Source: https://www.lexology.com/library/detail.aspx?g=16a79b75-2399-4b8d-a268-d77be3f0e1df
Timestamp: 2019-04-20 22:31:54+00:00

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The Texas Supreme Court reversed an appellate court’s ruling that policy limits were exhausted precluding coverage of defense costs in excess of a joint venture limit. Anadarko Petroleum Corp. v. Houston Cas. Co., et al., 2019 Tex. LEXIS 53 (Jan. 25, 2019).
The insured was a non-operator owner of an offshore oil and gas lease with a 25% joint-venture interest. It had an energy package policy with liability limits reflective of the insured’s percentage interest in any joint venture. The well blew-out and caused an oil spill. The parties to the joint venture sued each other, and the insured settled with the operator and transferred its 25% ownership interest in exchange for indemnity for all current and future claims under the Oil Pollution Act. A court found the insured and the operator jointly and severally liable for the clean-up and awarded the U.S. civil penalties. The insurers paid their insured based on the policy’s scaling provision for percentage of ownership, but the insured sued the insurers and sought summary judgment for defense costs arguing that the joint venture limits did not apply to defense costs. The insurers cross-moved, arguing that policy limits were exhausted.
After the trial court ruled for the insured, and the appellate court essentially reversed part of that ruling, the parties petitioned the Texas Supreme Court. The Texas Supreme Court held that the joint venture scaling provision did not limit the insurers’ liability for defense costs because the term "liability" referred to an obligation imposed on the company by law to pay for damages sustained by a third-party, finding that this construction is consistent with the term's common meaning within insurance and other legal contexts. Further, the term “liability” did not include the voluntarily assumed obligation to pay lawyers, investigators, or others for services provided to defend against the liability. The Court also seemed persuaded that in other places within the policy the insurers referenced liability damages and costs, corroborating the conclusion that costs are not part of liability damages. Thus, it held that the insured could recover defense costs up to the overall policy limits.
The Virginia Supreme Court recently held that a commercial property policy issued to a limited liability company (“LLC”) does not insure property owned by its subsidiaries. Erie Ins. Exch. v. EPC MD 15, LLC, 822 S.E.2d 351 (Va. 2019).
The insured LLC acquired a membership interest in an entity that later became its subsidiary, and argued that the subsidiary’s property was insured by a coverage extension in its policy that extended coverage to buildings newly acquired by the LLC. It further argued that the term “acquired” is ambiguous and that the LLC should be deemed to have acquired property of an entity when it acquired a membership interest in that entity.
The Virginia Supreme Court disagreed and noted that to read a commercial property policy to cover property of subsidiaries would greatly expand the scope of coverage without any corresponding underwriting information necessary to make a risk assessment and establish a premium rating. The Court further noted that the term “acquire” is not ambiguous because to construe the term as the insured does would not make sense in conjunction with other policy terms. The Court pointed to the intentional act exclusion, among others, which excludes coverage only for property damage due to the intentional act of an insured. If the policy covered property owned by a subsidiary the Court reasoned, then the intentional act exclusion would only preclude coverage for intentional acts done by the insured, and not by the subsidiary, which construction the Court concluded would be nonsensical.
The North Carolina Supreme Court recently overturned a North Carolina Court of Appeals ruling that an insurer for an at-fault driver can use the faultless driver’s underinsured motorist coverage to reduce the amount of judgment owed to the faultless driver. Hairston v. Harward, 821 S.E.2d 384 (N.C. 2018).
The plaintiff sued the defendant for injuries sustained in an automobile accident. A jury returned a verdict awarding the plaintiff compensation for his injuries. The defendant was underinsured, and the plaintiff’s UIM insurer paid the plaintiff the amount of UM coverage to which he was entitled. The defendant then filed a motion in which he argued that the UIM payment should be deducted from the judgment the defendant owed plaintiff. The trial court ruled as a matter of law that the defendant was entitled to the credit. The North Carolina Court of Appeals affirmed.
The plaintiff appealed, contending that the decision to reduce the judgment violated the collateral source rule. The North Carolina Supreme Court concluded that payments a plaintiff receives as the result of UIM coverage should not be credited against the amount of a judgment in the plaintiff’s favor, which the Court characterized as fully consistent with the general thrust of American jurisprudence.
The Supreme Court of Mississippi answered a certified question from the U.S. Fifth Circuit Court of Appeals that an insurer is not compelled, and has no legal duty, to pay is not entitled to indemnity if it is protecting its own interests against greater liability. Colony Ins. Co. v. First Specialty Ins. Corp., 2019 Miss. LEXIS 52 (Miss. Jan. 31, 2019).
An insurer was faced with claims by a party claiming additional insured status for which the insurer asserted a position of non-coverage based on a pollution exclusion, and it filed a complaint for declaratory judgment regarding whether or not its policy provided coverage. However, it later agreed to pay its policy limit in exchange for a “full and complete release” from the underlying lawsuit, and dismissed its declaratory judgment action against the putative additional insured. It then sought indemnity from an insurer that issued a policy to the putative additional insured for the full amount it contributed to the settlement. The court found that the voluntary-payment doctrine precluded recovery for payments made on behalf of a defendant that it claimed it did not insure. The insurer then appealed to the Fifth Circuit, and the Fifth Circuit certified questions to the Supreme Court of Mississippi.
The first question was whether an insurer acts under “compulsion” if it takes the legal position that an entity purporting to be its insured is not covered by its policy, but nonetheless settles in good faith to avoid potentially greater liability that could arise from a future coverage determination. The Court analyzed Black’s Law Dictionary’s definition of compel, which is “1) to cause or bring about by force, threats, or overwhelming pressure or 2) to convince (a court) that there is only one possible resolution of a legal dispute.” The Supreme Court had previously held that a threat to sue is not considered compulsion. The Court declined to adopt the argument that a payment is involuntary if the payor is acting under compulsion to protect its own interests. The Court noted that the insurer was not under an “immediate and urgent necessity to pay the settlement demand” because it had the option to pursue its declaratory judgment action before paying the settlement. The second question was whether the insurer had a “legal duty” to pay as it was defending in good faith. However, the Court declined to address this question given its analysis of the first.
The Supreme Court of Oklahoma found that earth movement and water exclusions did not clearly exclude coverage for man-made events, and reversed summary judgment to the insurer. Okla. Sch. Risk Mgmt. Trust v. McAlester Pub. Sch., 2019 Okla. LEXIS 2 (2019).
A water pipe ruptured below one of the insured’s buildings, and its property insurer denied coverage based on earth movement and water exclusions. In the ensuing coverage litigation, the insurer moved for summary judgment, arguing that the loss was from earth movement or water underground, both of which are excluded. The question was whether they were man-made as opposed to naturally occurring. The court granted summary judgment, which was affirmed.
On appeal, the Oklahoma Supreme Court acknowledged that other jurisdictions have found earth movement exclusions to be ambiguous when they list naturally occurring events but do not also include unnatural events. The Court clarified that when an insurer creates specificity in one clause of a policy and then omits it in another of similar context, the omission is considered purposeful and should be given meaning. It held that the exclusions’ use of language not specific to natural causes or to man-made causes, and the absence of the phrase “however caused” (so that universal application would be clear), rendered them ambiguous. As a result, the Court concluded that the courts below improperly found that the insurer showed the exclusions excluded coverage for the damage resulting from the ruptured water pipe. It reversed summary judgment in favor of the insurer, and remanded the case to the district court for additional proceedings consistent with this opinion.
The U.S. Sixth Circuit Court of Appeals, applying Kentucky law, ruled that an insured’s twelve-day delay in providing notice to its insurer of a claim for property damage voided coverage under the policy because the insurer was prejudiced by the delay where the insured had demolished the damaged property prior to notification. South Fifth Towers, LLC v. Aspen Ins. UK, Ltd., 2019 U.S. App. LEXIS 3939 (6th Cir. Feb. 8, 2019).
The insured had a commercial property policy requiring “prompt” notice of any claim. The insured’s apartment building suffered water damage when water entered the building on one of the floors through a disconnected pipe. The insured informed its broker of the damage the next day. The broker did not notify the insurer, but hired a public adjuster to assess the damage. Days after the public adjuster surveyed the building, the insured hired a restoration contractor who immediately began demolition. The broker thereafter (twelve days after the loss) notified the insurer of the claim, and the insurer denied coverage citing the insured’s failure to provide timely notice. The insured filed suit and the parties filed cross-motions for summary judgment, which the district court granted for the insurer. The insured appealed.
The Sixth Circuit affirmed, finding that notice was not “prompt” as required by the policy and caused substantial prejudice to the insurer which was unable to survey the damage prior to demolition. The court dismissed the insured’s argument that it had a duty to protect the property from further damage requiring early commencement of demolition, stating that that was all the more reason to not wait twelve days to notify the insurer when the insured was aware of the significant damage.
The U.S. Fifth Circuit Court of Appeals, applying Texas law, held that a law firm’s representations to an excess insurer during trial against the insurer’s insured were squarely with the scope of the firm’s representation of its client and therefore protected from liability to non-clients. Ironshore Europe DAC v. Schiff Hardin, LLP, 912 F.3d 759, (5th Cir. 2019).
A law firm was defending the manufacturer of a child car seat involved in a crash causing a child to be permanently disabled. The defendant’s excess insurer periodically requested reports from defense counsel to determine whether its coverage would be invaded. The excess insurer was surprised by an excess verdict and sued defense counsel, contending that defense counsel had lied to it concerning how the case was proceeding and failed to convey settlement offers. The trial court judge denied the law firm’s summary judgment motion that its representations during trial and failure to communicate the offers did not impose liability to a non-client. The Fifth Circuit reversed, stating that the trial court had mistakenly believed that Texas law does not protect counsel for negligent misrepresentations relied upon by a non-client. It held that the exception for negligent misrepresentations applies only if the counsel is not acting in the capacity of representing its client, and counsel was.
The Eleventh Circuit Court of Appeals, applying Georgia law, recently held that a pollution exclusion applied to exclude coverage for damages due to bodily injury arising from the inhalation of welding fumes. Evanston Ins. Co. v. Sandersville R.R. Co., 2019 U.S. App. LEXIS 3906 (11th Cir. Feb. 8, 2019).
An employee of the insured sued the insured for bodily injuries arising out of welder’s lung, an occupational disease developed as a result of inhaling welding fumes containing iron. After the insured notified its insurer of the claim, the insurer reserved its right to deny coverage based upon a pollution exclusion in the policy. The insured ultimately settled the claim without contribution from the insurer, and the insurer then filed a declaratory judgment action. The court granted summary judgment in favor of the insurer, finding that the pollution exclusion precluded coverage for the employee’s claim. The insured appealed.
The Eleventh Circuit affirmed, finding that welder’s fumes containing iron particles unambiguously qualify as an “irritant or contaminant, including ... fumes,” and thus as “pollutants” as defined in the policy. The insured argued that the pollution exclusion applies only if the pollutants led to injury through their discharge, dispersal, seepage, migration, release or escape, which the insured argued did not occur. It relied on an older Eleventh Circuit case that found a similar pollution exclusion did not apply to bodily injury resulting from fumes inhaled by an individual while using an adhesive product to install carpet. The Eleventh Circuit emphasized the change in the legal landscape of the scope of pollution exclusions, and focused on the Georgia Supreme Court’s construction of similar pollution exclusions beyond traditional environmental pollution claims, citing to several cases in which coverage for injuries resulting from the inhalation of pollutants were found excluded under Georgia law.
The North Carolina Court of Appeals recently held that an insurer had a duty to defend an insured against a negligent infliction of emotional distress action filed against a homeowner, despite a sexual molestation exclusion contained in the policy. N.C. Farm Bureau Mut. Ins. Co. v. Cox, 2019 N.C. App. LEXIS 1 (N.C. Ct. App. Jan. 2, 2019).
A homeowner’s son allegedly raped the guest of the homeowner (an insured). The house guest brought a sole claim of negligent infliction of emotional distress against the homeowner and her son based upon the insured’s alleged failure to take reasonable actions to protect the guest from, and to support the guest after, a sexual assault by the insured’s son. The homeowner’s insurer initially agreed to defend the homeowner and her son but later sought a declaration that there was no coverage. The trial court granted the insurer’s motion for summary judgment against the insured and the guest, and the guest appealed.
Determining that the house guest sufficiently alleged a bodily injury and that the expected or intended injury exclusion was inapplicable, the North Carolina Court of Appeals considered whether coverage was precluded by the policy’s sexual molestation exclusion. The insurer argued that because the guest’s injury arose solely out of the sexual assault, coverage for the guest’s bodily injury was not covered. However, the Court of Appeals held that the exclusion did not preclude coverage because of factual allegations that could support a determination that the house guest’s injury (the emotional distress) was caused by conduct other than the sexual assault itself.
A Louisiana Court of Appeal, upon rehearing, reversed its previous affirmation of a trial court’s dismissal of an insured’s bad-faith claim against its insurer, holding that a plaintiff’s first-party claim is subject to the ten-year prescriptive period applicable to contract actions. Fils v. Starr Indem. & Liab. Co., 2019 La. App. LEXIS 158 (La. App. Feb. 4, 2019).
An uninsured motorist struck the plaintiff, who was operating his employer’s vehicle. The plaintiff submitted a claim to this employer’s UM insurer for injuries sustained in the accident. The insurer paid the plaintiff, but refused to make additional payments based on the plaintiff’s medical history. The plaintiff filed suit seeking the unpaid amounts, and then amended his petition to assert a bad-faith claim. The insurer filed an exception to the plaintiff’s amended petition asserting bad faith, claiming the plaintiff’s bad-faith claim was subject to a one-year prescriptive period and had prescribed. The trial court dismissed the plaintiff’s bad-faith claim. The plaintiff applied for a supervisory writ with the Court of Appeal, which was granted.
Initially, the court affirmed the dismissal, holding that an insurer’s duty of good faith is a general tort duty subject to a one-year prescriptive period. On rehearing, it reversed itself, holding that the insurer’s obligation to compensate the plaintiff for damages caused by an uninsured motorist flows from the policy, and, thus, the insurer’s duty to perform its obligation was contractual and subject to a prescriptive period of ten years. The court contrasted a third-party bad-faith claim as a tort action subject to a prescriptive period of one year, but noted that a third party is not a party to the insurance contract.
A federal court in Georgia recently held that an insurer was estopped from denying coverage to insureds due to the insurer’s failure to timely reserve rights under Georgia law. Auto-Owners Ins. Co. v. Cribb, 2019 U.S. Dist. LEXIS 17785 (N.D. Ga. Feb. 5, 2019).
The insureds, actually two individuals dba as BR Mountain Homes, were hired by a homeowner to construct the foundation and sub-floor for a log home to be built on the homeowner’s property by another contractor. After the insured completed part of its work, construction of the log home began by the other contractor. An employee of the contractor fell through a portion of unsupported sub-floor that had been constructed by the insureds and sustained injuries. The claimant sued BR Mountain Homes, and the CGL insurer defended subject to a reservation of rights. The claimant later filed an amended complaint to add the two individual insureds (although alleging they were officers). The insurer retained the same defense counsel to represent them. Several months later, the insurer issued reservation of rights letters to each of them, and later filed a declaratory judgment action against the insureds regarding coverage. The parties each moved for summary judgment on several issues. The insureds argued that the insurer was estopped from denying coverage to them.
In granting the insureds’ motion for summary judgment on this issue, the district court held that the insurer’s failure to reserve rights before providing a defense to the insureds estopped the insurer from denying coverage. The court explained that under Georgia law, an insurer that defends an insured without an express and specific reservation of rights to deny coverage is estopped from later denying coverage to that insured. The court found that the first reservation of rights letter was sent before the insureds were ever sued and thus was insufficient to reserve rights with respect to them, even though there was no suggestion that the coverage issues were any different. The court further found that since the insurer defended the insureds for nearly three months before issuing the supplemental reservation of rights letters, the insurer was estopped from denying coverage with respect to them.
A federal court in Arkansas granted an insurer’s motion for summary judgment finding that it did not owe defense or indemnity to its insured for an underlying lawsuit seeking damages for breach of contract. Murphy Oil Corp. v. Liberty Mut. Fire Ins. Co., 2019 U.S. Dist. LEXIS 4417 (W.D. Ark. Jan. 8, 2019), appeal filed (Jan. 18, 2019).
An oil company sold an oil refinery pursuant to a purchase agreement which included certain indemnity provisions. The following year, a fire occurred at the refinery resulting from various acts and omissions committed prior to the sale of the property. The purchaser sought indemnity from the seller for the damage explicitly premised on an indemnity provision in the purchase agreement, and ultimately filed suit. The seller notified its insurer of the claim and requested defense and indemnity. The insurer denied coverage on the basis the policy did not cover contractual damages. The seller sued, and cross-motions for summary judgment were filed. The seller argued that although the buyer’s claim against it was a claim for breach of contract, in substance it was for a tort liability that existed regardless of the purchase agreement and that the claim fell under the policy’s “absence of contract” exception to the contractual liability exclusion. The insurer argued that the claim was one for contractual damages and not property damage itself.
The court granted the insurer’s motion for summary judgment, finding that the underlying claims arose from the fact that the seller provided property that was in worse condition than it was represented to be, which constitutes a breach of the purchase contract. Thus, the court ruled, the claim did not arise from property damage itself, but rather from the alleged false representations and alleged failure to honor contractual obligations, which is not covered by the policy.
A federal court in Louisiana granted an insurer’s motion for summary judgment holding that costs to prevent sewage backup into its customers’ homes after the repair of a collapsed manhole were not sums the insured became legally obligated to pay as damages. Eagle Water, LLC v. Arch Ins. Co., 2018 U.S. Dist. LEXIS 217682 (W.D. La. Dec. 28, 2018).
An insurer issued a liability policy to the owner of a sewer system that serviced a neighborhood. The policy provided coverage for “sums that the Insured becomes legally obligated to pay as damages.” A sewer collapse occurred near a manhole, and a sinkhole was discovered near the collapsed manhole. The insured made necessary repairs to the sewer system and installed a bypass pump system to prevent sewage backup into its customers’ homes. The insured sought reimbursement for the costs of repair from its insurer arguing that but for these repairs, the insurer would have had to reimburse the insured for claims by neighborhood residents who would have sued the insured had sewage backed up into their homes. The insurer denied coverage on the grounds that the repair costs are not sums that the insured becomes legally obligated to pay as damages.
The court, relying on the plain language of the policy and governing case law, held that the repair costs were not sums the insured was legally obligated to pay as damages. The court stated that the insured’s conflation of its repair costs with damages it may have had to pay shows the insured never became legally obligated to any third-party homeowner.
A federal court in Georgia recently held that, where the insured contractor’s performance of a pool project resulted in a defective and unusable pool, the claims against the insured were not claims for “property damage” covered by the policy and thus the contractor’s insurer had no duty to defend or indemnify the insured in the underlying lawsuit. Cowart v. Nautilus Ins. Co., 2019 U.S. Dist. LEXIS 8531 (S.D. Ga. Jan. 17, 2019).
The insured entered into a contract with a property owner to install a pool, hot tub, and deck in the property owner’s backyard. After the insured had excavated a hole for the pool, installed a steel support, poured concrete for the pool shell, poured cement steps into the pool, and installed some tiles in the pool, the county safety department stopped the work due to lack of a permit for the project. The property owner demanded that the insured return funds tendered to him because the work partially performed had not been done in a safe, good and workmanlike manner and was defective. The insured’s insurer denied coverage. The property owner sued the contractor, whose insurer refused to defend or indemnify. Subsequently, the insured sued its insurer seeking, in part, a declaratory judgment regarding coverage.
The contractor’s insurer sought summary judgment and argued that it was not obligated to defend because the underlying lawsuit did not seek damages for “property damage” as defined in the policy because the allegations included only defects concerning the workmanship and construction of the pool. The court granted the insurer’s motion for summary judgment, finding that the insurer had no duty to defend or indemnify the contractor as the property owner did not allege that the insured’s partial performance of the pool project caused damage to, or loss of use of, property unrelated to the pool project itself and thus did not allege claims for any harm to property qualifying as “property damage” under the policy.
Phelps Dunbar LLP - George B. Hall, Jr.

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