In This Issue:

• Lack of Direct Contractual Relationship Doesn’t Doom Coverage
• Exclusion Operates to Preclude Coverage, California Appellate Court Rules
• Court Tosses TCPA Settlement Based Solely on Insurance Proceeds 
• Statute Hasn’t Run on Asbestos Claims Filed with CIGA

Lack of Direct Contractual Relationship Doesn’t Doom Coverage

Why it matters
The companies involved in a workplace accident are additional insureds pursuant to a sub-subcontractor’s policy and the insurer must provide coverage for underlying litigation resulting from a death and injuries on the jobsite, a Connecticut federal court judge has determined. The general contractor and a subcontractor were sued after a structure collapsed on a worksite and they sought to have the insurer for one of the sub-subcontractors provide a defense. The insurer balked, arguing that its insured wasn’t even named in the complaints and that the general contractor didn’t have contractual privity with the policyholder. Rejecting both arguments, the court found that the insurance policy did not require a direct contractual relationship between the insured and an additional insured and that even if it had, the contract between the insured and the subcontractor incorporated the terms of the general contractor’s contract. Therefore, defense and indemnification were required, the judge ruled, granting summary judgment to the general contractor and subcontractor on the insurer’s duty to defend.

Detailed Discussion
Shawmut Woodworking & Supply was the general contractor and designer for a construction project at Yale University. Shawmut subcontracted steel fabrication and construction work to Shepard Steele Company, who in turn subcontracted erection work to Fast Trek Steel.

In September 2010, a steel web structure collapsed during installation, injuring three workers and causing the death of one. The injured parties and the estate filed suits alleging negligence on the part of Shawmut and Shepard.

Liberty Mutual Insurance Company, Shepard’s insurer, provided a defense under a reservation of rights to Shepard and Shawmut. But the two companies demanded that First Mercury Insurance Company, Fast Trek’s insurer, defend and indemnify them as additional insureds. As required by its contract with Shepard, Fast Trek obtained a general liability policy from First Mercury with a $1 million occurrence limit (as well as an excess policy with up to $10 million of coverage).

First Mercury refused to provide a defense to Shawmut and Shepard for three reasons: First, that Shawmut did not meet the definition of an additional insured because it did not contract with Fast Trek. Second, even if the companies did qualify for coverage, it should only extend to Shawmut and Shepard for vicarious liability of Fast Trek, and because no claims were asserted against the insured in the complaints, no coverage existed. Finally, the insurer pointed to a policy exclusion that it claimed barred coverage.

The Additional Ensured Endorsement in Fast Trek’s policy provided coverage to “any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by:

1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured.”

Based on the subcontract between Fast Trek and Shepard, which required Fast Trek to “name Shepard as additional insured,” there was no dispute Shepard was an additional insured. But the court said a lack of contract between Shawmut and Fast Trek did not preclude coverage for the general contractor.

Shawmut’s contract with Shepard required any subcontract agreements to be bound by the original contract. Shepard did so, and the agreement with Fast Trek expressly incorporated the Shawmut-Shepard contract and separately stated that Fast Trek assumed the same obligations and responsibilities.

“[N]othing in the text of the Additional Insured Endorsement explicitly requires a direct contractual relationship between Fast Trek and an additional insured,” U.S. District Court Judge Janet Bond Arterton wrote. “Although the text of the Additional Insured Endorsement requires that Fast Trek and Shawmut ‘have agreed in writing in a contract’ that Shawmut will be an additional insured, no language requires that both parties agree in the same writing.”

Both Fast Trek and Shawmut have “agreed in writing in a contract” for Shawmut to be named as an additional insured, the court explained. Shawmut did so in its subcontract with Shepard and Fast Trek explicitly agreed in its sub-subcontract with Shepard.

First Mercury’s reading of the policy “would require the court to read into the Additional Insured Endorsement terms such as ‘direct’ or ‘between’ in contravention of the rule that courts will not read terms into a contract,” the judge added. And if the insurer wanted to limit its coverage to extend up only one level from Fast Trek to Shepard, “it could have readily done so with explicit contractual language to that effect.”

The fact that Fast Trek was not named as a defendant in any of the underlying complaints also was not a problem for Judge Arterton. The allegations of the complaints established that the injuries arose out of operations performed by Fast Trek employees for Shawmut, the court said, which triggered coverage on the basis of the complaint alone.

Additionally considering the report of the accident from the Occupational Health and Safety Administration, the judge found the report “unquestionably suggests the possibility of coverage because of the evidence that the accident was at least potentially attributable to Fast Trek’s failure to properly secure the beams.”

As for the Endorsement limiting coverage to vicarious liability, “First Mercury’s policy lacks language to connote the limitation it now urges,” Judge Arterton wrote. The language of the policy itself belied the insurer’s position by including “liability . . . caused, in whole or in part” by the named insured. “The inclusion of this language is inconsistent with ‘liability’ meaning ‘vicarious liability,’ because vicarious liability is an all or nothing proposition and thus a party could not be vicariously liable ‘in part’ for Fast Trek’s acts,” the court said.

First Mercury’s reliance upon a policy exclusion for “any professional engineering, architectural or surveying services” also failed. Identified as a “general contractor” and “subcontractor for steel fabrication” in the complaints, Shawmut and Shepard, respectively, were not designated as professional architects, engineers, or surveyors.

Although the complaints contained allegations of negligent design, “they also contain general allegations of failure to warn, failure to ensure a safe work area, and failure to properly install the steel beams,” the judge explained. “Thus, the professional liability policy exclusion does not apply to all of the allegations of the underlying complaints and does not absolve [First Mercury] of its duty to defend Shawmut and Shepard.”

To read the opinion in First Mercury Insurance Co. v. Shawmut Woodworking & Supply, Inc., click here.

Exclusion Operates to Preclude Coverage, California Appellate Court Rules

Why it matters
A California appellate court agreed with an insurer that an employment-related practices exclusion acted to preclude coverage for a policyholder facing a lawsuit filed by three employees. The insured argued that the employment-related practices exclusion did not apply to the underlying litigation, possibly because it involved salacious allegations of sexual harassment, invasion of privacy, and false imprisonment based on an incident where a supervisor questioned – and visually checked – female employees about whether or not they were menstruating. The employer insured argued that some of the shocking allegations fell outside the enumerated categories of the employment-related exclusion. However, the appellate panel affirmed summary judgment for the insurer, finding that even though certain allegations were not listed in the exclusion, the exclusion’s listing was not exhaustive, and the claims against the insured arose out of their employment with the employer.

Detailed Discussion
A group of employees brought an action against their employer, Jon Davler, Inc. The workers alleged that a supervisor at the cosmetics company became upset one morning when she found a used sanitary product in the women’s bathroom and blood around the toilet seat. The supervisor reacted by returning to the department and yelling at the “dirty” employees, demanding to know who was on their menstrual period.

When the employees denied it, the supervisor ordered another female employee to take each worker into the bathroom and have them pull down their pants and underwear for an inspection. The employees complied with the supervisor’s orders after being told they would be fired if they refused.

The subsequent lawsuit, a putative class action, charged Jon Davler with sexual harassment, invasion of privacy, and false imprisonment based on the bathroom stall examination. Jon Davler tendered the complaint to Arch Insurance Company. The relevant policy provided coverage for “personal and advertising injury” for seven different categories of offenses, one of which included “[f]alse arrest, detention or imprisonment.”

But the policy also featured an Employment-Related Practices Exclusion that stated the coverage for personal and advertising injury did not apply to an injury arising out of any refusal to employ a person, termination of a person’s employment, or “[e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person.”

Arch declined coverage and refused to provide a defense. Jon Davler then sued the insurer for breach of contract and Arch moved for summary judgment, a motion granted by the trial court.

On appeal, Jon Davler tried to convince the panel that the use of phrases such as “such as” and “arising out of” created an ambiguity in the policy’s terms. The use of the term “such as” limited the scope of the Exclusion, the insured argued, and false imprisonment was “markedly different” from the specific examples listed in the Exclusion.

But the court said the phrase was nonexclusive and not intended to be exhaustive. Further, “[f]alse imprisonment shares general similitude with several of the matters specifically enumerated in the [Exclusion], such as coercion, discipline and harassment,” the panel wrote, as the “unlawful violation of the personal liberty of another.” Workplace harassment can include false imprisonment, and employment actions often involve both claims, the court added.

As for the “arising out of” language, Jon Davler said it created an ambiguity by appearing both in the coverage clause and in the Exclusion. But recognizing that California courts have generally interpreted the phrase very broadly, the panel found it clear that the injuries alleged by the employees arose out of their employment with Jon Davler.

“[T]he nexus between the ‘other tort’ (i.e., false imprisonment) and the employees’ employment with Jon Davler was as close as a nexus can be: the only reason the employees were forced into the bathroom for inspection was that they were employed by Jon Davler, were following a directive from a supervisor at their place of employment, and would lose their jobs if they did not comply with the inspection demand,” the court said. “And there was nothing in the allegations of the complaint in the underlying action suggesting that there was any relationship between Jon Davler and the employees subject to the inspection other than the employer-employee relationship.”

Nor could the policy as a whole be considered ambiguous because the insuring provision specifically provided coverage for false imprisonment and the Exclusion did not specifically exclude false imprisonment. An insurance policy may exclude coverage for particular injuries or damages in certain specific circumstances while providing coverage in other circumstances, the court said.

“To be sure, the exclusion could have been drafted to expressly cover an injury arising out of an employment-related act giving rise to false imprisonment by adding false imprisonment to the list of examples, but the fact that the Exclusion ‘could have been written differently does not necessarily mean . . . it is ambiguous,’” the panel wrote.

The insured’s last effort – a facial challenge to the Exclusion – similarly failed. The panel said the language was “sufficiently plain and clear” and an “average layperson would understand that the exclusion applies a category of claims: those arising in the employment setting. An average person knows what employment is.”

To read the decision in Davler v. Arch Insurance Co., click here.

Court Tosses TCPA Settlement Based Solely on Insurance Proceeds

Why it matters
Insurers are increasingly playing a role in Telephone Consumer Protection Act (TCPA) litigation as the cases continue to mount and plaintiffs look for deep pockets in their quest for multimillion-dollar awards. In a recent ruling from a Florida federal court, a judge refused to sign off on a proposed $8.7 million deal between an insured and a TCPA plaintiff that was based solely on the plaintiff class seeking recovery from the defendant’s indemnifiers and insurers, a move the court said was too speculative to approve – a not unexpected decision given the insurers’ refusal to provide defense coverage for the suit.

Detailed Discussion
The dispute began with a putative class action lawsuit filed by Physicians Healthsource against Doctor Diabetic Supply LLC, alleging that the defendant sent 17,440 faxed advertisements that did not contain a clear and conspicuous notice, which constituted a violation of the TCPA.

DDS’s insurers – Federal Insurance Co., Essex Insurance Co., and Endurance American Specialty Insurance Co. – all refused to defend the litigation. Because DDS said a verdict based on the number of faxes sent would send the company into bankruptcy, the parties reached a settlement deal based on DDS’s insurance proceeds.

Under the terms of the deal, the court would enter judgment in favor of the settlement class in the total amount of $8.72 million (or $500 for each of the alleged 17,440 faxes). DDS agreed to pay the cost of settlement notice up to $10,000. The class would execute a covenant not to seek any other recovery from DDS but to collect the remainder of the judgment from the insurers for the settlement amount as well as attorneys’ fees (30 percent of the future recovery) and a $15,000 incentive award for the named plaintiff.

The parties told the court that the deal was reasonable and fair given the range of potential damages (up to $26.16 million if the statutory damages were trebled) and DDS’s inability to pay.

“Further litigation of the underlying claims against DDS in this court, on appeal, or in bankruptcy will be expensive for the class and will not move the class members closer to collecting any money,” according to the motion in support of preliminary approval of the settlement. “On the other hand, if this action is settled, the class can concentrate the efforts on seeking recovery from . . . the insurers. The settlement should be preliminarily approved because it will minimize the inevitable costs of future litigation of this matter.”

Not so fast, ruled U.S. District Court Judge Patricia A. Seitz, who found the deal too speculative to even grant preliminary approval.

In a terse order, she rejected the settlement. “The Court will not approve a settlement with such an uncertain recovery,” she wrote.

Both parties went back to the drawing board in the wake of the court’s ruling. Physicians Healthsource filed a motion to certify the class, while DDS filed a motion to dismiss the suit for lack of subject matter jurisdiction. The defendant told the court that it served an offer of judgment of the maximum amount of statutory damages plus costs and an injunction prohibiting future violations of the TCPA (around $6,000).

The offer of judgment would provide the plaintiff with the full relief requested in the complaint, DDS argued, and therefore the action no longer presented a live case or controversy and should be dismissed.

To read the proposed settlement in Physicians Healthsource, Inc. v. Doctor Diabetic Supply LLC, click here.

To read the order rejecting the settlement, click here.

Statute Hasn’t Run on Asbestos Claims Filed with CIGA

Why it matters
What triggers the statute of limitations on claims filed against the California Insurance Guarantee Association (CIGA)? According to a California appellate court, one thing that does not start the clock is the filing of a declaratory judgment action to determine CIGA’s obligation to pay an insolvent insurer’s obligation in a case brought by a trust to pursue recovery of an estimated $6 billion in asbestos bodily injury claims. “To preserve a claim for coverage by CIGA, an insured must give CIGA notice of its potential claim by the deadline for filing a claim in the insolvent insurer’s liquidation proceedings,” the panel explained. “This notice permits CIGA to take such steps as it deems appropriate to ascertain the facts and protect its interests in responding to an eventual demand for payment. The time within which the insured must submit its claim for payment, however, does not commence until the insured possesses a ‘covered claim’ within the meaning of the statute. CIGA must be presented with a timely claim for payment and affirmatively deny coverage before a breach of its duty can occur. An insured’s complaint seeking a declaration of duty, and the defendant’s answer disputing its duty, does not constitute the submission and denial of a claim sufficient to trigger the statute of limitations.”

Detailed discussion
For many years, three companies – Western Asbestos Company, Western MacArthur Co., and Mac Arthur Co. – distributed asbestos-containing building materials. Facing asbestos-related litigation, the Western Companies filed for Chapter 11 bankruptcy in 2002. In 2004, the bankruptcy court established the Western Trust, an asbestos claimants’ trust, to manage personal injury claims arising from exposure to asbestos-containing products, estimated at $6 billion.

Although the Western Companies had seven liability policies issued by Home Insurance Company, Home was declared insolvent in 2003. Western Trust filed an action in California state court against several defendants related to the Home policies. The Trust also pled a declaratory relief cause of action against CIGA, seeking “to determine the existence and scope of CIGA’s obligations” to the insureds “in light of Home’s liquidation.”

CIGA filed an answer to the complaint in 2005 with a general denial of liability and 24 affirmative defenses, including that Western Trust’s complaint was premature because the Trust was pursuing other insurance. In the interim, Western Trust reached a settlement with the New Hampshire Insurance Commissioner, Home’s liquidator. Pursuant to the deal, Western Trust dismissed without prejudice its pending complaint against CIGA and the Commissioner allowed a claim for $242.5 million. CIGA was dismissed from the California state claim in May 2011.

In February 2013, Western Trust filed the current action: a new complaint for declaratory relief against CIGA for breach of its obligation to pay claims covered by Home’s policies. Western Trust asserted that Home policyholders are unlikely to receive full payment of their claims because the liquidation claim was settled for $242.5 million and no other undisputed insurance existed to cover the Western Companies’ asbestos bodily injury liabilities, leaving CIGA required to compensate Western Trust for the extent the asbestos claims would have been paid by Home but for its insolvency.

CIGA argued that if any breach occurred, it happened in August 2005 when it filed an answer to Western Trust’s first declaratory action, launching the three-year statute of limitations, which had expired by the time the second complaint was filed.

In reply, Western Trust said the time limit had not even begun to run. Both declaratory actions alleged an actual controversy concerning coverage, Western Trust told the court – but did not allege that a viable claim has yet matured or that the trust has even submitted a specific claim for payment.

A trial court disagreed and granted CIGA’s motion to dismiss based on the expiration of the statute of limitations.

But on appeal, the panel took a close look at precisely what the statute requires. Insurance Code Section 1063.2(a) sets forth CIGA’s duty to pay “covered claims,” with several exclusions and limitations, and makes clear that the statute of limitations begins to run when CIGA rejects a claim.

But when does the limitations period begin to run for submitting a claim for coverage? The court found this “a more difficult question,” as neither the statute nor any regulation specifies a point at which a claim must be submitted to CIGA. California’s statute differs from other states’, the panel added, which set a deadline for filing claims with the association.

“To the contrary, the California statute provides no specification of the procedures for presenting or processing claims against CIGA,” the court wrote, and the only express statutory requirement is found at Section 1063.1(c)(1)(C), that the insured present “a claim to the liquidator in the state of domicile of the insolvent insurer or to the association on or before the last date fixed for the filing of claims in the domiciliary liquidating proceedings.”

“Filing such a claim is a condition precedent to the accrual of a cause of action but the deadline for filing the insolvency claim is not necessarily the date at which the cause of action against CIGA accrues and does not determine the date by which such an action must be filed,” the court said. “Applying the basic principle that a statute of limitations does not begin to run until ‘the cause of action is complete with all of its elements,’ no cause of action accrues against CIGA until an insured has acquired a ‘covered claim’ within the meaning of the statute.”

An insured’s right to recover from CIGA does not arise and cannot be determined until it is known what recovery the insured will obtain in the insolvency proceedings, the court said, and “a fair argument can be made that the cause of action against CIGA does not accrue until that uncertainty has been resolved.”

“The present complaint does not allege that all such claims against other insurers were exhausted more than three years before the action was filed,” the panel said. “Indeed, it cannot be determined from the face of the pleading when, if ever, the trust acquired a ‘covered claim’ and a cause of action against CIGA.”

No specification existed in either complaint of any amount that Western Trust alleged to be a covered claim, “much less of any particular asbestos claim giving rise to a liability of the trust covered by a Home policy for which the trust demanded payment from CIGA,” the court said. “Neither the 2004 nor the 2013 complaint alleged, explicitly or implicitly, that any amount was payable to CIGA as of the time the complaint was filed.”

Without evidence that a cause of action for payment upon a covered claim had accrued or that a claim for any such payment had been submitted more than three years before the present complaint was filed, the statute of limitations did not bar the action, the panel concluded.

Even if Western Trust was found to have submitted a claim, the court said there was no showing that CIGA denied it. The record contained no correspondence that CIGA evaluated a claim, determined it did not constitute a covered claim, or denied coverage.

The Association’s 2005 answer to the first declaratory action “can be understood to assert no more than that the trust had not then submitted a ‘covered claim’ within the meaning of the statute,” the court said. “With no specific claim before it, and with proceedings ongoing that unquestionably precluded any claim against CIGA from being a ‘covered claim,’ CIGA could hardly have alleged otherwise. Moreover, while CIGA’s answer to the 2004 complaint obviously sought to preserve all possible defenses, having alleged that the complaint was premature because the trust was pursuing other insurance and had not exhausted its remedies in the Home liquidation proceedings, CIGA can hardly assert at this time that the prior action was, in fact, a timely demand for payment barring a claim when the former uncertainties have been eliminated.”

CIGA’s contention that the 2004 complaint constituted a claim for payment and CIGA’s answer a denial of coverage misconstrued the nature of a declaratory relief action, the panel added, which operates prospectively. “It would be a perversion of the process to hold that the assertion of a dispute in a declaratory relief action, and a defendant’s answer acknowledging the controversy, constitutes either a claim that the defendant has already breached its obligations or an actionable repudiation of the alleged obligations,” the court wrote.

To read the opinion in Snyder v. California Insurance Guarantee Association, click here.