Source: http://traublieberman.blogspot.com/2011/08/
Timestamp: 2019-04-18 19:12:12+00:00

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Pitfalls associated with drafting settlement agreements, particularly as to coverage matters, are illustrated by the recent decision in Harvard Drug Group, LLC v. Twin City Fire Insurance Co., 2011 U.S. Dist. Lexis 86556 (E.D. Mich. Aug. 5, 2011). The insurer in that case issued a claims-made policy to the insured, which provided employment practices liability coverage. During the term of the policy, the insured tendered a harassment claim and discrimination lawsuit by one of its employees to the insurer. The insurer and the insured eventually reached a settlement as to coverage for the underlying action, which was memorialized in an agreement. After the settlement was finalized and the policy terminated, and apparently was not renewed, the employee filed a second lawsuit against the insured, based on the same facts, but this time alleging wrongful termination. The insurer denied coverage for the second action, on the grounds that it was not made during the policy period, as required by the insuring agreements, and was included in the terms of the settlement agreement. The insured did not accept this position, and commenced a coverage action against the insurer.
The insurer filed a motion to dismiss the action, which the insured opposed. The insured also filed a cross motion for summary judgment. The court denied the insurer’s motion, and granted the insured’s cross motion. In reaching this decision, the court first considered whether the second action by the same employee was covered under the policy’s insuring agreements, which mandated that claims be first made during the policy period. The court determined that, although the second claim was first made after the policy terminated, it arose from “interrelated wrongful acts,” and hence was deemed a single claim with the prior one that was made during the policy period. The court relied on provisions contained in the policy which stated that claims arising from the same or interrelated wrongful acts represent single claims. Despite holding that the two actions were essentially one, the court determined that the settlement agreement did not apply to the second action. According to the court, the policy’s interrelated wrongful act provisions could not be read into the settlement agreement. The court also found that the unambiguous language of the settlement agreement did not support the insurer’s position. The agreement contained standard provisions which stated that the insured released any and all rights and claims under the policy, “whether known or unknown, suspected or unsuspected, fixed or contingent,” arising out of or related to the first action. The court determined that these provisions could not be read to apply to a claim that was not yet in existence at the time of the settlement. They were instead construed to apply to unknown liabilities and damages only, which were associated with the first action filed by the employee against the insured. The court, therefore, determined that the insurer had to provide coverage for the second action.
The court’s holdings in this case are highly questionable, and appear to be based on pro-insured inclinations. The insurer, however, could have avoided this outcome by the inclusion of more specific language in the settlement agreement, which would have applied to any future claims, whether in existence or not, that arose from the same or related facts as the first action.
In Nationwide Mutual Ins. Co. v. Mortensen, 2011 U.S. Dist. LEXIS 77356 (D. Conn. July 18, 2011), the United States District Court for the District of Connecticut affirmed its earlier decision that an insurer was not entitled to recoupment of defense costs despite receiving an adjudication that it had no duty to defend. Nearly one month later, in its recent decision in Scottsdale Ins. Co. v. R.I. Pools, Inc., 2011 U.S. Dist. LEXIS 90380 (D. Conn. Aug. 15, 2011), a different judge from the same federal district court ruled that an insurer is entitled to reimbursement of defense costs under such circumstances.
In both matters, the insurers cited primarily to the 2003 decision by the Connecticut Supreme Court in Security Ins. Co. of Hartford v. Lumbermans Mutual Casualty Co., 826 A.2d 107 (Conn. 2003), in which the court stated that it is proper to “order reimbursement for the cost of defending the uncovered claims in order to prevent the insured from receiving a windfall.” Lumbermans involved an insured’s asbestos liabilities over a seventeen-year period, several years of which it was uninsured. The Connecticut Supreme Court held that in light of Connecticut’s pro rata methodology for allocating defense costs, the insured should be required to pay its prorated share of the defense for uninsured periods.
The federal judge in Mortensen limited Lumbermans to its facts, reasoning that recoupment of defense costs was proper in that case since there was no potential for coverage in the uninsured periods. The Mortensen court distinguished the facts in Lumbermans from those before it, where “there was at least a potential that the defendants’ claims [for breach of contract and trademark infringement] would be covered.” (Emphasis in original.) Given this potential for coverage, explained the court, “Nationwide had a temporary duty to defend until a determination on coverage was made,” and as such, it would be improper for Nationwide to recoup its defense costs incurred during this period. The court further held that absent a policy provision to the contrary, or an explicit assent by the insured, an insurer would never be entitled to recoupment under such circumstances.
By contrast, in the more recent decision in R.I. Pools, a different judge from the same court held that the insurer was entitled to recoupment of defense costs following an adjudication of non-coverage. Looking to the general liability policy’s supplementary payments provision, the judge concluded that the insurer is entitled to reimbursement of all defense costs associated with defending suits deemed not covered, although it would not be entitled to reimbursement of costs associated with investigating or settling any such suits. Of note, the judge in R.I. Pools cited only to the Lumbermans decision in support of its holding, and did not address the court’s earlier decision in Mortensen. Moreover, the judge did not discuss whether the policy must have a recoupment provision or whether the insured must assent to the possibility of recoupment of defense costs.
The contrasting decisions in Mortensen and R.I. Pools makes it very likely this issue will continue to be litigated in Connecticut, at least at the federal level.
In its seminal decision Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998), the Florida Supreme Court held that the terms “irritants” and “contaminants” as used in an absolute pollution exclusion, are not ambiguous, and that the exclusion is not restricted to matters traditionally thought of as industrial or environmental pollution. The United States Court of Appeals for the Eleventh Circuit, in a matter involving Florida law, recently had occasion to address the Deni decision in Markel Int'l Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, 2011 U.S. App. LEXIS 16552 (11th Cir. Aug. 11, 2011), a case involving the issue of whether millings resulting from road work constituted “contaminants” or “irritants” for the purpose of the pollution exclusion.
The insured, Florida West, was sued by an individual claiming to have suffered severe bacterial poisoning as a result of being required to wade through retained flood waters at the insured’s facility. Plaintiff claimed that the water had been contaminated by millings from nearby roadwork, and that these millings specifically were the source of his bacterial poisoning. The insurer, Markel, denied coverage based on the policy’s pollution exclusion, as well as another exclusion not relevant to the appeal. The federal district court held in favor of Markel, relying in large part on the decision in Deni.
… he contracted bacterial poisoning and infection from millings, which Florida West allowed to mix with flood water. We agree with the district court that "[w]hile millings may not inflict injury under normal circumstances, millings are alleged to have produced bacterial poisoning and infection, which certainly are 'irritating effects.'" Thus, under the facts alleged in [the underlying] complaint, the millings constituted a pollutant.
In Las Vegas Metropolitan Police Dep’t. v. Coregis Ins. Co., 2011 Nev. LEXIS 52 (Aug. 4, 2011), the Supreme Court of Nevada addressed whether an insurer must be prejudiced in order to disclaim coverage based on late notice, and if so, which party has the burden of demonstrating prejudice or the lack thereof.
The insured, Las Vegas Metropolitan Police Department, was named as a defendant in an underlying civil rights lawsuit. The Department did not give notice to Coregis of its potential liability until ten years after the incident giving rise to the litigation. Coregis denied coverage for the matter on the basis of the insured’s late notice. In subsequent coverage litigation, the lower court granted summary judgment in favor of Coregis, concluding that the Department’s notice was late and that Coregis was prejudiced as a result.
On appeal, the Supreme Court of Nevada initially concluded that there was a genuine issue of material fact as to whether the Department’s notice was late, since there was a question as to which of the policy’s notice requirements applied. More significantly, the court addressed which standard should apply for late notice disputes under Nevada law. Citing to what it considered the “majority rule,” the court held that an insurer must be prejudiced in order to deny coverage based on late notice and that it is the insurer’s burden to demonstrate prejudice. Prejudice, explained the court, exists “where the delay materially impairs an insurer’s ability to contest its liability to an insured or the liability of the insured to a third party.” The court further noted that prejudice is necessarily an issue of fact.
In Citigroup Inc. v. Federal Ins. Co., 2011 U.S. App. LEXIS 16316 (5th Cir. Aug. 8, 2011), the United States Court of Appeals for the Fifth Circuit, applying Texas law, considered whether a settlement between an insured and a primary layer insurer for an amount less than the policy’s limits could be considered exhaustion of that policy for the purpose of triggering excess policies in the insured’s tower of coverage.
Citigroup, as successor to Associates First Capital Corporation, sought coverage under a $200 million tower of directors and officers coverage for underlying consumer lending practices claims. While Citigroup provided timely notice of the claims, it later settled the matters without the consent of its insurers, prompting an initial denial of coverage from each of the insurers in the tower. Citigroup’s primary insurer, Lloyd’s, later changed its coverage determination and agreed to a $15 million settlement with Citigroup, notwithstanding the fact that the policy had a $50 million limit of liability. The remaining insurers maintained their denial of coverage, resulting in coverage litigation.
The Fifth Circuit considered whether the lower court properly granted summary judgment to the insurers on the basis that there was no exhaustion of the primary Lloyd’s policy. Citing to New York law, Citigroup argued that if an excess policy ambiguously defines “exhaustion,” then settlement with an underlying insurer, even if for an amount less than full policy limits, necessarily constitutes exhaustion for the purpose of determining excess layer attachment. The court disagreed that there was any ambiguity, holding that each excess policy plainly defined when and under what circumstances underlying insurance would be considered exhausted. Specifically, each policy required payment of the “full” or “total” amount of underlying limits. As such, the court held that Citigroup’s settlement with Lloyd’s, for an amount less than the full policy limits of that policy, could not be considered exhaustion for the purpose of triggering Citigroup’s excess insurance policies.
In Illinois National Ins. Co. v. Wyndham Worldwide Operations, 2011 U.S. App. LEXIS 15894 (3d Cir. Aug. 3, 2011), the United States Court of Appeals for the Third Circuit had occasion to consider whether the doctrine of mutual mistake allows for reformation of an insurance policy against a party that was not part of the insurance procurement process.
Illinois National had issued several years of successive aircraft fleet insurance policies to Jet Aviation, an aircraft maintenance and charter services company. While the policies were negotiated exclusively between Illinois National and Jet Aviation, the policies extended coverage to certain qualifying Jet Aviation clients, but only when Jet Aviation managed the client’s aircraft and aircraft usage. In the fifth year of the program, Jet Aviation and Illinois National negotiated a revised managed aircraft endorsement, which was the endorsement extending coverage to third parties such as Wyndham. While Jet Aviation and Illinois National intended for the endorsement to provide broader coverage for entities affiliated with Jet Aviation, the actual wording of the endorsement also had the unintended effect of providing broad coverage to clients of Jet Aviation, such as Wyndham, even when using aircraft without Jet Aviation’s management. Wyndham was not aware of the change to the endorsement when issued.
During the period of the policy with the revised endorsement, a Wyndham employee rented a Cessna aircraft from a company other than Jet Aviation. The aircraft subsequently crashed, resulting in the death of five people on the ground. While Jet Aviation had no involvement with the involved plane, the wording of the revised management aircraft endorsement nevertheless would have provided liability coverage to Wyndham for the matter. Illinois National subsequently brought a declaratory judgment action against Wyndham arguing, among other things, that the policy should be reformed to reflect the mutual intent of Illinois National and Jet Aviation. Wyndham argued, and the United States District Court for the District of New Jersey agreed, that because Wyndham was not involved “in the negotiation and drafting” of the policy, the standard for reformation would not be one of mutual mistake, but rather the more stringent standard of unilateral mistake under which a party’s own negligence cannot serve as a basis for reformation.
In a majority panel decision, however, the Third Circuit concluded that notwithstanding the fact that Wyndham did not participate in the underwriting process, “[r]eformation on the basis of mutual mistake can be granted even when it is to the disadvantage of a third party.” In light of the testimony from Illinois National and Jet Aviation that their mutual intent was to limit coverage for non-owned aircraft to aircraft used by or at the direction of Jet Aviation, the Third Circuit held that the lower court erred by analyzing Illinois National’s claim under the unilateral mistake standard rather than the less severe standard of mutual mistake. Accordingly, the Third Circuit remanded the matter for further evaluation of Illinois National’s and Jet Aviation’s intent, as well as Wyndham’s argument that reformation, even in light of a mutual mistake, would be inequitable under the circumstances.
In its recent decision Crestdale Associates, Inc. v. Everest Indemnity Ins. Co., 2011 U.S. Dist. LEXIS 84380 (D. Nev. Aug. 1, 2011), the United States District Court for the District of Nevada addressed the issue of whether an insured is entitled to a refund of earned advanced premium on the grounds that the risk intended to be covered under the policy never came to fruition.
Premium audit adjustment calculations will be made to determine additional premiums only. There will be no downward adjustments of the advance premium resulting from the premium audit provisions of this policy. … There will be no return of any portion of the advance premium in the event of cancellation of the policy after [the date the advance premium becomes fully earned].
Notwithstanding this express language of this provision, the insured argued that it should be entitled to a refund of premium since the anticipated receipts from the developments never happened. The advance premium had been calculated at the height of the real estate market. Just after the policies were issued, however, the market collapsed, causing Crestdale to dramatically alter its plans for the developments. In fact, Crestdale completely abandoned one of the developments and ended up selling the vacant lots to a competitor. It was this abandoned development – referred to as the “Hacienda” development – that was the subject of competing summary judgment motions before the Crestdale court.
The policy covering the Hacienda development had a thirty-six month policy period. Pursuant to the policy’s premium endorsement, the advance premium became fully earned after twelve months. Crestdale cancelled the policy just prior to the two-year anniversary of the policy. Crestdale claimed that it was entitled to a full refund of the advance premium paid on the Hacienda policy, claiming that the policy could not be considered a valid contract since the necessary risk never attached. In other words, argued Crestdale, there was no consideration for the premium paid. Crestdale also argued that Everest would be unjustly enriched if it retained the advance premium among under such circumstances.
The court disagreed, holding that an actual risk did attach to the policy since the policy was issued, thereby binding Everest to provide coverage for the Hacienda development for the period that it was in effect. During this period, the court explained, Everest “remained contractually obligated to anticipate risks resulting from the fact that Crestdale could have begun construction at any time … .” That Crestdale never commenced such construction did not render the policy invalid for lack of consideration. The court further rejected Crestdale’s claim for unjust enrichment, holding that Nevada law does not recognize such a cause of action when there is an express written contract, such as the Hacienda policy.
In its recent decision in Wright-Ryan Constr., Inc. v. AIG Ins. Co. of Can., 2011 U.S. App. LEXIS 15502 (1st Cir. July 27, 2011), the United States Court of Appeals for the First Circuit, applying Maine law, had occasion to consider whether the term “you” as used in a general liability policy is limited to the policy’s named insured, or whether it includes additional insureds.
This issue in Wright-Ryan arose out of a priority of coverage dispute involving two primary policies under which Wright-Ryan qualified as an insured. The first policy, issued by Acadia Insurance Company, was issued directly to Wright-Ryan. The second policy, issued by AIG to a subcontractor of Wright-Ryan’s, provided additional insured coverage to Wright-Ryan on a primary and non-contributory basis for all liability “arising out of [the subcontractor’s] premises or operations.” Wright-Ryan was sued in a bodily injury lawsuit brought by an employee of the subcontractor. Wright-Ryan tendered the matter to the subcontractor and to AIG directly, but when neither responded, Acadia defended the matter directly and ultimately settled the case. Acadia and Wright-Ryan then commenced a declaratory judgment action against AIG to recover the settlement amount as well as Wright-Ryan’s defense costs.
a. Primary Insurance This insurance is primary except when b., below, applies.
(1) Any of the other insurance, whether primary, excess, contingent, or on any other basis . . . (a) That is . . . coverage for "your work"; . . .
When this insurance is excess, we will have no duty . . . to defend the insured against any "suit" if any other insurer has a duty to defend the insured against that "suit".
Reading these provisions together, we find the definition of "you" to be unambiguous: it refers solely to a person or organization listed as a Named Insured in the policy Declarations or “qualifying as Named Insured” by virtue of being newly formed or acquired by a Named Insured.
Applying this definition to the AIG and Acadia policies, the court concluded that the AIG policy could not be considered excess to the Acadia policy, since the word “you” in the AIG policy referred not to Wright-Ryan, but rather to the subcontractor. On the other hand, because the word “you” in the Acadia policy referred solely to Wright-Ryan, the coverage afforded under Acadia policy necessarily was excess to the coverage afforded to Wright-Ryan under the AIG policy.

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