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EYE ON COVERAGE – POINTERS FOR POLICYHOLDERS

Summer 2006

Here are some new cases and interesting developments in California insurance law.


Bad Faith Failure to Settle Claim

A trucking company delivered a loan of almonds that it contaminated when it failed to clean out chemical residue in the trailer. U.S. Fire paid to settle the claim, then sued its policyholder to recover the settlement, citing a raft of policy exclusions. But those exclusions were asserted without facts to back them up, because the insurance company was pre-disposed to deny the claim without a proper investigation. The court relied on expert testimony that the exclusions were invoked improperly. United States Fire Ins. Co. v. Button Transportation.

Product Liability - Vendor’s Endorsement-Change of Product

Vendor’s endorsements are usually worded very broadly. Travelers failed to wiggle out of such an endorsement issued to the manufacturer of inlet hoses for washing machines. Dayco sold hoses in 750 lengths to a manufacturer who cut the hose and installed couplings, then shipped the hose to Westinghouse. The manufacturer was covered under the endorsement as one who distributed Dayco’s product, even though the manufacturer changed the hose and made a new product out of it. Alpha Holdings v. Travelers found the endorsement to be ambiguous.


Umbrella Coverage for Administrative Cleanup Orders

Umbrella policies may provide coverage for environmental cleanup costs, when primary policies do not provide that coverage. The California Supreme Court has rendered a series of difficult and confusing decisions on insurance coverage for environmental cleanup costs ordered by state or federal agencies. The first two decisions, Foster-Gardner, Inc. v. National Union, 18 Cal. 4th 857 (1998) and Certain Underwriters at Lloyd’s London v. Superior Court, 24 Cal. 4th 945 (2001) held that there is no coverage under the standard insurance policy issue before 1986, because those policies provide a duty to defend “suits”, but no duty to defend “claims” before administrative agencies. In a later decision, Powerine Oil Co., Inc. v Superior Court, 37 Cal. 4th 377 (2005) the Court found coverage under an umbrella policy that provided coverage for
“damages”, “expenses” and “claims”. Thus, any policyholder dealing with environmental cleanup costs has to check the exact wording of its insurance policies. The Supreme Court has made a critical distinction between coverage for “claims” and coverage for “suits”; and the exact verbiage of a policy can make a difference.
Ironically, policyholders who do not have the requisite “magic words” in their umbrella policies may have to be sued by a state agency in order to preserve coverage. That is one of the ironic consequences of this line of authority, which promotes litigation rather than settlement. These cases are out of step with case law around the country which almost universally holds that there is coverage for administrative actions of environmental agencies.

Total Pollution Exlcusion Isn’t Total

While applying a “literal” approach to the meaning of “claim” or “suit”, the Californai Supreme Court has done just the opposite under the “total pollution exclusion”. A literal reading of the exclusion excludes coverage for all “irritants” and “contaminants”, which might conceivably apply to anything. That’s too broad, said the court in MacKinnon v. Truck Ins. Exchange, 31 Ca. 4th 635 (2003). The exclusion only applies to traditional environmental pollution. Thus, the exclusion does not apply to the back up of sewage caused by a contractor installing a sewage by-pass system that failed. In that case, Griffin Dewatering v. Northern Insurance Co., an Orange County jury recently assessed some $11 million in punitive damages after the insurance company promised coverage to the contractor, but then invoked the “total pollution exclusion”.

Coverage for the Additional Insured’s Sole Negligence

Additional insured coverage continues to be a viable source of coverage for contractors. It is common for one party to a contract to insist that the other party provide “additional insured” coverage under the second party’s insurance policy, even for the “sole negligence” of the first party. Thus, a movie studio let a film company use its lot to make a film, but insisted that the film company name the movie studio as an additional insured under the film company’s policy. An employee of the film company sued the movie studio for injuries sustained while constructing a set for a film. The liability policy of the film company owed coverage under the additional insured endorsement, even though the move studio might have been solely responsible for the injury. American Cas. Co. v. General Star Indemnity, 24 Cal. Rptr. 334 (2005). Additional insured coverage is always good, if you can get it! Let someone else pay for your insurance, as part of the deal.


Surplus Lines Broker’s Duty Runs to Non-Client Beneficiary

Insurance brokers have a fiduciary duty to obtain coverage; and this duty runs to intended beneficiaries of the insurance policy, even if they are not clients of the broker. A California business required its software vendor, located in India, to obtain an errors and omissions policy to cover software that failed. When it failed to work, the business sued the software company, but its insurance company denied coverage, citing an exclusion for claims arising in India. The business then sued the surplus lines broker for obtaining a policy that did not provide coverage for claims arising in India. The broker argued that it had no duty to the business, which was not its client. The court held that the broker’s fiduciary duty ran to persons who were the likely beneficiaries of the insurance policy, not just to the named insureds. Business to Business Markets, Inc. v. Zurich Specialty Insurance. One wonders – did anyone read the policy when it was delivered by the insurance company?

Claims Made Coverage – What Are Interrelated Claims?


Claims-made policies typically contain a provision stating that all “interrelated claims” will be treated as a single claim. This makes sense when a single person files multiple claims arising out of a single incident – say, for example, different claims of malpractice arising from a failure to diagnose a problem. But the provision should not apply when there are multiple, unrelated claimants seeking to sue the same person, for different acts taking place on different dates. That was the ruling in The Doctors Co. v. Realyvasquez (Shasta County Superior Court, 2005). Hundreds of patients alleged that the medical staff at one hospital engaged in a conspirace to perform unnecessary hear surgeries. The insurance company argued that the claims were all “interrelated” because they flowed from a single alleged conspiracy. Not so, said the the court. Each patient represent a different claim.

Defense Costs Within Limits – Settle Early With Independent Counsel!

Many liability policies provide that defense costs are included within the limits of insurance. Every dollar spent on defense costs reduces the amount of insurance left. These polices are based on the assumption that the policyholder will be facing small, nuisance cases that will be settled for small amounts. What happens when that is not the case – say there is a $1 million policy that gets eaten up by $1 million in defense costs, leaving nothing left? That is the absolute nightmare under these policies. They require, therefore, that cases be settled early, before defense costs wipe out the policy limits. These policies also require that “independent counsel” be chosen by the policyholder, so the policyholder decides how the policy proceeds will be spent. Insurance companies should readily appoint “independent counsel” and try to settle early. But many insurance companies don’t and instead choose to gamble with the insured’s diminishing policy limits. This is a classic recipe for disaster and bad faith. Policyholders need to take charge of the defense and settlement under these policies and to overcome resistence by insurance companies to settle early.


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Jstanzler @sfcfirm.com.


 
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