Bringing Insurance Litigation Into Focus

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In Perspective

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Sept. 2014 Faulty Workmanship as an "Occurrence"

Photo---Kevin-merrimanBy Kevin T. Merriman and Mark D. LoGalbo

A recent trend has emerged in the way in which courts deal with claims for coverage arising from a contractor’s faulty workmanship.  For years, the majority view has been that faulty workmanship claims are not covered under Commercial General Liability (“CGL”) policies because they do not arise from “occurrences.”  In recent years, however, a number of courts have revisited this issue, holding that such claims do constitute “occurrences,” thus casting doubt on whether the “majority” view may still be regarded as such.  The controversy even has prompted several states to pass legislation deeming construction defect claims to be “occurrences” under CGL policies.

The issue is significant because, while construction defect claims might otherwise be excluded under the business risks exclusions of a CGL policy, many claims are brought by general contractors based on faulty workmanship performed by their subcontractors. 

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March 2014 Washington Court Holds That Unambiguous Exhaustion Language Bars Coverage

Photo---ILIA---Diane-Polscer--crop-dlp-picBy Diane Polscer

Washington’s Court of Appeals recently held that the exhaustion provisions in two excess policies are unambiguous and, therefore, barred coverage because the underlying carrier had not paid its policy limits.  QuellosGrp. LLC v. Fed.Ins. Co., ---P.3d ---, 2013 WL 5989370 (Wash. Ct. App. Nov. 12, 2013) (published).  In Quellos, the insured sought to recover from several insurers $35 million in settlements and $45 million in defense costs paid in connection with a fraudulent tax shelter developed by the insured.  Id. at *4.  One insurer issued a claims-made policy during the relevant policy period with $10 million liability limit.  Id. at *2.  The other two insurers issued first-tier and second-tier excess policies above this limit.  Id.  The underlying insurer agreed to pay the insured $5 million, and the insured agreed to pay the gap between this amount and the primary insurer’s $10 million limit in an effort to trigger the excess policies.  Id. at *5.

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February 2014 Traditional Insurance Products and Cyber-Liability Claims

Photo---Peter-SelvinPeter Selvin

The recent data breach incident involving Target Corporation highlights the exposure that companies, and their officers and directors, have in connection with such incidents. Among the risks present in such a scenario are these:

  • Under the pertinent state and federal rules, a company whose data has been stolen or compromised will be liable for remediation-related expenses, such as costs associated with large charge backs, card re issuance, account monitoring and fines imposed by the credit card companies.
  • The company will also face liability, often in the form of class-action lawsuits, from customers whose personal information has been compromised. Anderson, et al. v. Hannaford Brothers Co., 659 F.3d 151 (1st Cir. 2011). It will also face liability from the financial institutions who may be obligated to reissue their customers' cards and reimburse them for fraudulent transactions. In re Heartland Payment Systems, Inc. Customer Data Security Breach Litigation, 834 F.Supp.2d 566 (S.D. Texas 2011).
  • The company, and also its officers and directors, will face liability from its shareholders for failing either to prevent the data breach incident or accurately disclose its cybersecurity risks. Indeed, shareholders of Target recently filed two shareholder derivative lawsuits against the company and its officers and directors. In essence those shareholders claim that neither the company nor its officers or directors took reasonable steps to maintain its customers' personal and financial information or to implement adequate internal controls to detect and prevent such a data breach. See "Target Directors and Officers Hit with Derivative Suits Based on Data Breach", http://www.dandodiary.com/2014/articles/cyber-liability/target-directors (February 3, 2014).
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March 2014 Excess Insurance and Umbrella Coverage:When Is the Defense Duty Triggered?

Photo---ILIA---Diane-Polscer--crop-dlp-picBy: Diane Polscer

Pure Excess and Umbrella liability insurance are often confused for the same thing, and the terms routinely are used interchangeably.  In fact, umbrella coverage is often just a type of excess insurance that provides coverage different than pure excess insurance. Usually, an umbrella policy may provide pure excess insurance under one coverage form and drop-down umbrella coverage under a separate coverage form.  Under pure excess coverage, a defense obligation may be triggered only when the underlying insurance is exhausted by payment of settlements or judgments.  By contrast, under umbrella coverage,a defense obligation under the latter may be triggered on a primary basis due to gaps in coverage.

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April 2014 New York Federal Court Awards Excess Insurer Full Policy Limits in Bad Faith Claim Against Primary Insurer

Photo---Kevin-merrimanBy Kevin T. Merriman and William R. Leinen

In a March 31, 2014 decision, the Northern District of New York found a primary insurer liable to an excess insurer for bad faith settlement practices in the defense of its insured in an underlying motor vehicle lawsuit. After a bench trial in Quincy Mutual Fire Insurance Co. v. New York Central Mutual Fire Insurance Co., Civil Action No. 3:12-CV-1041, the Court found that New York Central, as the primary insurer, acted in bad faith and grossly disregarded the interests of Quincy, the excess carrier, by: (1) refusing to increase its settlement offer for almost four years; (2) refusing to tender its policy limits until three weeks before trial where the damages were indisputably in excess of the primary limits several years earlier; and (3) failing to conduct or obtain an analysis and valuation of the underlying litigation’s potential jury verdict value until mere weeks before the scheduled damages-only trial. The Court found that New York Central’s conduct caused it to lose two opportunities to settle the case at times in which liability against its insured was clear and Quincy’s excess exposure would have been none or significantly less than the full amount of its policy limits. Importantly, the Court recognized that Quincy, as the excess insurer, had no duty to undertake a defense in the underlying litigation, and therefore rejected New York Central’s argument that Quincy’s conduct in monitoring the litigation contributed to its damages. As a result, the Court awarded Quincy the full amount of its policy limits in damages, plus prejudgment interest.

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New Opportunities For Finding Liability Insurance Coverage In Business Cases

Photo---Peter-SelvinPeter S. Selvin

Many lawyers who routinely handle cases involving business disputes fail to consider whether the client's plain vanilla Commercial General Liability ("CGL") policy may actually afford coverage in such cases. The key is often found in the CGL policy's "personal injury" or "advertising injury" coverages that are set forth as part of "Coverage B" in such policies.

Among the typical "offenses" found in Coverage B is the following formulation: An oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.

Importantly, the claims for which there is coverage under Coverage B arise from purposeful and intentional conduct. See, e.g., Harrow Prods., Inc. v. Liberty International Insurance Company, 64 F.3d 1015, 1025 (6th Cir. 1995). Thus, conduct which is commonly alleged in connection with business torts may often fall within one or more coverage "offenses."

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