Source: http://www.phelps.com/insurance-law-report-february-2019-2-27-2019
Timestamp: 2019-04-23 22:24:33+00:00

Document:
The Texas Supreme Court reversed an appellate court’s ruling that policy limits were exhausted, thus 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 the insured based on the policy’s scaling provision for liability limits based on 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 for liability limits did not address the insurers’ coverage of defense costs because the term "liability" refers 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 Court found that 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 as well as 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 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 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 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 UIM 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 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 (Okla. Jan. 29, 2019).
On appeal, the Oklahoma Supreme Court noted 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. 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. Ironshore Europe DAC v. Schiff Hardin, LLP, 912 F.3d 759, (5th Cir. 2019).
A law firm was defending a defendant, and its 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.
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. In the ensuing coverage litigation, 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 enforcement 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, 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).
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 the court concluded 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 first-party bad-faith 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 his 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 amended petition asserting bad faith, claiming the bad-faith claim was subject to a one-year prescriptive period and had prescribed. The trial court dismissed the bad-faith claim. The plaintiff applied for a supervisory writ with the Court of Appeal, which was granted.
The insureds, actually two individuals dba as BR Mountain Homes, were hired by a homeowner to construct the foundation. 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 court held that the insurer’s failure to reserve rights as to the individual insureds before providing a defense 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 than with respect to BR Mountain Homes. 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.
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 constituted 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.
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 payment on 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.
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” and thus the contractor’s insurer had no duty to defend. 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 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.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v.