on a parcel of land in northern California. Sierra hired Howell's Forest Harvesting to perform certain timber harvest operations under the terms of a logging agreement. The logging agreement required Howell to obtain a CGL policy and to name Sierra as an additional insured.

       In September 2007, a fire ignited while Howell was working in the area, and eventually burned 65,000 acres of land. Sparks caused by Howell's bulldozers allegedly caused the fire. Multiple lawsuits were filed against both Sierra and Howell.

       American States issued a CGL policy to Howell which included Sierra as an additional insured. Coverage was afforded to Sierra, however, "only to the extent Sierra is held liable due to: . . . Howell's ongoing operations for Sierra." Therefore, coverage was limited to Sierra's vicarious liability as to Howell, and Sierra's independent liability was not covered. 

      Sierra also hds an umbrella policy with Pennsylvania. The policy provided excess insurance when Sierra was vicariously liable with Howell and American States' policy limits were exhausted by payment of claims. Further, Pennsylvania's policy provided umbrella, or primary, coverage when property damage arose from Sierra's non-vicarious liability with Howell pursuant to American State's CGL policy.

       After the underlying suits were filed, Sierra tendered to both American States and Pennsylvania. American States accepted the defense. Pennsylvania did not defend Sierra. 

       The fire-related suits against Sierra settled, exhausting both American State's and Pennsylvania's respective policy limits. 

       American States then sued Pennsylvania for equitable contribution of defense costs paid to Sierra. The parties filed cross-motions for summary judgment.

       The court found that Pennsylvania had a primary duty to defend Sierra. Under the CGL policy, American States was required to defend Sierra only to the extent Sierra was vicariously liable with Howell. Conversely, Pennsylvania's umbrella policy covered Sierra for any suit seeking damages for property damage which was not covered by American State's policy. Pennsylvania's policy therefore dropped down and became primary coverage for suits in which Sierra was independently liable for property damage. 

       In the underlying cases, plaintiffs alleged that Sierra could have been independently liable for the fire because of Sierra's responsibility to suspend operations in certain weather conditions. Thus, Pennsylvania's duty to drop down and defend as a primary insurer under the umbrella policy could have been triggered by claims in the underlying lawsuits. 

       Therefore, American State's motion for summary judgment was granted while Pennsylvania's motion was denied.

Insolvency of Primary Carrier Does Not Invoke Excess Coverage

   The insured failed to present any argument for excess coverage after the insolvency of the primary carrier. Canal Ins. Co. v. Montello, Inc., 2015 U.S. App. LEXIS 20625 (10th Cir. Nov. 27, 2015).

   Montello distributed an oil drill containing asbestos between 1966 and 1985. Montello was sued by individuals claiming injuries due to exposure to the asbestos.

   Montello was insured by The Home Insurance Company from March 1975 to March 1984. In 2003, Home was declared insolvent. Home did not pay any claims for bodily injury on Montello's behalf. 

   Montello's excess carrier, Canal Insurance Company, filed a declaratory judgment action against Montello. The district court agreed with Canal that it had no obligation to drop down and defend or indemnify Montello.

    The Tenth Circuit affirmed. Canal did not undertake to insure the solvency of Montello's primary insurer. The excess policy triggered Canal's obligation to indemnify when personal injury was caused by an occurrence. The insolvency of the underlying insurer was not an occurrence as defined in the policy. 

   Further, Canal's liability was triggered when the underling insurer's limits were reduced by payment of loss. The underlying insurer's inability to pay was not payment of loss. Montello also argued Canal's umbrella policy provided coverage. For Canal's umbrella policy to apply, the underlying insurance had to be inapplicable to the occurrence. Home's policies provided coverage for asbestos-=related claims, making them applicable to the occurrence. 

   Nor did the other insurance clause invoke excess coverage. The other insurance provision was not intended to expand an excess or umbrella insurer's liability. Therefore, the clause did not require Canal to assume the obligations of underlying insurers listed in the Schedule of Underlying Policies simply because those insurers were no longer able to fulfill their obligations.

   Finally, the district court correctly held that the excess insurer's duty to defend did not arise as a result of the primary insurer's inability to defend. The language of the defense endorsement was clear: the excess insurer had to provide defense coverage only when the extent of the underlying insurer's obliglations had been satisfied.

No Additional Insured Coverage Under Umbrella Policy

   The additional insured was not covered under a property policy for an injury occurring after work was completed. Lewark v. Davis Door Servs., 2014 Wash. App. LEXIS 341 (Wash. Ct. App. Feb. 10, 2014).

    Public Storage, Inc. hired Davis Door Service Inc. to perform work at its facilities. The master agreement required Davis Door to maintain a CGL policy that insured Public Storage "during the entire progress of the work." Davis Door secured a CGL policy with American Economy. It also took out an umbrella liability policy with American States.

   After Davis Door completed work on a door, Terrie Lewark injury her back opening the door. She sued Public Storage and Davis Door. Lewar and Public Storage settled. Public Storage assigned to Lewark its rights under the umbrella policy with American States. Lewark then sued Davis Door and American States. The trial court found that Public Storage was not an additional insured under the American States umbrella policy. 

   The umbrella policy provided that insured entities included any person or organization "for which an insured is required by virtue of a written contract . . . to provide the kind of insurance that is offered by this policy." Public Storage argued that the language, "the kind of insurance that is afforded by this policy," was ambiguous. The policy did not specify whether it was referring to a CGL policy or an umbrella policy. Whether both policies provided CGL coverage did not create an ambiguity. The master agreement required a CGL policy. Davis Door complied with the requirement. The umbrella policy was excess coverage, providing coverage in excess of the limits of the CGL policy and in excess of the amounts required by the master agreement. Coverage under the umbrella policy was not required by the master agreement.

   Further, Lewark's underlying claim was based on an injury more than two months after the repairs to the door had been completed. The master agreement required Davis Door to maintain insurance "during the entire progress of the work." This language did not require completed operations coverage. Therefore, Public Storage was not covered under the umbrella policy as an additional insured.

Insurer Must Defend Under Policy Providing Excess and Umbrella Coverage

   Defense obligations under a policy containing umbrella and excess coverage were before the court in Legacy Vulcan Corp. v. The Superior Court, 184 Cal. App. 4th 285 (Cal. Ct. App. 2010).

   Vulcan manufactured and sold perchloroethylene.  The City of Modesto sued Vulcan, alleging that use of perchloroethylene by the dry cleaning industry had resulted in environmental contamination.  Vulcan tendered its defense to Transport Insurance Company. 

   Transport denied coverage and filed suit for declaratory relief.  The trial court concluded Transport's obligations were limited to those of an excess carrier and that the duty to defend did not arise until the exhaustion of a self-insured retention and all underlying insurance.

   The Court of Appeals disagreed, determining that Transport's policy provided both excess and umbrella coverage.  One clause granted coverage in excess of all underlying insurance, clearly providing excess coverage.  A second clause provided for coverage of claims "not within the terms of the coverage of the underlying insurance listed in Schedule A."  Under this clause, if the underlying insurance listed in Schedule A provided no coverage for a particular claim (as distinguished from coverage that had been exhausted), and the claim was within the scope of the Transport policy, the Transport policy covered the claim.  Accordingly, this second clause provided coverage for claims where the underlying policies specified in the schedule provided no coverage.  As a result, it provided umbrella coverage, which constituted primary coverage.  Consequently, there was a duty to defend under the umbrella clause.

   Further, the reference to "underlying insurance" in the first, excess clause was ambiguous.  The phrase could reasonably be interpreted to mean either the insurance listed in Schedule A only or all underlying insurance held by Vulcan.  Resolving this ambiguity in favor of the insured, the term "underlying insurance" as used in the first clause encompassed only the policies listed in Schedule A.

   Finally, the court considered whether the self-insured retention had to be exhausted before Transport's duty to defend arose.  The Court noted that the impact of an SIR on the duty to defend depended on the particular policy language.  In the absence of clear policy language, to require the exhaustion of an SIR before an insurer had the duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.  Transport's policy stated that the duty to indemnify was limited to amounts in excess of the $100,000 retained limit, but did not state that the duty to defend such claims was limited by the retained limit in any manner.  Therefore, the duty to defend was not limited by the policy's SIR.

   Thanks to my Damon Key colleague and fellow blogger (inversecondemnation.com), Robert Thomas, for flagging this case.