Washington Court Holds Insurer Not Entitled to Reimbursement of Defense Costs

The Court of Appeals for the State of Washington, in its recent decision National Surety Corp. v. Immunex Corporation, 2011 Wash. App. LEXIS 1695 (Wash. App. July 25, 2011), had occasion to consider whether an insurer is entitled to recoupment of defense costs incurred prior to receiving a judgment declaring that it owed no duty to defend.

National Surety insured Immunex under an umbrella and excess liability policy.  Immunex was named as a defendant in a number of suits alleging that it participated in a conspiracy with other prescription drug manufacturers to artificially inflate the average wholesale price of its products.  While the first of the suits was filed in 2001, Immunex did not provide first notice of the suits to National Surety until 2006.  National Surety initially denied coverage based on late notice, but later agreed to provide a defense under a reservation of rights and to seek a declaratory judgment.  Among other things, National Surety reserved its right to recoup defense costs paid in the event it was determined that National Surety had no duty to defend.

Both the trial court and the appellate court agreed that the underlying suits filed against the insured, alleging price discrimination arising out of the insured’s alleged participation in the fraudulent pricing scheme, did not constitute “personal and advertising injury” under the policy, which included the offense of “discrimination.”  While the term “discrimination” was not defined by National Surety’s policy, the appellate court agreed that the underlying suits “originate[d] not from discriminatory actions but from fraudulently inflating” the price of its products.  Although this conduct “might have impacted some consumers more than others, that does not mean the offenses originated from discrimination.”  Thus, the court agreed that National Surety did not have a duty to defend the underlying suits.

While the court held that National Surety had no duty to defend, it disagreed that National Surety was entitled to recoupment of defense costs it had already incurred. The court acknowledged that lack of Washington case law on the issue, but found guidance from the line of cases holding that an insurer has a duty to defend whenever a complaint alleges a potentially covered claim.  While it was ultimately determined that National Surety had no duty to defend, there was no certainty of that outcome until the trial court ruled in National Surety’s favor.  Accordingly, National Surety had a duty to defend from the time the underlying complaint was filed through the time it received summary judgment in the coverage litigation, and as such, it was proper for National Surety to pay defense costs during that period.

The court addressed at length an insurer’s options when it is not clear from the face of the pleading as to whether a defense obligation is triggered.  Under such circumstances, the insurer can deny coverage outright or provide a defense under a reservation of rights and seek a declaratory judgment.  By providing a defense under a reservation of rights, the insurer avoids the potential for having breached any subsequently determined defense obligation.  By opting for the latter, explained the court, the insured is not unjustly enriched by receiving a defense:

… National Surety had the benefit of insulating itself from a bad faith claim and possible coverage by estoppel.  Therefore, the payment of the defense costs is not purely a gratuity to the insured and no unjust enrichment occurs if National Surety covers the cost of defense until the trial court ordered otherwise.

Thus, the court held that an insurer’s reservation of rights to recoup defense costs will not be enforced absent express language in the policy allowing for such relief.

South Dakota Supreme Court Addresses Sudden and Accidental Pollution Exclusion Language

In its recent decision in Demaray v. De Smet Farm Mut. Ins. Co., 2011 S.D. LEXIS 98 (S.Dak. July 20, 2011), the South Dakota Supreme Court addressed whether the phrase “sudden and accidental,” as used in a pollution exclusion, is ambiguous.

The insureds, who ran a cattle operation, were sued for alleged intermittent, repeated and continuing discharge of animal and other wastes and process waste water into lakes and streams on the claimant’s property.  The insureds sought coverage under the liability coverage of a policy issued by De Smet Fam Mutual Insurance Company.  De Smet, in turn, denied coverage on the basis of the policy’s pollution exclusion applicable to the “the discharge, dispersal, release, or the escape of pollutants into or upon land, water or air.”  The exclusion, however, contained an exception for “bodily injury or property damage arising out of the sudden and accidental discharge, dispersal, release or escape into or upon land . . . of pollutants used in or intended for use in normal and usual farming activities[.]”  The insureds argued that the exception applies because the pollution alleged in the underlying complaint failed to allege that the pollution was the result of intentional conduct.

The court acknowledged that matter was one of first impression as no South Dakota court previously addressed the phrase “sudden and accidental” in the context of a pollution exclusion.  The court therefore looked to the two lines of “sudden and accidental” case law in other jurisdictions.  The first line of cases holds that the phrase “sudden and accidental” is ambiguous since the word sudden can have several meanings, including accidental and abrupt.  In light of this ambiguity, these courts construe the phrase in the insured’s favor to mean accidental, and as such, the phrase “sudden and accidental” means “unexpected or unintended.”  By contrast, the other line of cases holds that the phrase is unambiguous and that the term “sudden” refers solely to a temporal element.  The court agreed with the latter line of cases.

Thus, agreeing that the phrase “sudden and accidental” has a temporal element, the court looked to the allegations in the underlying complaint to determine whether any of the alleged discharges could be describe as “abrupt or immediate and unexpected or unintended.”  The court held that no such conduct was alleged.  Rather, the underlying complaint alleged intermittent and continuous discharges which the court explained was not “sudden and accidental”:

No language in the Alvine complaint arguably supported a cause of action for a "sudden and accidental" discharge of pollutants. "Intermittently" cannot be construed to mean abrupt or immediate. The complaint clearly made claims against Demaray and Hagemann for "past and continuing" and "repeated" discharges that "will continue." There is no immediacy or abruptness with a discharge that is intermittent, repeated, and likely to continue.

The court further rejected the insureds’ attempt to point to single “sudden and accidental” events within the larger course of systemic conduct, such as a sudden and violent rainstorm that caused waste to be discharged onto the claimant’s property.  The court explained that it would not engage in “microanalyzing” the insureds’ long-term routine of waste disposal in order to find one single, discrete instance of a “sudden and accidental” discharge. 

Deductibility of CPP Disability Benefits

The plaintiff in Demers v. B.R. Davidson Mining & Development Ltd. [2011] ONSC 2046 received CPP benefits following a car accident in 1999. A dispute arose as to the deductibility of these benefits.

Prior to November 1, 1996 it was clear that CPP benefits were not deductible. The law in this respect became less clear with the enactment of Bill 59. This Bill dealt with car accidents occurring after November 1, 1996 and before October 1, 2003. As a result of its enactment, s.267.8(1) of the Act provided for the deduction of benefits for “loss of earning capacity”. What wasn’t clear was whether this included CPP benefits.

To complicate matters further, there were two conflicting court decisions. The court in Meloche v. McKenzie ,[2005] O.J. No. 3761 (S.C.J.) looked to the 2003 amendments which specify that CPP benefits are deductible and concluded that this amendment must be a clarification of the original legislation. The court in Sonnenberger v. Creamer, [2009] O.J. No. 754 (S.C.J.) made the opposite finding as it took the position that the amendment did not provide for retrospective application.

There is also a Court of Appeal decision, Kosanovic v. Wawanesa Mutual Insurance Co., [2004] O.R. (3d) 161 (C.A.) which held that CPP benefits were not deductible for this time period. This case was not considered by the court in Meloche and arguments were made by the defendants in Demers that this case should not be considered.

Shaw J. found Kosanovic relevant and binding but also focused on two principals of statutory interpretation to settle the issue: 1) the ordinary meaning of a legislative provision should prevail absent a good reason to reject it; and 2) there must be something in the wording of the provision or in the circumstances in which it is enacted to indicate that the provision is meant to be retroactive. He concluded that the legislation in effect in 1999, when the accident occurred, does not expressly provide for the deduction of CPP benefits and the amended legislation does not indicate retroactivity.

As a result of this case there appears to be two distinct periods of time: 1) accidents which occurred between October 23, 1989 and September 30, 2003 (CPP benefits not deductible); and 2) accidents which occurred after October 1, 2003 (CPP benefits deductible).

Fifth Circuit Agrees: Duty to Indemnify Broader than Duty to Defend Under Texas Law

In D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., 300 S.W. 3d 740 (Tex. 2009) and Burlington Northern & Santa Fe Railway Co. v. Nat'l Union Fire Ins. Co., 334 S.W.3d 217 (Tex. 2010), the Texas Supreme Court established the rule that an insurer can have a duty to indemnify even in the absence of a corresponding duty to defend.  The United States Court of Appeals for the Fifth Circuit recently addressed this concept in Colony Ins. Co. v. Peachtree Construction, Ltd., 2011 U.S. App. LEXIS 14740 (July 19, 2011).

Peachtree was a general contractor hired by the State of Texas for a highway-repaving project.  Peachtree contracted with a third party, CrossRoads, to provide construction signs, barricades and warning devices.  Pursuant to this contract, CrossRoads was required to name Peachtree as an additional insured under its primary and excess liability policies.   Colony was CrossRoads’ primary liability carrier.

Peachtree was later sued in a wrongful death action arising out of a motorcycle crash that happened at the construction site. While the suit alleged that Peachtree failed to use proper signage and warnings, CrossRoads was not named as a defendant nor did it contain any allegations concerning CrossRoad’s negligence.  Peachtree tendered the matter to CrossRoad’s insurers.  Colony provided Peachtree with a defense under a reservation of rights, but commenced a declaratory judgment action, arguing that it had no duty to defend or indemnify since the underlying matter did not allege negligence on the part of CrossRoads. The federal district court granted summary judgment in favor of Colony, holding that because the underlying suit did not allege any negligent arising out of CrossRoads’ work, Colony had no duty to defend Peachtree, and as such, it could not have a duty to defend.

Peachtree did not appeal the aspect of the district court’s concerning the duty to defend.  Rather, its appeal was limited to the issue of whether in light of the D.R. Horton decision (the matter apparently was briefed before the Burlington Northern decision), Colony could have a duty to indemnify even though its defense obligation was not triggered.  The Fifth Circuit, citing to D.R. Horton, agreed that indemnity obligation could arise even in the absence of a defense obligation, explaining that under Texas law, the duty to indemnify is not subordinate to the duty to defend and, in fact, requires a separate factual analysis.  Even though the underlying suit did not contain any allegations concerning CrossRoads’ own negligence that would trigger a defense obligation, the district court was still required to consider whether Colony had a duty to indemnify.  As the Fifth Circuit explained, “[w]here there has been an underlying trial on the issue of liability, the facts adduced at trial might differ from the allegations, and thus, a duty to indemnify could be shown notwithstanding the absence of a duty to defend.”  Thus, the lower court was required to consider any factual evidence offered by Peachtree, including evidence extrinsic to the underlying complaint, to determine whether the accident arose out of CrossRoads’ work performed on behalf of Peachtree such that Colony’s indemnity obligation was triggered.

Seventh Circuit Affirms Cost of Capital Improvements Not Covered Under GL Policy

In its recent decision, Continental Cas. Co. v. Sycamore Springs Homeowners Association, 2011 U.S. App. LEXIS 15005 (July 22, 2011), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, had occasion to consider whether an underlying suit demanding that the insured undertake measures to prevent future “property damage” triggered coverage under a general liability policy.

The insured, Courtyard Homes, was the developer of a residential subdivision constructed in a flood plain in Indianapolis, Indiana.  In fact, both Courtyards Homes, and the homeowners’ association, Sycamore Springs, knew of the flood risks associated with the area.  Courtyard Homes addressed this risk by constructing various flood-protection elements such as levees and retention ponds.  It was alleged, however, that Courtyard Homes overdeveloped the property, placing too much strain on these preventative measures, and that as a result, they failed during an extended period of heavy rains.

Sycamore Springs later sued Courtyard Homes, but not for damage resulting from the flooding.  Rather, Sycamore Springs sought relief in the form of requiring Courtyard Homes to construct improved measures to reduce the chances of future flooding.  Courtyard Homes’ carrier, Continental, denied coverage primarily on the basis that “any loss was the expected result of a deliberate reduction in the subdivision's ability to deal with heavy rain or a rising river” and thus did not allege "property damage" arising out of an occurrence.  In the ensuing coverage action, the district court did not reach the issue of whether the underlying suit alleged an occurrence.  Rather, the court found in favor of Continental on the basis that the suit did not allege loss arising out of “property damage,” but instead sought  to prevent future “property damage.”  Costs associated with preventing future, hypothetical “property damage,” held the court, did not fall within the policy’s coverage. 

On appeal, the Seventh Circuit affirmed the lower court’s decision, and in doing so, rejected the insured’s argument that costs of capital improvements can qualify for coverage under a liability policy.  The court reasoned that the moral hazards involved would prevent general liability insurers from writing such coverage:

Protected by a policy covering the costs of improvements, a builder would produce a substandard project and demand that the insurer finish the job; builder and buyers could split the savings. Insurers, recognizing this incentive, would raise the price of their policies so high that no builder planning to do the job right would find the offer attractive. The result would be the collapse of the insurance market. No one would gain, and honest builders would lose because insurance would no longer be available. That's why Continental's policy does not cover the expense of improving the subdivision's flood defenses.

Thus, held the Seventh Circuit, because the underlying suit did not involve any amounts that could be considered covered “property damage,” the lower court’s ruling was proper.  The Seventh Circuit nevertheless considered and rejected Continental’s argument that the underlying matter did not allege an “occurrence,” explaining that the unintended and unanticipated consequence of an intentional choice (i.e., constructing a housing development in a flood zone without proper precautions) can be an accident for the purpose of a liability policy.  Notwithstanding, a general liability policy provides coverage only for “property damage” resulting from such an accident, not for costs associated with preventing future “property damage.”

California Court Holds Groin Punch Not an Occurrence

The California Appellate Court for the Second Appellate District recently issued a ballsy decision that can only be described a low blow to insureds.  In State Farm General Ins. Co. v. Frake, 2011 Cal. App. LEXIS 911 (Cal. App. July 13, 2011), the court was asked to consider whether the insured’s intentional battery of his friend’s nether regions constituted an “occurrence” for the purpose of a renter’s liability policy.

The fracas in Frake reads like an episode of Jackass.  The insured, Frake, was visited by two former high school classmates in Chicago for a weekend of “partying and drinking” to be highlighted by a Cubs game.  These friends, immune to all fears of future fertility, enjoyed the age-old tradition of sucker punching each other in the groin which, to be frank, is best described by the court:

Frake explained that, since high school, his friends had engaged in “a cycle of horseplay[,] specifically … hitting each other in the groin.” During this “consensual” ritual, one person would normally try to “slap or hit [another person] in … the groin area,” and the recipient would then “attempt to return [the slap or hit].” According to Frake, the practice was so common that his friends would “greet each other with a one arm hug,” while covering their “groin area” with the other arm for “protection in case [someone] decided to … instigate th[e] horseplay.”

That weekend, after enjoying a ballgame of a more traditional  sort at Wrigley Field, and after all involved had consumed excessive amounts of alcohol, King attempted to punch Frake’s “friends,” but his aim was wide and his hand redirected  by Frake.  Having protected his flank, Frake fisted his former friend in the front, lending new meaning to taking the King’s bishop.  King later sued Frake alleging that “Frake deliberately struck King in the groin,” although the complaint did not contain any allegations as to whether Frake intended injury.  King was eventually awarded $400,000 for injuries way too painful for these authors to describe.

State Farm provided Frake with a defense under a reservation of rights, but later commenced a declaratory judgment action on the issue of whether the underlying suit alleged an “occurrence,” defined by the policy as an accident. Frake argued that that while he intended to strike his buddy’s bullocks, he did not intend to cause harm, and as such, his conduct should not be considered anything but accidental.  The court’s response to this argument can best be described as testy.  The court rejected the concept that the consequences determines whether one’s conduct is an accident, explaining:

The language of the policy at issue here, which is the same language used in most standard liability policies, supports the conclusion that the term “accident” refers to the insured's conduct, rather than the unintended consequences of that conduct. The policy provides coverage for “bodily injury … caused by an occurrence.” The term “occurrence” is defined as “an accident.” Therefore, under the policy, “an ‘occurrence’ is a causal event, defined as an ‘accident.’ In this context, an ‘accident’ cannot mean unintended damage because the causal event also would be the result. Logically, a consequence cannot cause itself.”  (Citations omitted.)

Moreover, the court rejected the insured’s arguments that the decision by the California Supreme Court in Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 47 Cal. 4th 302 (Cal. 2009) and by the Second Appellate Division in State Farm Fire & Casualty Co. v. Superior Court, 164 Cal. App. 4th 317 (Cal. App. 2008) dictated the result that unintended consequences of an intentional act constitute an “occurrence” for the purpose of a liability policy.  These cases, explained the court, are consistent with the notion that absent “an intervening act of fortuity,” it is the injury-producing act that is dispositive of whether an occurrence happened.  Thus, cocksure of its decision, each member of the court ruled that State Farm did not owe a duty to defend or to indemnify Frake under the policy. 

EDS. NOTE: FOR OBVIOUS REASONS, THE IDENTITY OF THE AUTHORS OF THIS POST SHALL REMAIN CONFIDENTIAL.

Summary judgment in jury cases

Is summary judgment available in jury cases?

Cooke v. Toivonen (2011), 105 O.R. (3d) 232 (S.C.J.)

This case involved a multi-vehicle automobile collision. The Cooke vehicle was hit from behind by Price, and in turn Cooke hit Toivonen. Toivonen hit the vehicle in front of him.

The plaintiffs consented to an order releasing Toivonen from the action; however, the remaining defendants objected, arguing that to do so would amount to bifurcating the trial. Rule 6.01 permits bifurcation only if all parties consent. In Kovacs v. Kovacs, the Court of Appeal held that jury cases are an exception to the court’s inherent power to split a trial.

The Court held that it has the authority to order summary judgment in jury cases. Summary judgment is not at odds with a litigant’s right to a jury trial. There was no air of reality to a claim that the Toivonen vehicle could be liable and the action and crossclaims against Toivonen were dismissed.