Welcome to CICR’s annual review of insurance cases. Here, we spotlight five decisions from the last year that you should know about—and five pending cases to watch.
As our picks for “Cases to Know” indicate, 2019 was not a slow year in the insurance coverage arena. The decade ended with decisions in some closely monitored cases on a variety of issues like the “duty to settle,” employee claims adjuster liability for “bad faith,” and the so-called “unavailability of insurance” exception. You can read about these and other developments below.
Looking forward, five state top courts in our “Cases to Watch” are poised to provide guidance on some important issues. They include whether insurers can sue their appointed underlying defense counsel for legal malpractice, whether carriers can recoup defense costs from their policyholders, and the allocation to be applied in “long tail” claims. So stay tuned.
We hope you enjoy this special feature. Thank you for your interest in our publication. As always, we welcome reader feedback.
Cases to Know
Pitzer College v. Indian Harbor Insurance Company, 447 P.3d 669 (Cal. 2019)
California Supreme Court concludes that the state’s common law “notice-prejudice rule”* is a “fundamental public policy” in the insurance context and generally applies to consent provisions in first-party policies. Thus, even though the environmental pollution policy in Pitzer had a choice of law provision** requiring application of New York law—which does not require an insurer to prove prejudice for late notice of claims under policies issued and delivered outside of New York—that provision could be overridden by California’s public policy of requiring insurers to prove prejudice after late notice of a claim. The court distinguished “no voluntary payment” provisions in third-party liability policies: “Because the insurer’s right to control the defense and settlement of claims is paramount in the third party context, California appellate courts have generally refused to find the notice-prejudice rule applicable to consent provisions in third party policies.”
Further discussion of the case by Tony Miscioscia and Tim Carroll is available here.
* According to the court, the rule “generally allows insureds to proceed with their insurance policy claims even if they give their insurer late notice of a claim, provided that the late notice does not substantially prejudice the insurer.”
** “Under section 187 [of the Restatement (Second) of Conflict of Laws], the parties’ choice of law generally governs unless (1) it conflicts with a state’s fundamental public policy, and (2) that state has a materially greater interest in the determination of the issue than the contractually chosen state.”
R.T. Vanderbilt Company, Inc. v. Hartford Accident and Indemnity Company, et al., 216 A.3d 629 (Conn. 2019)
Connecticut Supreme Court, in a highly-anticipated decision, addresses “unavailability” and other key coverage issues in the context of asbestos-related disease claims. Among other things, the court affirmed and adopted rulings by an intermediate appeals court that: (1) the so-called “unavailability of insurance” exception to time-on-risk pro rata allocation applies, and that damages and defense costs should not be allocated to any period where insurance was “unavailable” in the market; (2) the underlying claims are subject to a “continuous trigger;” and (3) the “sudden and accidental” and “absolute” pollution exclusions only apply to “traditional environmental pollution,” and not to claims for occupational disease caused by exposure to asbestos. In a case of first impression nationally, it also ruled that two occupational disease exclusions* preclude coverage for claims of occupational disease regardless of whether the claimant was employed by the policyholder or a third party.
Further discussion of the case by Patti Santelle and Ciaran Way is available here.
* The exclusions at issue provide that (1) “this policy shall not apply . . . to personal injury (fatal or nonfatal) by occupational disease;” and (2) “[t]his policy does not apply to any liability arising out of: Occupational Disease.” The term “occupational disease” is not defined in the policies.
First Acceptance Insurance Company of Georgia, Inc. v. Hughes, 826 S.E.2d 71 (Ga. 2019)
A unanimous Georgia Supreme Court, in a closely watched case, finds that an insurer did not act unreasonably in failing to accept a valid offer to settle underlying auto liability claims within policy limits before it was abruptly withdrawn and was entitled to summary judgment on the insured’s negligence and “bad faith” claims. The court elaborated:
As [the] offer was not a time-limited settlement demand, [the insurer] was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer. And given, especially, that the [claimants] communicated an unequivocal desire. . .to attend [a] proposed settlement conference, [the insurer] could not have reasonably known that it needed to respond within 41 days or risk that its insured would be subject to a judgment in excess of the policy limits. . .
The decision clarifies that an insurer’s duty to settle arises only when a claimant presents a valid offer within policy limits; and not when, absent such an offer, the insurer “knows or reasonably should know that settlement within the insured’s policy limits is possible.”
Daniels v. State Farm Mutual Automobile Insurance Company, 444 P.3d 582 (Wash. 2019)
Washington Supreme Court rules, in an auto subrogation case, that the state’s common law “made whole doctrine”* requires a first-party insurer to reimburse fault-free insureds for their full deductibles before any proceeds from a partial recovery can be allocated to the insurer. Specifically, according to the court,
Whether in the context of a reimbursement request, offset, or direct subrogation action, a fault-free insured must be made whole for their entire loss before an insurer may offset or recover its own payments. Stated another way, the proceeds of any recovery from a third-party tortfeasor, whether in a subrogation action or otherwise, must be allocated in such a way as to first make the insured whole.
The ruling appears to contemplate reimbursement reductions based on the insured’s fault pursuant to Washington insurance regulations (WAC 284-30-393).**
* The opinion (citing Thiringer v. American Motors Ins. Co., 588 P.2d 191 (Wash. 1978)) explains the doctrine as a general rule that “while an insurer is entitled to be reimbursed to the extent that its insured recovers payment for the same loss from a tortfeasor responsible for the damage, it can recover only the excess which the insured has received from the wrongdoer, remaining after the insured is fully compensated for his loss.”
** WAC 284-30-393 provides, in part, that “[t]he insurer must include the insured’s deductible, if any, in its subrogation demands. Any recoveries must be allocated first to the insured for any deductible(s) incurred in the loss, less applicable comparable fault.”
Keodalah v. Allstate Insurance Company, et al., 449 P.3d 1040 (Wash. 2019)
Washington Supreme Court, in a 5-4 decision, holds that employee claims adjusters are not personally liable for “bad faith” or Consumer Protection Act (CPA) claims based on alleged violations of the state’s Insurance Fair Conduct Act (IFCA) [RCW 48.01.030]* and administrative code. The court concluded that the IFCA does not create a private right of action for “bad faith” damages against adjusters:
If we were to read the statute to imply a cause of action, by the statute’s plain language, such implied cause of action would apply against insureds as well. That is, insurers would be empowered to sue their insured, and the providers and representatives of both insurer and insured would face potential liability for alleged bad faith “in all insurance matters.” [T]he provision of such a broad inferred cause of action subjecting every person and entity listed in RCW 48.01.030 to liability would not be consistent with the legislature’s purpose in enacting the statu[t]e. . .
The dissent agreed as to the interpretation of the IFCA, but argued that the policyholder should still be able to pursue claims against the adjuster under the CPA and for common law “bad faith.” It acknowledged, however, that the majority of courts that have considered the issue do not recognize a common law duty of good faith on the part of a claims adjuster to the insured.
Further discussion of the case by Randy Maniloff and Tim Carroll is available here.
Video of the argument is available here.
* RCW 48.01.030 (Public interest) provides: “The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance.”
Cases to Watch
Arch Insurance Company v. Kubicki Draper, LLP, No. SC19-673 (Fla.)
Florida Supreme Court to decide whether an insurer can pursue a legal malpractice action against defense counsel it retained to represent an insured in underlying litigation. A state appeals court previously held in the case that the insurer lacked standing to sue because it was not in contractual privity with the law firm or an intended third-party beneficiary of the relationship between the firm and the insured (and the case did not fit within recognized exceptions to the privity rule). The appeals court acknowledged the insurer’s public policy arguments that precluding these types of actions would essentially shield law firms from liability resulting from their malpractice but declined, under the circumstances, to expand existing privity exception precedent.
The case is set for argument on March 4, 2020.
Rossello v. Zurich American Insurance Company, No. 24, Sept. Term, 2019 (Md.)
Maryland Court of Appeals to decide whether pro rata or “all sums” allocation applies in the context of asbestos-related bodily injury claims. The court granted certiorari on the following issue:
Does Maryland Law construe Respondent’s 1974 insurance policies as promising to pay the judgment in full, contrary to the law of some other states?
The state’s intermediate appeals court and federal courts applying Maryland law have allocated based on pro rata time on the risk in the “long tail” context. See, e.g., Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Jeffers, 2020 Md. App. LEXIS 26 (Md. Ct. Spec. App. Jan. 8, 2020) (alleged lead BI exposures); Mayor & City Council of Baltimore v. Utica Mutual Ins. Co., 802 A.2d 1070, 1103 (Md. Ct. Spec. App. 2002) (asbestos in buildings claims) (“To compress long-term damage of a continuing nature into a single policy period, which would effectively be called for under the ‘joint and several’ or ‘all sums’ approach, is ‘intuitively suspect.’”). The claimant argues that the “all sums” language in the liability policies at issue does not permit spreading of losses to other years, and that asbestos bodily injury is indivisible and therefore distinguishable from the asbestos in buildings claims in Utica Mutual.
Video of the argument is available here.
Nautilus Insurance Company v. Access Medical, LLC, et al., No. 79130 (Nev.)
Nevada Supreme Court to decide whether an insurer can recover underlying defense costs from its insured pursuant to a reservation of rights letter. The court accepted the following certified question:
Is an insurer entitled to reimbursement of costs already expended in defense of its insureds where a determination has been made that the insurer owed no duty to defend and the insurer expressly reserved its right to seek reimbursement in writing after defense has been tendered but where the insurance policy contains no reservation of rights?
The certification order notes that courts following the majority rule find it to be in the parties’ best interests to permit insurers to recoup their defense costs under a reservation of rights: “Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed” (quoting Buss v. Superior Court, 939 P.2d 766, 778 (Cal. 1997)).
Lubrizol Advanced Materials, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., et al., No. 2018-1815 (Ohio)
Ohio Supreme Court to decide, in a defective products claim coverage case, whether “all sums” allocation under Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 769 N.E.2d 835 (Ohio 2002) applies under a policy containing “those sums” language.* The court accepted the following certified question:
Whether an insured is permitted to seek full and complete indemnity, under a single policy providing coverage for “those sums” the insured becomes legally obligated to pay because of property damage that takes place during the policy period, when the property damage occurred over multiple policy periods?
According to the policyholder, there is no “legal or linguistic distinction” between policies providing for payment of “all sums” vs. “those sums.” The insurer and supporting amici dispute that and argue in part that the court should be guided by cases that have differentiated the language (e.g., Thomson Inc. v. Insurance Co. of N. Am., 11 N.E.3d 982 (Ind. App. 2014)) and that the alleged damages should be allocated on a pro rata or actual basis to periods when it took place.
Video of the argument is available here.
* The policy’s insuring agreement provides: “We will pay on behalf of the Insured those sums in excess of the Retained Limit that the Insured becomes legally obligated to pay by reason of liability imposed by law or assumed by the Insured under an Insured Contract because of Bodily Injury, Property Damage, Personal Injury or Advertising Injury that takes place during the Policy Period and is caused by an Occurrence happening anywhere in the world.”
Sapienza v. Liberty Mutual Fire Insurance Company, No. 29000 (S.D.)
South Dakota Supreme Court to decide, on certified question, whether costs incurred by homeowner-insureds to comply with an injunction are covered “damages” under their homeowners/excess liability insurance. The insureds built a house that violated construction regulations and were ordered in underlying litigation with neighboring property owners to tear it down. They seek to recover the costs of demolition and construction as well as loss of use and enjoyment of their house from their homeowners/excess insurer, and have argued against a “technical” interpretation of the policies (i.e., that the term “damages” is limited to “legal damages” and does not include equitable relief) based in part on environmental coverage decisions.
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