The assignment of insurance policies and claims

I’ve been a trial lawyer for over 30 years, and I think I need to point out that corporate/transactional lawyers aren’t real lawyers.  If you haven’t been on the receiving end of an evidence ruling that makes you wonder whether the judge attended law school in a Winnebago, then I’m sorry, you may be a “practitioner,” but you’re not a real lawyer. On the other hand, corporate/transactional lawyers…er, practitioners…are way, way smarter than we litigators are. They have to understand things like complicated tax laws and how to structure complex commercial deals, which is generally far above our pay grade.  Most of us became trial lawyers because we can’t do math.

In structuring transactions, one issue that sometimes comes up is whether insurance claims, or insurance policies, can be assigned to another party. This issue also occasionally arises in the litigation context, when a plaintiff may be willing to settle a case in exchange for the assignment of the defendant’s insurance claim with its carrier.  (That may include an assignment of the bad faith claim, if any.)

Warning:  Assignments can be tricky.  But, while insurance companies may attempt to disclaim coverage based upon any assignment of a policy or claim, in general, the assignment has to increase the carrier’s risk in order to provide a valid basis for denial of a claim.

The New Jersey Appellate Division recently considered the implications of an assignment in Haskell Properties, LLC v. American Ins. Co.  The case involved certain insurance companies’ refusal to provide coverage for the cleanup of a contaminated property that Haskell had acquired in an asset sale approved by the bankruptcy court. The carriers argued “no pay,” in part because (according to them) any assignment was invalid since Haskell did not obtain the consent of the insurance companies beforehand.

The Appellate Division first considered Section 541 of the Bankruptcy Code, which defines property that is considered part of the debtor’s estate. Haskell argued that the Bankruptcy Code preempted any contractual provision that attempted to limit or restrict the rights of the debtor to transfer or assign its interests in bankruptcy. The Court held: “Section 541 effectively preempts any contractual provision that purports to limit or restrict the rights of a debtor to transfer or assign its interests in bankruptcy.” But, “it does not govern transfers to third parties from the estate approved by the bankruptcy court under 11 USCA §363, as was the case here”. According to the court, “there is no provision under Section 363 that authorizes the trustee to sell property in violation of state law transfer restrictions.”

So, the Court ruled that insurance companies did not have to cover losses that occurred after a policy was assigned in contravention of a consent-to-assignment clause. If a policy prohibits assignment, and the insurance company does not consent to assignment of the policy…it’s a no go for the policyholder.

These prohibitions do not apply to claims that accrued before the assignment, however. The Court wrote: “The Seller’s claims for coverage under the policies relating to occurrences that happened before the transfer to plaintiff were freely assignable by the Seller, to the extent the policies were ‘occurrence policies.’ Those policies insure ‘the occurrence itself,’ and provide coverage ‘once the occurrence takes place…even though the claim on may not been made for some time thereafter.’”  (Emphasis mine; citations omitted.)

The key is whether, by virtue of the assignment, the risk to the carrier increased. According to the Court, “no-assignment [provisions within insurance policies] do not prevent the assignment after loss for the obvious reason that the clause by its own terms ordinarily prohibits the assignment of the policy, as distinguished from a claim arising thereunder, and the assignment before loss involves a transfer of a contractual relationship while the assignment after loss is the assignment of the right to a money claim…The purpose behind a no-assignment clause is to protect the insurer from having to provide coverage for risk different from what the insurer had intended…once the insurer’s liability has become fixed due to a loss, an assignment of rights to collect under insurance policies is not a transfer of the actual policy but a transfer of a right to a claim of money.”

Bottom line:  assignment of the policy generally requires the consent of the carrier.  Assignment of an existing claim, not so much.

You can read the full Haskell decision by clicking here.

Insurance lessons from the Penn State tragedy: “Within the scope of employment”

I remember sitting in a continuing legal education class once, where the speaker was an experienced employment defense lawyer. He said that, normally, he liked to open his talks with a funny story or a joke, but he couldn’t do that during this particular talk, because there was absolutely nothing funny about sexual harassment; in many instances, it ruined lives. While I like to keep most of these posts somewhat light, the horrible events that took place at Penn State University fall into that “nothing funny” category. I’m sure you’re aware of the widely-reported situation, so there’s no need to provide great detail. Briefly, Jerry Sandusky, an assistant football coach to the legendary Penn State head coach Joe Paterno, was a pedophile who abused young boys on and around the Penn State campus for many years. He’s now in jail, where he belongs, and a good argument can be made that the whole debacle literally killed Coach Paterno.

As you can imagine, the terrible events spawned numerous legal proceedings, and wherever there are liability suits, there are usually insurance claims. Penn State paid out millions in settlements to Sandusky’s victims, and one of the issues was whether Penn State’s commercial general liability insurer, Pennsylvania Manufacturers, should cover some or all of those costs.

Under many of the insurance policies, that issue turned on whether Sandusky was acting within the scope of his employment when he committed his terrible crimes. That’s because the policies contained a “Abuse or Molestation” Exclusion (or “AME”), which provided that coverage would not apply to bodily injury arising out of “the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.”  The policies defined “insured” to include Penn State’s employees, “but only for acts within the scope of their employment by [Penn State],” or “while performing duties related to the conduct of [Penn State’s] business.”

I think you can see where this is going.

(By the way, the question of whether an employee is acting “within the scope of employment” can be very important in a number of different contexts. For example, depending upon the circumstances, the answer to that question may govern whether an injured employee will be compensated by workers’ compensation or general liability insurance. Sometimes, a corporate policyholder has an interest in having a claim processed under one of those types of policies and not the other.)

The carrier, naturally, took the position that all of Sandusky’s acts of molestation took place while Sandusky was “performing duties related to the conduct of [Penn State’s] business’” and that therefore there was no coverage.  The trial court agreed, essentially ruling that because Sandusky used his status as a Penn State football coach to attract his victims, he was acting as an “insured” within the meaning of the policy. In so holding, the court wrote the following (very unfortunately worded) sentences: “When he brought the children on campus and abused them in the locker room, or took them with him to PSU football games and abused them in motel rooms, he was simultaneously enjoying the privileges and perquisites of his position as a PSU Assistant Coach. His concurrent, non-abusive, acts on campus and at games were ‘acts within the scope of his employment by [PSU]’ or ‘duties related to the conduct of [PSU’s] business.’”

The Court also wrote: “Sandusky’s acts of abuse were obviously not part of his job. To use an employee’s job description to protect the insured from application of the AME would render the exclusion meaningless in every instance of abuse. The court will not do so.”

Respectfully, I can’t help but conclude that this case is a paradigm example of bad facts making bad law. If this Court is correct, it means that even if an employee goes rogue and commits horrendous (criminal) acts not authorized by the employer, he or she is potentially acting within the “scope of employment” for insurance purposes.  If that’s what carriers want the AME to mean, then they should write it that way.

The coverage case, by the way, is being handled by my old boss Jerry Oshinsky, one of the best insurance lawyers in the country.  Penn State has moved for an interlocutory appeal of the Court’s ruling, and this is part of  what Jerry wrote in his brief: “The opinion could be argued to turn the law of vicarious liability on its head…by seeking to impose ‘some responsibility’ upon employers for any tortious or criminal act their employees commit, based solely upon the title of the employee, regardless of whether the conduct occurs off-site, outside working hours, and well beyond the scope of the employee’s job duties and responsibilities. Under the opinion’s reasoning, the employee’s title supersedes the nature of the employer-employee relationship and its relation to the unlawful conduct.”

Interlocutory appeals (that is, appeals taken before all proceedings are closed in the trial court) are almost never granted.  If the appeals court declines to accept this interlocutory appeal, though, they’re going to hear about the issue again at the end of the trial court proceedings, for sure.

As an aside, this case goes to the heart of what risk management is all about. Insurance coverage should always be a last resort. Never count on it, because if a carrier can figure out a way not to cover a loss, the denial letter is coming. The best way to lessen your chances of liability is to have appropriate supervision and controls in place at all times, and to foster and encourage a proper reporting system within your organization, regardless of the potential bad publicity.  Larry Donnithorne’s little gem of a book “The West Point Way of Leadership” is required reading at our firm, and sets forth the following steps for ethical decision-making (also known as “choosing The Harder Right”), which should be considered by all leaders:

  1. What are the relevant facts of the situation?
  2. What are the alternative actions available?
  3. Who will be affected?
  4. What moral principles are involved?
  5. How would these principles be advanced or violated by each alternative action?

You can read the trial court’s Sandusky decision here.  The case raises several other important issues, and I will discuss some of them in future posts.

Yes, construction defects are covered “occurrences” in New Jersey

Are you the parent of a teenager?  Have you ever been the parent of a teenager? If the answer to either of those two questions is yes, have you ever felt like you’re banging your head against the wall? You think you’re speaking plain English, but they’re just not getting it.

That’s the way I sometimes feel about Court. As I’ve written on this blog before, I understand and empathize with the difficult job that judges have. I’ve spent 30 years practicing insurance law, and I still don’t understand it fully. Yet we routinely appoint judges to the bench, pay them what first-year associates are making at major law firms, and expect them to master every area of the law from Admiralty to Zoning, often with no seasoned law clerk to help them navigate the process.  Not a great situation, especially given the tremendous workload we dump on them.

The nationwide struggle between insurance companies and policyholders over whether lawsuits for construction defects should be covered under commercial general liability policies reminds me of raising a teenager, if you’re on the policyholder side.  You think you’re speaking English, but sometimes you feel like it’s just not getting through to overworked judges or carriers.

While commercial insurance policies are (in my view) often unnecessarily complicated, reading them should essentially involve a simple three-step process.

First, what does the insuring agreement say? (In other words, what does the policy cover, as a general matter?)

Second, what’s excluded from coverage?

Third and finally, what do the exceptions to the exclusions restore to coverage?

In the construction defect field, some insurance claims people and judges ignore the three necessary steps. For example, without specifically citing the language of the insuring agreement, they contend that “faulty workmanship” can never be a covered “occurrence’” because it’s a “business risk” (whatever that means).

But an “occurrence” is basically defined by insurance policies as an “accident.” “Faulty workmanship” is, by definition, negligence, and negligently-caused damage (which is an accident) is covered by liability policies.

As for construction defects constituting a “business risk,” that language doesn’t appear in the policies either, and almost everything involved with the conduct of a business (or everyday life) involves a quantifiable risk. Every time you getting your car to drive to the supermarket, there’s a risk that you’ll become involved in an accident – a risk that can be actuarially determined. (What if you got into an accident and your insurance company refused to cover it, because the accident was the result of a “personal risk”? The coverage would be worthless.)

I recently had the chance to apply the proper three-step analysis in a construction defect case that we argued before the New Jersey Appellate Division (thankfully they agreed!). And now, in great news for general contractors, builders and developers, the New Jersey Supreme Court has adopted the three-step analysis in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C.  (You can obtain a complete copy of the Cypress Point decision by clicking here.)

Cypress Point  involved a condominium project in which the subcontractors apparently botched some of the work, causing problems such as roof leaks and water infiltration at the interior window jambs and sills of residential units. The Condominium Association brought an action against the developer and several subcontractors. The question was whether the developer was covered for liability associated with damage caused by the subcontractors’ work.

With respect to the insuring agreement (step one), the Court stated: “Under our interpretation of the term ‘occurrence’ in the policies, consequential harm caused by negligent work is an ‘accident.’ Therefore, because the result of the subcontractor’s faulty workmanship here – consequential water damage to the completed and nondefective portions of Cypress Point – was an ‘accident,’ it is an ‘occurrence’ under the policies and is therefore covered so long as the other parameters set by the policies are met.”

The Court then turned to the topic of the “your work” exclusion (step two), which generally excludes coverage for damage to a contractor’s work. The Court noted that the version of that exclusion used in a particular policy was critical, because the 1986 version of the exclusion (in common use today) contains an exception to the exclusion for work done by subcontractors (step three). The Court noted that the typical subcontractor exception resulted from the demands of the policy-buying public, which wanted this sort of coverage, and the view of insurance companies that their products would be easier to sell with the subcontractor coverage included.

Accordingly, the Supreme Court wrote: “The insurers here chose not to negotiate away the subcontractor exception and instead issued the developer a series of 1986 ISO standard form CGL policies which explicitly provide coverage for property damage caused by a subcontractor’s defective performance.”  Case closed.

I expect that the battle will now turn to the question of what constitutes covered “consequential damage.” Nevertheless, despite the comments of some of my colleagues in the defense bar that Cypress Point isn’t a watershed victory for policyholders in the construction and building field…it is.

Developments in insurance coverage for asbestos-related liabilities

I’m not sure which is more grimly entertaining:  watching old advertisements for cigarettes (see here), or watching old advertisements for asbestos products (see here).  If you’re an executive in the front office of a company that acquired an asbestos manufacturer, however, you might fail to appreciate the dark humor.  A few years back, RAND Corporation estimated the cost of asbestos-related liabilities to American companies at $265 billion.  Transaction costs (including legal fees) have consumed half of that amount.

The amazing thing about asbestos litigation is that, much like the product that spawned it, it seems to be virtually indestructible. I was involved with it over 30 years ago as a summer associate at a major New Jersey law firm; and I’m still involved with it. The battle has shifted over the years from the question of whether asbestos liabilities are covered (under policies not containing an asbestos exclusion, and sometimes even then) to the question of how to allocate asbestos-related liability among insurance companies. The New Jersey Supreme Court has issued several major decisions on this issue, yet the issue seems never to be fully resolved. Two weeks ago (as I write this), the New Jersey Appellate Division handed down yet another decision trying to untangle the various questions raised by complex toxic tort insurance coverage cases. The decision was rendered in the case of Continental Insurance Co. v. Honeywell Corp., and you can obtain a full copy by clicking here.

In this post, I wanted to touch briefly upon two aspects of the decision. First, the fact that every excess and umbrella policy should be carefully examined when purchased, because these policies may provide significantly less coverage than you believe you’re getting. Second, the question of when a policyholder is entitled to recover its counsel fees from the insurance company when it has to sue to enforce coverage.

Honeywell’s corporate predecessor, Bendix, manufactured brake and clutch pads that contained asbestos.  Honeywell has been sued in tens of thousands of cases alleging exposure to asbestos from Bendix products, and between Honeywell and its insurance companies, over $1 billion has been spent to resolve the claims. After 13 years of coverage litigation, Honeywell managed to settle with all of its insurance companies except for two high level excess carriers: St. Paul and Travelers.

The Honeywell case serves as a reminder that the language of excess and umbrella policies is not uniform and may represent a trap for the unwary policyholder.  In this case, the relevant policies defined “loss” as “the sums paid in settlements of losses for which the Insured is liable after making deductions for all other recoveries, salvages and other insurances (other than recoveries under the policy/ies of the Primary Insurer), whether recoverable or not, and shall exclude all expense[s] and costs.”  “Costs” was defined to include “interest on judgments, investigations, adjustments, and legal expense[s] (excluding, however, all expenses for salaried employees and retained counsel of and all office expenses of the Insured).” (Emphasis added.)

Honeywell raised a number of arguments as to why this (and similar) language in its excess policies did not negate the defense obligation.  The Court, however, disagreed, finding that the language of the excess policies unambiguously excluded defense costs.  So:  When placing and reviewing excess or umbrella policies, pay close attention to the definition of “loss.”  Is there a defense obligation, or not?  If there isn’t, are you comfortable with assuming the costs of defense once the underlying policies are exhausted?

A more troubling aspect of the case, at least for those of us who do coverage work from the policyholder side, is the court’s denial of counsel fees to Honeywell.  In New Jersey, under R. 4:42-9(a)(6), a “successful claimant” in “a liability or indemnity policy of insurance” is entitled to recover its attorneys’ fees.  The Honeywell Court conceded that “[f]ee shifting…discourages insurance companies from attempting to avoid their contractual obligations and force their insureds to expend counsel fees to establish the coverage for which they have already contracted.”   And, as the New Jersey Supreme Court ruled in Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994), “[i]nsurers whose policies are triggered by an injury during a policy period must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs. For failure to provide coverage, a policyholder may recover costs incurred under the provisions of Rule 4:42-9(a)(6).”

Here, Honeywell prevailed on several issues (such as on Travelers’ argument that numerous coverage years should be allocated to Honeywell, because Honeywell ostensibly had “self-insured” its risks for those years).  Yet the Court refused to allow Honeywell to recover attorneys’ fees because, in part, “this is a case about nothing more than allocation…not a case about denial of coverage.”  That language is extremely troubling, and, with all due respect to the esteemed Court, is something that only an “insurance dilettante” could write.  As anyone experienced in mass tort coverage cases in New Jersey knows, “allocation” is the new denial of coverage.  Carriers, in many cases, take the most expansive reading of Owens-Illinois (and its offspring, Carter-Wallace v. Admiral Ins. Co. 154 N.J. 312 (1998)) possible, often in an effort to shrink their coverage to as close to zero as possible. Policyholders are then forced to expend large sums of money on coverage litigation, in an effort to create a fair allocation.

In reaching its decision, the Court also seems to have fallen for the usual insurance company argument that larger corporations should somehow be afforded less coverage than smaller companies based upon the same policy language, writing: “[T]his is not a situation concerning a contract of adhesion.  Honeywell is a large and sophisticated corporation with a knowledgeable risk management division. Accordingly, Honeywell and its predecessor Bendix, were on equal bargaining positions when they negotiated their insurance contracts with their insurers.”

That statement may be true in judge-world, but not in the real world. No matter how large a corporation is, it is never on an equal bargaining footing with an insurance company. Yes, corporate risk managers may be able to negotiate certain favorable endorsements or minor changes in policy language. But that’s about it. Trying to change language in a preprinted policy form has about the same chance of succeeding as Rutgers does of winning the National Division I Football Championship this year.  (Calm down, Rutgers fans, I’m just keeping it real…)

Unfortunately, I expect that insurance companies will use the language in this unreported decision to argue that in any case involving allocation, the policyholder should not be allowed to recover its fees as a “successful claimant.”  Hopefully, Courts won’t allow them to get away with it.

Enforcing insurance coverage for “intentional” torts

I have in my office a copy of a Travelers claims manual from the 1980s. In discussing the duty to defend, the manual says, in part: “Ambiguity…means that the words are capable of being understood in two or more reasonably logical ways. Ambiguity should be resolved in favor of the insured. Prompt decisions must be made and effectively communicated to the insured. Defense obligations are broader than the obligation to pay. More and more jurisdictions require the insurer to look beyond the allegations in a lawsuit to determine if the loss is covered. Underlying these principles is the requirement to meet the duty of good faith to the insured. The most positive way to do that is to look for coverage in our policies, and not to look for ways to deny coverage.”  (Emphasis mine.)

Sounds like a policyholder brief!  Respectfully, though, there are some areas in which claims personnel do seem to look for ways to deny coverage. One of these areas is Coverage B of the standard commercial general liability policy, which covers “advertising injury” and “personal injury.” That includes protection against claims for torts such as defamation and invasion of privacy.  The problem is that the covered offenses often include an element of intent on behalf of the policyholder; and claims personnel are taught that any injury expected or intended by the policyholder is never covered.

This thorny issue recently came up in a case in the Second Circuit, National Fire Ins. Co. of Hartford v. E. Mishan & Sons, Inc.  The case involves class action lawsuits alleging that the policyholder (Emson), which imports promotional products and other merchandise, engaged in a scheme to deceive customers into incurring recurring credit card charges.  The policy contained the standard coverage for “personal and advertising injury,” defined in part to include “the oral or written publication, in any manner, of material that violates a person’s right of privacy.” But the policy also excluded coverage for personal and advertising injuries resulting from “knowing violations” of another’s rights. The policyholder contended that the claims involved allegations of violation of the right to privacy. But the insurance company contended that the “knowing violations” exclusion provided it with a way out.  (The insurance policy giveth, the insurance policy taketh away…)

The Court disagreed with the carrier, though, because the possibility existed that Emson’s violation of privacy could have been negligent, not intentional.  Specifically, the Court wrote: “We cannot conclude with certainty that the policy does not provide coverage, because the conduct triggering the knowing violation policy exclusion is not an element of each cause of action. Therefore, Emson could be liable to plaintiffs even absent evidence that it knowingly violated its customers’ right to privacy. Furthermore, while the underlying plaintiffs alleged generally that Emson acted knowingly and intentionally, the actual conduct described does not rule out the possibility that Emson acted without intent to harm.”   (Emphasis mine.)

The Court noted that the duty to defend exists “until it is determined with certainty that the policy does not provide coverage.” Given that test, the Court held that it was improper for the insurance company to deny the claim.

(Side note of the “toot my own horn” variety:  In holding that coverage existed, the Court relied extensively on CGS Industries, Inc. v. Charter Oak Fire Ins. Co., 720 F3d 71 (2d Cir. 2013). The CGS Court rejected application of the “knowing violation” exclusion in a Lanham Act coverage case, because even under the Lanham Act, the policyholder may have inadvertently, as opposed to intentionally, infringed. I served as local counsel on that case for David Gauntlett of Gauntlett & Associates in Irvine, California.)

A couple of observations about this decision.  First, because the case was decided under New York law, the Court held that the carrier had “a duty to defend the entire action brought under any of the Policies, including the uncovered claims.” Under New Jersey law, conversely, if there is a reasonable way to allocate defense costs between covered and uncovered claims, the insurance company is only obligated to provide a defense as to the covered claims. This is why choice of law can be so critical in insurance coverage actions (and also why you should review proposed policy forms carefully for choice-of-law provisions before binding coverage.). Second, if you’re on the policyholder side, and an exclusion is used to remove coverage that has been specifically granted, think about the concept of “illusory coverage” as a way to support your claim.  See  Russell v. Princeton Laboratories, Inc., 50 N.J. 30, 38, 231 A.2d 800 (1967) (holding that contracts should not be interpreted in a way that gives the promisor – in our context, the carrier –  the ability to make its promise “illusory,” or worthless).

A potential business insurance coverage trap: the Professional Services Exclusion

When my daughter was little, we loved putting jigsaw puzzles together. We would dump the pieces on the floor and spend hours trying to figure out how they fit. Sometimes there would be a “gap” in the puzzle, and we’d eventually get frustrated and assume that we were missing a piece. But somehow, the missing piece would almost always show up. In many ways, that’s how insurance exclusions work. They often create a (frustrating) “gap” that’s intended to be filled by other types of insurance. The so-called professional services exclusion is an excellent example of that phenomenon.

In insurance-speak, many businesses have two separate components: (A) the commercial, and (B) the professional.  “Professional services” exclusions ostensibly serve the purpose of limiting a general liability carrier’s exposure in an area in which the policyholder is supposed to buy separate errors and omissions coverage. Many courts have found that losses falling within the insuring provision of an errors and omissions policy are excluded by the typical professional services exclusion in a commercial general liability policy.

But here’s the foundational question:  What are “professional services”?  It’s not always so clear, but generally “professional services” are acts that require the actor to draw upon his or her professional training or expertise.  As an example of wrestling with this question, in Guaranty Nat. Ins. Co. v. North River Ins. Co., a patient died after jumping out a hospital window.  After an earlier incident in which a psychiatric patient had escaped through a window, the hospital had inserted screws in the window sashes to prevent the windows from being opened more than a few inches.  But they didn’t work. The carrier tried to disclaim coverage for liability resulting from the patient’s death, arguing that the “professional services” exclusion applied, because the decision on how best to secure the windows involved professional, medical judgment. The Court disagreed, writing: “The decision to protect…patients through screws in the window sashes rather than through fixed, protective screens over the windows was an administrative, business decision and was not a professional, medical decision.”  (Emphasis mine.)

(You can read the Guaranty National case by clicking here.)

The Third Circuit recently dealt with an interesting twist on the “professional services” question. PNC Financial Services Group paid $102 million to resolve several class action lawsuits.  The suits involved an automated, fee-based overdraft program that processed debit card transactions, and charged PNC’s customers overdraft fees. PNC allegedly manipulated the order in which transactions were processed, by processing them from largest to smallest instead of chronologically, supposedly to gouge customers on the fees. The suits also contended that PNC failed to disclose to customers that they could opt out of this policy and avoid overdrafts and fees altogether.

PNC had a $25 million self-insured retention, above which sat a $25 million professional liability policy sold by Houston Casualty Company. Axis sold a $25 million excess policy, over the Houston coverage.

The policies defined “damages” to mean “a judgment, award, surcharge or settlement… and any award of pre-and post-judgment interest, attorneys’ fees and costs.” But the policies excluded “fees, commissions or charges for Professional Services paid or payable to an Insured” from the definition of “damages.”

“Professional Services” were defined to mean “services performed… for the benefit of, or on behalf of a Customer or potential Customer of the Insured for a fee, commission, or other consideration…”

The Court held that PNC’s practice of charging overdraft fees constituted “professional services,” and were therefore excluded from the definition of “damages” under the policy. Approximately $30 million of the settlement related to the underlying plaintiffs’ attorneys’ fees and costs, and the Court held that those weren’t covered either.

The Court wrote: “We conclude that the approximately $30 million awarded to class counsel as attorneys’ fees and costs do not constitute an award of attorneys’ fees and costs that PNC was legally obligated to pay. Rather, PNC was legally obligated to pay $102 million to reimburse class members for charged overdraft fees, from which the class plaintiffs – not PNC – paid their attorneys approximately $30 million for their services. Accordingly, the entire $102 million in settlement payments constitute a refund of fees or charges for Professional Services that class members paid to PNC…and as such, are excluded from coverage pursuant to the Professional Services Charge Exception.”

A couple of takeaways from this case.

First, I wasn’t personally involved with the case and therefore I’m sure I’m missing something, but I don’t understand the assumption that a program for charging bank fees necessarily constitutes “professional services,” in light of the case law on that issue. It seems more like a ministerial function, more akin to the decision to use screws on the windows that we saw in the Guaranty National case.  From the policyholder’s perspective, the first question always has to be, are these really “professional services” – that is to say, services that require some level of professional judgment – at all?

Second, from a coverage perspective, always be careful how you describe payments in settlement documents. Here, the policyholder may have left $30 million on the table because, the Court said, the fees were simply part of a larger settlement payment intended to compensate the underlying plaintiffs for improper overdraft fees. It’s possible that a more insurance-savvy approach to categorizing the fee payment in the documents could have supported coverage. (And again, armchair hindsight is always 20/20.)

(You can read the PNC decision by clicking here.)

Is “occurrence” an ambiguous term?

There’s a famous (apocryphal?) story about Cato the Elder, one of the leaders of ancient Rome.  Cato was obsessed with destroying Carthage (now Tunis), the Roman Empire’s rival. He would end every speech (and apparently most conversations) with “Carthago delenda est” – Carthage must be destroyed.  The story goes that when Demosthenes (a prominent Greek orator) would speak, the people would say, “What a pretty speech!”  But when Cato would speak, the people would say, “On to Carthage.”

One of my mentors in this business was kind of like Cato.  His favorite – and frequent – saying was: “Occurrence is ambiguous.”  And he managed to convince a lot of courts that he was right.

The insurance industry incorporated the term “occurrence” into its standard-form comprehensive general liability policies in 1966. You would think that, after 50 years of battles, we would now know what the term means.  But new cases continue to come down the pike showing that we still don’t.  And the answer to whether an “occurrence” has taken place is critical. In many liability policies, an “occurrence” is the triggering event; no “occurrence,” no coverage. Construction of the term is also important because if there’s more than one “occurrence,” then more than one limit of liability can apply.

So let’s take a look at a couple of recent decisions. Hollis v. Lexington Insurance (out of the Eastern District of Virginia) involved a fireworks display gone awry. A 3-inch mortar shell landed in the crowd of spectators, detonating inches from the underlying plaintiff Kathryn Hollis and her two sons. Kathryn and her infant son M.H. suffered terrible burns and brain injuries.  Her other son Alexander was less seriously injured (and later recovered $45,000). A jury ultimately awarded Kathryn a verdict of $4,750,000 after finding that the fireworks company and its president were negligent. She and her husband then filed another lawsuit, this one on behalf of M.H. The court stayed the M.H. case, pending a determination of whether insurance coverage existed and to what extent.

The relevant insurance policy contained a familiar definition of occurrence: “[A]n accident, including continuous or repeated exposure to substantially the same harmful conditions.” The policy covered up to $1 million per occurrence and $2 million in the aggregate.  Excess coverage also existed, in the amount of $4 million per occurrence and in the aggregate.

The plaintiffs argued that there were 19 occurrences in the case (!), corresponding with the number of duties that the defendants allegedly breached, which included negligently selecting and purchasing the fireworks; violating laws and regulations in importing the fireworks; failing to test the fireworks; failing to make sure that the crowd was at a safe distance; and so on. The insurance company, naturally, wanted there to be only one occurrence, if there was any coverage at all.

I’m a policyholder guy, but even I admit that the “19 occurrences” argument was a tough one to win.  We’ve all seen plaintiff’s lawyers who draft complaints as though they were issue-spotting on a law school exam.  (And even if the policyholder did win, there were only $6 million in aggregate limits, which may have been impacted by the prior judgments.)  Making each alleged breach of duty a separate “occurrence” seems somewhat arbitrary, at least under the facts of this case.  And, in agreeing with the insurance company on the number of occurrences issue, the Court wrote: “The allegations of negligence in this case are all associated with the exact same injuries, which occurred contemporaneously due to the explosion of the fireworks shell. Without any allegation of distinct injuries attributable to the 19 allegedly wrongful acts, the insureds’ negligence forms only a single cause. Therefore…the Underlying Complaint alleges only a single occurrence.”  (Emphasis mine.)

The Court’s decision is silent on the question of whether Kathryn’s prior $4,750,000 verdict (or Alexander’s $45,000 verdict) was covered by insurance, and to what extent. An obvious question is:  If all three plaintiffs had brought suit in the same case, would only one “per occurrence” limit apply to them collectively?  This is why, when examining your company’s coverage package, you want to be sure how the “per occurrence,” “per claim” (if any), and aggregate limits work.  If the worst happens, you could be left with a lot less insurance then you thought you had.

Now let’s look at a second recent case, Lee v. Universal Underwriters, from the 11th Circuit.   A Ford dealer negligently repaired the brakes on a 2000 Ford Expedition.  Years later, the driver (Lee) tried to stop while approaching ongoing traffic, but the brakes failed. Lee drove onto the grass shoulder to try to slow down, and the SUV flipped, killing him and injuring his passenger, Brenner.  Lee’s widow and Brenner both sued the dealer, Terry Holmes Ford.

The policy defined “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in…INJURY…during the Coverage Part period neither expected nor intended from the standpoint of a reasonably prudent person.”

The dealer’s insurance carrier, Universal, denied coverage because the “occurrence” date, which Universal deemed to be the accident date of December 11, 2008, supposedly fell outside the policy period.

After Universal declined coverage, the dealer settled by admitting liability for all counts alleged in the lawsuits. The dealer then assigned to Lee’s widow and Brenner the rights to recover under any applicable insurance policies. With liability established, the case went to arbitration for an assessment of damages. The arbitrator awarded $4.2 million for Lee’s death and $1.2 million for Brenner’s injury. Lee’s widow and Brenner then sued Universal directly to recover.

Universal again argued that there was no coverage because the “occurrence” hadn’t happened during the policy period, but the Court disagreed, writing: “The policy’s plain text is ambiguous about what type of ‘occurrence’ triggers coverage. The policy does not clearly state that it applies only to injuries that occur within the policy period, nor does it state specifically what type of ‘accident’ during the policy period might trigger coverage. The policy also identifies an ‘injury’ as a distinct concept from an ‘occurrence’ or ‘accident’ for coverage purposes, suggesting that the ‘occurrence’ trigger for coverage is not the same as the time of injury…The policy could reasonably be interpreted as requiring either that the accident – here, the negligent repair – occur during the policy period, or that the injury resulting from the accident – here, the car crash – occur during the policy period.”

Since the policy was ambiguous, the Court construed the against the carrier as drafter.

Takeaways from the policyholder’s perspective:  Whether an “occurrence” has happened is often a matter of heated debate.   (In fact, in the context of long-tail claims, such as asbestos claims, the New Jersey Supreme Court, finding standard-form insurance policy language unequal to the task, has created a legal fiction that a separate “occurrence” happens in each policy year of the triggered time period.  Owens-Illinois v. United Ins. Co., 138 N.J. 437, 478 (1994)).   If you can offer a reasonable theory for how your set of facts fits into the “occurrence” definition, and how many “occurrences” took place, you can often win.  Part of the reason that the policyholder lost in Hollis is that the Court likely felt that the idea of 19 occurrences was arbitrary and unreasonable.

You can find a complete copy of the Hollis decision by clicking here, and a complete copy of the Lee decision by clicking here.

Enforcing insurance coverage for “intentional” business torts

The other day, I was talking with a lawyer who represented a plaintiff in litigation relating to a failed business transaction. He was lamenting the fact that, if he were to take judgment against the defendants, there wouldn’t be insurance to help satisfy the claim, since, according to him, “no insurance company is ever going to pay for breach of contract.” This called to mind a fundamental tenet of my first boss in this business, who used to say: “If you go into a case thinking there’s no coverage, I guarantee you won’t find any.” I think this may be especially so when dealing with Coverage B of a standard general liability policy (which relates to “personal injury” and “advertising injury”). You really have to compare, very carefully, all of the allegations in the underlying complaint to the specific terms of coverage, and not rely on the labels created by the underlying plaintiffs’ attorney or your insurance company or broker.

This issue recently came up in the New Jersey Appellate Division, in a case involving the alleged breach of a non-compete and confidentiality agreement by an insurance broker.  (The case is Borden-Perlman Insurance Agency v. Utica Mutual Insurance Company, and you can download a complete copy of the decision by clicking here.)

Facts: Trombetta worked for Orchestrate, a company that, among other things, serves as a managing general underwriter, placing coverage in the “sports medicine industry.”  He had signed a three-year non-compete and confidentiality agreement with Orchestrate.  He left Orchestrate and went to work for Borden-Perlman, an insurance brokerage, and one month later, he apparently used Orchestrate’s confidential information to go after Orchestrate’s clients. That understandably made Orchestrate unhappy, so Orchestrate brought suit for, among other things, tortious interference and defamation. According to Orchestrate, Trombetta improperly had told Orchestrate’s clients that Orchestrate didn’t process insurance claims in a timely manner; didn’t provide promised discounts to its clients; and was generally guilty of sloppy paperwork.

Business torts like defamation always present a problem for those of us who do coverage work, because they contain an element of deliberate intent, and judges and insurance claims representatives are sometimes unable to process the concept of insurance coverage for alleged intentional acts that cause intended results.

Here, though, the Utica policy defined “personal injury” to include slander and libel (as is typical in Coverage B of a general liability policy). While the policy excluded coverage for “deliberate…[or] knowing conduct,” the policy also stated that Utica would defend such allegations, but would not “have any liability for any judgment for dishonest, fraudulent, malicious, or criminal conduct.” (Emphasis mine.)

In holding that Utica had breached its duty to defend, the Court wrote: “We have determined that the defamation, tortious interference, and negligent misrepresentation allegations may potentially arise out of negligent misleading and false statements made during the course of rendering services to various clients. The policy recognizes that insureds may be sued for defamation, and in such suits, insureds may generally be accused of engaging in dishonest, fraudulent, or malicious conduct [which] may be excluded under the policy as a covered loss, [but] the clear language of the policy requires Utica to defend Borden-Perlman for covered losses, such as defamation and tortious interference, which allegedly were caused by the defamation.”  (Emphasis again mine.)

An aside:  Sometimes in coverage claims, the policyholder’s failure or success will turn on which state’s law applies.  Here, the New Jersey Court rendered its decision under Texas law, because the policy was a multistate liability policy, covering disclosed risks in New Jersey, Texas, and Pennsylvania; Borden-Perlman’s underlying liability arose in Texas; and there was no choice-of law provision in the policy. (To me, the carrier’s failure to include a choice-of-law provision always creates a latent ambiguity that should be construed in the policyholder’s favor.  But that’s just me.) Why was this significant? Because under Texas law, the carrier had to defend the entire case, not only the covered claims.  In New Jersey, conversely, some case law holds that the carrier has a duty to reimburse the policyholder only for covered claims, as long as defense costs can be reasonably apportioned between covered and non-covered claims. (Even in New Jersey, though, when the defense costs can’t be reasonably apportioned, the carrier must assume the cost of defense of both covered and non-covered claims.)

The takeaway:  When dealing with insurance claims, always remember the Felix Unger Rule, which you can review by clicking here.

Beware the Strict Interpretation of Notice Provisions in Claims-Made Policies

A few years back, a major financial institution retained us to review its insurance coverage program. After checking the main items I usually look for, I asked the Risk Manager whether the heads of the organization’s various business units knew the basics of the notice provisions in the company’s major coverages. I could see her eyes glazing over. Why would anyone care about that, and why in the world was I adding make-work to the already-overburdened Risk Manager’s to do list?

The answer is pretty simple: You can have the best coverage in the world, and you can still be in trouble when a major claim rolls in, because you blew the notice provisions under the policy. This danger is even more acute in large and diffuse (“sophisticated”) organizations, because your people in the field may have no idea what types of things are and aren’t covered under your program, and when and how to send information to the Risk Management Department. They may think insurance is only for slip and fall incidents and fender benders; and of course, a complex business coverage program goes way beyond that.

We once represented a defense contractor, for example.  The contractor had designed and manufactured certain machinery to be installed in a military application, and the work was done at a facility in another state, far distant from corporate headquarters (and the risk management department). When the contractor performed a final inspection on the equipment before sending it to the military, the equipment inexplicably started to discharge lead (prohibited in this type of application).  Frenetic activity resulted, including numerous interviews of employees, and destructive testing of the equipment. No one, however, focused on filing an insurance claim with the contractor’s property carrier, until an insurance broker raised the issue while conducting an annual review, a year and a half later. We became involved very late in the process, and, after filing suit, we were able to achieve a decent settlement – but the settlement would’ve been a lot better if we weren’t facing a serious late notice issue.  Such are the perils of unclear lines of communication.

With that background, consider the New Jersey Supreme Court’s recent decision in Templo Fuente de Vida Corp. v. National Union, which you can read here.  The case involved the notice provisions under a claims-made D&O policy.

Templo hired Morris Mortgage Inc. (MMI) to help obtain funding for the purchase of certain property, for the relocation of a church and daycare center. MMI identified a possible funding source (Merl), but the anticipated lender failed to come through on the final closing date (ouch).  Templo sued Merl (the recalcitrant lender), which later became known as First Independent.

National Union had sold First Independent a D&O and Private Company Liability Policy with a $1 million limit.  The Policy potentially covered the Templo claim. More than six months after being served with the first amended complaint in the underlying suit, and only after retaining counsel and filing an answer, First Independent provided notice of the claim to National Union. National Union denied coverage, arguing in part that notice of the claim had not been given to National Union “as soon as practicable,” as the policy specifically required.  There was no dispute, however, that First Independent gave notice within the policy period.

First Independent settled the underlying litigation. The settling defendants’ liability exceeded $3 million, and they committed to pay plaintiffs a portion of that liability by a fixed date. To cover part of the settlement amount, First Independent assigned to Templo (the underlying plaintiff) its rights and interests under the National Union policy.

In its declaratory judgment suit against National Union, Templo argued in part that notice had been given during the policy period, and that National Union had suffered no prejudice as a result of the timing of notice. The New Jersey Supreme Court rejected this argument, holding that the existence of prejudice was only relevant to late notice issues arising under “occurrence”-based policies, and not under claims-made coverage.

The Court wrote: “Plaintiffs do not assert that the notice provision in question was ambiguous. During oral argument plaintiffs conceded that First Independent did not notify National Union of the claims ‘as soon as practicable,’ and plaintiffs did not provide the trial court with any evidence to justify First Independent’s reporting delay…We hold only that on this record the unexplained six-month delay did not satisfy the policy’s notice requirement.…We need not and do not draw any ‘bright line’ on these facts for timely compliance with an ‘as soon as practicable’ notice provision.”

Then, picking up on the old saw often relied upon by insurance companies, the Court noted that First Independent – which had 14 full-time employees, two part-time employees, and a Human Resources Department – had been represented by an insurance broker in its negotiations with National Union, and was a “sophisticated insured” and therefore not entitled to the benefit of the doubt on notice.  This confirms that there are two different worlds: “Judge World” and the “Real World.” In “Judge World,” “sophisticated policyholders” get less insurance then ordinary consumers, based upon the same policy language. Also in “Judge World,” insurance brokers apparently routinely negotiate the terms of standard form notice provisions contained in commercial insurance policies.

Although most of us operate in the “Real World,” we sometimes can’t avoid being dragged into “Judge World.” I therefore go back to the beginning of this post. Make sure your business unit managers (or your clients’ business unit managers) know the basics of the notice procedures under your major coverages.  And be careful about taking assignments of insurance claims to satisfy debt. You may think that the claim is worth substantially more than it actually is.

By the way, here’s a pretty good article on proper risk management controls.

Recent Developments in Business Interruption Claims

Arnold Palmer once described golf as “deceptively simple and endlessly complicated.”  That’s a good description for insurance also.  (Fortunate for me, since I get paid to figure it out.)  Given the rules of construction, ambiguities (even latent ambiguities) in insurance policies are supposed to be construed against the carrier. I’ve therefore always wondered why the insurance industry doesn’t do much more to minimize the “endless complications.”  On the other hand, trying to get a judge to find that policy language is ambiguous, especially in the commercial context, can be like trying to get a camel through the eye of a needle (to go all Biblical on you), so maybe the insurance industry knows what it’s doing.

The basic concept of business interruption insurance is pretty easy to understand.  A covered cause of loss of happens (like, say, a fire) and your company loses money because of a resulting slowdown or suspension of operations. Business interruption coverage (also known as “business income coverage”) applies to loss suffered during the time required to repair or replace the damaged property and get back up and running. The coverage may also be extended to apply to loss suffered after completion of repairs, for a specified number of days. There are two ISO business income coverage forms: the business income and extra expense coverage form (CP 00 30) and the business income coverage form without extra expense (CP 00 32).

Sounds “deceptively simple,” eh?  But let’s take a look at two recent decisions.

DirecTV v. Factory Mutual involved the question of what happens when a supplier suffers a catastrophe, causing the policyholder to lose income. Factory Mutual sold DirecTV business interruption coverage containing a “contingent time element” provision. This type of coverage extends insurance beyond the policyholder’s own property to the location “of a direct supplier, contract manufacturer or contract service provider.”

DirecTV, of course, is a satellite television company. Its satellite dishes pick up signals from satellites and submit those signals to a DirecTV receiver, known as a setup box or “STB”, which transmits the signals to the subscriber’s television.

DirecTV contracted with four companies to manufacture and supply its STBs. The manufacturers bought the component parts and incorporated them into the finished STBs, and then sold the STBs to DirecTV. The STBs included, as a component part, hard drives manufactured by two companies, one of which was Western Digital. In October 2011, a monsoon in Thailand damaged Western Digital’s hard drive manufacturing facilities. DirecTV argued that the damage to the Western Digital facilities reduced the supply of hard drives available for incorporation into DirecTV’s STBs. The resulting price increase in Western Digital hard drives, as well as the expense of obtaining substitute hard drives, caused DirecTV approximately $22 million in losses and extra expenses.  DirecTV submitted a business interruption claim to Factory Mutual, requesting reimbursement of the $22 million.

Factory Mutual denied the claim, arguing that Western Digital was not a “direct supplier, contract manufacturer or contract service provider” to DirecTV. And, unfortunately for DirecTV, the Court wholeheartedly agreed, writing: “Absent any evidence that the parties intended ‘direct supplier’ to have any technical, or industry-specific meaning, there is no reason to look beyond the ordinary meaning of the term. And without recourse to electronics supply industry jargon, any definition of ‘direct supplier’ to mean ‘customer-controlled component supplier’ would not be reasonable…The ordinary meaning of ‘direct supplier’ does not apply to a situation where DirecTV never received anything from Western Digital.”

This case points out the need for risk managers and insurance brokers to understand the policyholder’s business fully. Had the supply chain been analyzed, perhaps the policy could have been amended by endorsement to include indirect suppliers, or at least certain indirect suppliers.

Another recent decision concerning business interruption coverage stemmed from Superstorm Sandy, known to lawyers in the New York metro area as “the gift that keeps on giving.”  Almah LLC v. Lexington involved an office building in Lower Manhattan that got torn apart pretty badly by the storm. Lexington paid over $26 million on the claim, including $1,342,392 for wind damage. The policyholder argued that it was entitled to a further payment of $15.8 million for non-physical damage and losses, including the cost of removing debris and contaminated property; the cost of hiring professionals to inspect the property; rental loss for the time when the building was not habitable; rental loss and rent abatements caused by the lack of voice, data, or video services; and the demolition and rebuilding of portions of the building to comply with municipal ordinances. Lexington, on the other hand, argued that it already had paid in its entire flood limit of $25 million, and that no further payment was required.

So, the question was whether the claims for consequential loss (including business interruption) fell within the flood sublimit and were therefore properly rejected. The Court wrote: “The flood sublimit applies to many of Plaintiff’s claims arising from the Superstorm Sandy flood. The plain language of the Policy provides that the $25 million coverage for flood in an ‘area of 100-Year Flooding, as defined by the Federal Emergency Management’ (i.e., the Property) is for total loss or damage including any insured Time Element loss. Therefore, any claim by Plaintiffs that arises out of [time element] falls within the $25 million limit of liability for flood. Making this distinction may not be as easy as Lexington contends. Plaintiffs’ other claims must be addressed on an item-by-item basis.”

In other words, the Court rendered a decision that essentially said nothing, after (I’m sure) an enormous amount of money was spent on lawyers by both sides. The Court basically said, if a particular time element loss is attributable to the flood, then the flood sublimit applies.  It’s not clear from the decision whether a good argument could be made that the building was uninhabitable due to wind damage alone. In a number of instances following Sandy, too many lawyers and insurance adjusters jumped to the conclusion that the storm was a “flood event,” without carefully analyzing the facts applicable to each specific insured property.

Deceptively simple, but endlessly complicated.