Sixth Circuit Holds Excess Insurer’s Coverage Obligations Not Triggered

In its recent decision in Goodyear Tire & Rubber Co. v. Nat'l Union Fire Insurance Company of Pittsburgh, PA, 2012 FED App. 0337P (6th Cir. Sept. 18, 2012), the United States Court of Appeals for the Sixth Circuit, applying Ohio law, had occasion to consider whether an excess insurer’s coverage obligations were triggered when the primary policy’s limit of liability was not fully exhausted.

Goodyear had a primary layer directors and officers policy with National Union with a limit of liability of $15 million.  It also had an excess policy issued by Federal Insurance Company with a limit of liability of $10 million, excess of the National Union policy.  Notably, Federal’s policy contained an exhaustion provision stating that “[c]overage hereunder shall attach only after [National Union] shall have paid in legal currency the full amount of the Underlying Limit [i.e., National Union's policy limit of $15 million] for such Policy Period.”

Goodyear sought coverage from its insurers for a series of underlying shareholder class actions, and an SEC investigation, arising out of a restatement of Goodyear’s earnings.  While the suits ultimately were dismissed and the investigation terminated, Goodyear’s legal fees amounted to $30 million.  National Union and Federal both disputed coverage for Goodyear’s legal fees, prompting Goodyear to file a declaratory judgment action against both insurers.  After litigating this action for several years, Goodyear entered into a settlement and release with National Union for $10 million.  Federal subsequently argued that as a result of this settlement, its own policy could not be triggered since National Union had not and never would pay “in legal currency the full amount of the Underlying Limit.”  On motion for summary judgment, the United States District Court for the District of Michigan, applying Ohio law, held in Federal’s favor.

In its decision on appeal, the Sixth Circuit telegraphed its decision by characterizing Goodyear’s appeal as being “the latest in a series of recent cases in which one corporation asks us to disregard the plain terms of its insurance agreement with another corporation.” Goodyear, in fact, conceded that the exhaustion provision in Federal’s  policy was clear and unambiguous.  It nevertheless argued on appeal that the Federal policy should be triggered for two reasons despite the fact that National Union had not paid its full policy limits.

First, argued Goodyear, Ohio strong public policy favoring settlements should trump the exhaustion language in the Federal policy.   In other words, Goodyear should not be penalized for having settled its coverage dispute with National Union.  In support of this argument, Goodyear cited to two cases involving underinsured motorist policies in which the plaintiffs settled with the tortfeasors’ carrier for less than full policy limits and then sought coverage under their own underinsured motorist coverage.  In these cases – Bogan v. Progressive Casualty Ins. Co., 521 N.E.2d 447 (Ohio 1988) and Fulmer v. Insura Prop. & Casualty Co., 760 N.E.2d 392 (Ohio 2002), Ohio’s Supreme Court refused to “strictly enforce” the exhaustion provision in the plaintiff’s underinsured motorist policies.  The Sixth Circuit concluded, however, that the public policy concerns in Boganand Fulmer were unique to underinsured motorist coverage and were not present in the context of commercial lines coverage:

Underinsured-motorist coverage was mandated under Ohio law at the time of the accidents in Boganand Fulmer, see Ohio R.C. § 3937.18(A)(2); and the court in Bogan held that the exhaustion provision there was contrary to "the intent of the General Assembly as expressed in" the statute mandating such coverage, 521 N.E.2d at 453. We do not have any such conflict with legislative intent here, which is reason enough not to apply Bogan or Fulmer. Nor do we have any concern about "hasten[ing] the payment to the injured party who obviously needs compensation soon after the injuries when the medical expenses begin to amass and when the anxiety level is probably quite high[,]" id. at 451—which is still more reason not to apply those cases. What we have, instead, is an insurance agreement into which sophisticated parties freely entered.

Goodyear also argued that Federal should not be able to avoid a coverage obligation because it was not prejudiced as a result of its settlement with National Union.  The Sixth Circuit also found this argument unavailing, concluding that prejudice was not a relevant consideration:

But this case does not concern a mere notice or cooperation requirement, which perhaps we could wave off absent any real harm to the insurer. Rather, the provision at issue here is where the rubber hits the road: the agreement's Insuring Clause, under whose terms Federal undisputedly did not agree to provide the coverage that Goodyear now seeks.

Thus, the Sixth Circuit affirmed the lower court’s ruling, concluding that Federal had no coverage obligation to Goodyear as a result of its less than policy limits settlement with National Union.

Arizona Court Considers Coverage Under An Employment Benefit Endorsement

In its recent decision in Enterprising Solutions, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA (D. Ariz. Sept. 11, 2012), the United States District Court for the District of Arizona had occasion to consider whether an insured was entitled to coverage under a professional liability policy’s employee benefits liability coverage for its alleged failure to have properly calculated necessary contributions to fund a group medical and dental plan.

The insured, Enterprising Solutions, Inc. (“ESI”) was a professional employer organization, providing outsourced services such as payroll administration to employer-clients.   ESI and its clients would enter into “co-employer agreements” whereby it would assume various employer-related responsibilities.  Through these agreements, ESI became a co-employer of its clients’ employees.  At issue in the Enterprising Solutions litigation was ESI’s administration of an employee health benefit program and an employee dental plan.  Among other things, ESI assumed responsibility for determining the amount of contributions necessary to fund the plans.  The contribution levels established for the 2008 and 2009 plans turned out to be insufficient to cover claims and expenses, causing ESI it to terminate the plans.  As a result, ESI was the subject of numerous claims brought by plan participants.

National Union insured ESI under a Staffing Services Liability Policy, providing professional liability coverage ESI’s employment-related administrative services.  Of relevance, the policy excluded from coverage the “Insured’s failure to fulfill any duty or obligation imposed by Employment Retirement Income Security Act of 1974, including amendments to that law, or similar federal, state, or local statutory or common law.”  Also relevant to the coverage dispute was an Employee Benefit Liability (“EBL”) endorsement, which insured:

… all sums which you shall become legally obligated to pay as damages because of any claim made against you for “wrongful acts” arising out of “administration” of your “employee benefits program,” …

The EBL endorsement defined “administration” as:

(a) giving counsel to employees with respect to your “employee benefits program”;

(b) interpreting your “employee benefits” program”;

(c)  handling of records in connection with your “employee benefits program”; or

(d) effective enrollment, termination or cancellation of “employee” under your “employee benefits programs”

provided any action which gives rise to a “Wrongful Act” was authorized by you.

The EBL endorsement also contained an exclusion barring coverage for “all sums which you shall become legally obligated to pay as a loss because of any ‘breach of fiduciary duty’ or because of any ‘breach of fiduciary duty’ by any person for whom you are legally responsible and arising out of your activities as a fiduciary of any plan covered by this endorsement.”

National Union argued, among other things, that the underlying claims were not covered, as the claims did not result from a “wrongful act” and that in any event, the claims were excluded from coverage as a result of the ERISA exclusion and the breach of fiduciary duty exclusion.   The court agreed, albeit skeptically, that ESI’s alleged conduct constituted “wrongful acts” as that term was defined.  It nevertheless concluded that exclusions barred coverage for the conduct alleged.  Specifically, the court held that ESI’s responsibilities in determining the level of necessary contributions did not fall within the policy’s definition of “administration,” reasoning that it could find no authority for the proposition that “discretionary decision-making activities,” such as determining contributions, qualify as “administration” of an employee benefit plan.  The court further noted that:

Plaintiff's calculation of contribution levels involved the exercise of discretion and was not, therefore, merely administrative. In that respect, plaintiff's exercise of discretion in failing to properly calculate contributions is not included within the definition of "administration" and is beyond the scope of the policy.

The court also concluded that even if ESI’s miscalculation of contributions could be considered “administration” of an employee benefits program, the miscalculation was still undertaken in ESI’s fiduciary capacity to the plan participants.  “Fiduciary,” the court observed, is defined by ERISA as:

[A] person is a fiduciary with respect to a plan to the extent (I) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets; (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of the plan.

The court concluded that ESI qualified as a fiduciary as it had “control and authority” over the health and dental plans.  Specifically, the court found that ESI’s miscalculation of necessary contributions “was, indeed, the exercise of discretion relating to plan management and administration and was, consequently, subject to ERISA fiduciary standards.”  As such, the court concluded that the policy’s ERISA and breach of fiduciary duties exclusions served as additional grounds for noncoverage.

Production of Statements Made Following an Accident

A recent motion decision deals with two issues that can arise in defending claims: the extent of litigation privilege with respect to statements made following an incident, and whether reviewing such a statement prior to examination for discovery waives privilege.

In Knox v. Applebaum Holdings, 2012 ONSC 4181 (CanLii) the plaintiff brought a motion seeking production of a statement prepared by the defendant’s property manager following an accident in its parking lot.  The accident occurred at 8:55 p.m..  The property manager was quickly notified, travelled to the parking lot, took pictures and called her risk manager to report what she had found at 12:35 a.m.  At this point, she was aware that two people had been injured.  She typed up a statement detailing her recollection of what she had seen and learned of the accident while it was fresh in her mind.  The statement was delivered to the adjuster later that day.

On the motion, the issues were whether the statement was protected by litigation privilege and whether privilege was lost when the property manager reviewed it when she prepared for her examination for discovery.

Justice Hockin held that litigation privilege attached to the document.  The property manager knew there was an accident and that two people had been injured.  She believed that litigation would follow.  It did not matter that the defendant was not represented by counsel at the time.  The dominant purpose of the document was to facilitate her employer’s defence and to assist in her forensic involvement of the case. 

Privilege was not waived.  Justice Hockin relied on Wronick v. Allstate (1997), 7 C.P.C. (4^th) 285 (Gen. Div.) where Justice Leitch held that reviewing a privilege document to refresh one’s memory in preparation for examination for discovery does not amount to a waiver of privilege.

Delaware Supreme Court Considers Exhaustion of Underlying Coverage

In its recent decision in Intel Corp. v. American Guarantee & Liability Insurance Co., 2012 Del. LEXIS 480 (Del. Sept. 7, 2012), the Supreme Court of Delaware, in a case involving application of California law, had occasion to consider whether an insured’s out-of-pocket payment of defense costs count toward exhaustion of policy limits for the purpose of triggering an excess policy.

The Intel decision is yet the latest decision in a complicated coverage case that has proceeded in both Delaware state court and California federal court.  The coverage litigation arises out of several class action antitrust lawsuits filed against Intel.  In the relevant policy year, Intel had a primary general liability policy issued by Old Republic with limits of liability of $5 million, and an excess policy issued by XL Insurance Company with limits of liability of $50 million.  Immediately excess to the XL policy was a follow form excess liability policy issued by American Guarantee & Liability Insurance Co. (“AGLI”).  As a result of coverage litigation between XL and Intel, XL paid to Intel $27.5 million of its $50 million policy limits.  Intel continued to pay defense costs out-of-pocket following this settlement. Intel claimed that AGLI’s policy was triggered as a result of its payment of sufficient defense costs.  AGLI, however, contended that the XL policy could only be exhausted as a result of payments made by XL.

Complicating the court’s analysis was the fact that the AGLI policy contained two provisions concerning when AGLI’s coverage obligations were triggered.  After determining which provision controlled, the court considered the intent of that provision’s language, which stated:

C.  Nothing contained in this Endorsement shall obligate us to provide a duty to defend any claim or suit before the Underlying Insurance Limits shown in Item 6 of the Declarations are exhausted by payment of judgments or settlements.  (Emphasis supplied.)

The court concluded that under California law, the phrase “payments of judgments or settlements” could not be interpreted to include payments by the insured.  “Judgments,” the court explained, refers to a decision by an adjudicative body, whereas “settlements” refers to agreements between parties to a dispute.  Intel’s payment of its own defense costs, reasoned the court, were payment of neither judgments nor settlements.  As the court explained:

California law does not provide a definitive interpretation of the phrase “payment of judgments or settlements.”  Although not dispositive of our holding, we note that California courts general have construed the phrase to exclude cases where the insured “credits” the underlying insurance carrier with the remaining policy limits.  That is, courts have required the actual payment of the full underlying limits.  The requirement of actual payment supports our plain meaning interpretation of “judgments or settlements” to exclude Intel’s direct payment of defense costs, and require actual payment by the insurer.

In reaching this holding, the Delaware Supreme Court relied on the California Court of Appeals decision in Qualcomm, Inc. v. Certain Underwriters At Lloyd’s London, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008).  The Qualcomm court held that an insured could not trigger its excess policy by paying the gap created when it settled with its primary insurer for less than full policy limits. The Delaware Supreme Court acknowledged that the exhaustion language in the policy in Qualcommwas slightly different than that contained in the AGLI policy, but it nevertheless found a general rule that “[p]lain policy language on exhaustion, such as that contained in Paragraph C [of the AGLI policy], will control despite competing public policy concerns.”  Moreover, the court rejected Intel’s reliance on the Second Circuit decision in Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), which held that an insured can properly exhaust a policy by out-of-pocket payments.  Zeig, noted the Delaware court, had been rejected by the Qualcomm court and courts in other jurisdictions as well.

Florida Court Affirms Late Notice Disclaimer

In its recent decision in Wheeler's Moving & Storage v. Markel Ins. Co., 2012 U.S. Dist. LEXIS 125726 (S.D. Fla. Sept. 5, 2012), the United States District Court for the Southern District of Florida had occasion to consider under what circumstances an insured’s failure to comply with a policy’s notice provision results in a forfeiture of coverage.

Markel Insurance Company insured Wheeler’s Moving & Storage under a general liability policy that, among other things, required notice of occurrence or suit “as soon as practicable.”  Wheeler’s was named as a defendant in a personal injury lawsuit, but failed to give notice of the suit to Markel until eighteen months after suit was filed, by which time discovery had already closed.  At the time notice was received, a mediation was scheduled for one week later and the trial scheduled for two weeks later.  Markel denied coverage on the basis of late notice, as well as on the basis of its policy’s auto exclusion.  Subsequent to Markel’s denial of coverage, Wheeler’s defense counsel successfully withdrew from the case and Wheeler’s elected not to retain new counsel.  The matter ultimately went to trial on damages alone and the underlying plaintiff was awarded $1.4 million.

Wheeler’s later sued for coverage, arguing that Markel’s late notice disclaimer was invalid.  On motion for summary judgment, the court began its analysis by observing that under Florida law, an insured’s failure to provide timely notice creates a “rebuttable presumption of prejudice to the insurer.”  Thus, it is the insured’s burden to prove that its late notice did not result in prejudice to the insurer.   Notwithstanding, it is the insurer’s burden of showing a lack of any material facts as to “(1) what the policy required with respect to notice, (2) when notice was provided, within the meaning of the policy and Florida law, (3) whether notice was timely, and (4) whether prejudice exists, either by operation of the unrebutted presumption or otherwise.”

In considering these factors, the court agreed that Wheeler’s failure to have provided notice to Markel of the underlying suit until eighteen months into the litigation -after discovery had closed and on the eve of trial - was late as a matter of law.  Notice as soon as practicable, as required by the Markel policy, required that notice be given with reasonable dispatch and within a reasonable time in view of the facts and circumstances.  As the court explained, “[n]o reasonable interpretation of the record evidence supports a finding that notice was timely.”  As such, Markel was entitled to a presumption of prejudice.

Wheeler’s attempted to rebut this presumption by proffering two expert opinions concluding that Markel was not prejudiced and, in fact, that Markel had breached its policy obligations by not undertaking a thorough investigation into whether Wheeler’s late notice actually prejudiced its ability to defend the underlying case.  The court rejected this assertion, explaining that because prejudice is presumed, Markel was not required to undertake an investigation into prejudice.  The court also rejected the experts’ opinions concerning Markel’s ability to defend the underlying case, concluding that the opinions were based on speculation only and without any credible supporting evidence.

Wheeler’s also argued that Markel was not entitled to rely on the late notice defense since it also denied coverage on the basis of its policy’s auto exclusion.  Wheeler’s specifically argued that “[w]here an insurer possesses enough information to permit it to deny the claim on other grounds, Florida courts have consistently held that an insurer waives the right to reject coverage on the basis that the insured failed to provide timely notice of the claim.”  This argument relied on the decision in Keenan Hopkins Schmidt and Stowell Contractors, Inc. v. Continental Cas. Co., 653 F. Supp. 2d 1255, 1263 (M.D. Fla. 2009), in which a Florida federal district court held that the insured successfully rebutted a presumption of prejudice by demonstrating that the insurer was able to fully investigate and determine the application of a policy exclusion. 

The court held that Wheeler’s attempt to broaden the Keenandecision was unavailing, since by Wheeler’s reasoning “no insurer would ever be able to assert late notice as a defense unless it was the sole basis of a denial of coverage.”  Moreover, the court found Keenan inapplicable to the facts involving Wheeler’s:

The facts in Keenan and in the instant case, however, are radically different. In Keenan, the insurer had ten months notice and was able to investigate the claim, whereas in this case, Markel effectively had no notice and no ability to conduct discovery. Wheeler's asserts that Markel had an opportunity to investigate potential coverage defenses prior to the entry of judgment and had sufficient information to deny coverage on other grounds other than the late notice defense. These assertions are rejected.

Thus, concluded the court, Wheeler’s failed to rebut the presumption of prejudice, thereby entitling Markel to judgment as a matter of law based on the insured’s failure to comply with its policy’s notice provision.

Failure to Add Property Owner as Additional Insured

Many winter maintenance contracts require the contractor to add the property owner as an additional insured on its policy.  But what happens when the contractor fails to do so and the owner is sued?

In Papapetrou v. 1054422 Ontario Ltd., 2012 ONCA 506 (C.A.), the plaintiff sued the Cora Group, alleging she slipped and fell on black ice on its property.  Cora contracted with Collingwood Landscape for winter maintenance services.  In the service contract, Collingwood agreed to name Cora as an additional insured on its CGL policy, but failed to do so.  On a motion for summary judgment, Collingwood was ordered to assume Cora's defence and indemnify it for damages.  Collingwood appealed.  Cora conceded that the order to indemnify was premature so the primary issue on appeal was whether the motions judge erred in ordering Collingwood to assume Cora's defence.

The Court of Appeal set aside the original Order and substituted an Order that Collingwood pay for Cora's defence.

Simmons J.A. held that Collingwood's breach of its contractual obligation to name Cora as an additional insured did not create a duty to defend; rather, it gave rise to a remedy in damages.  The quantum of such damages is the amount Cora will be required to pay for a defence of the claims that Collingwood's insurer would have paid had Collingwood fulfilled its contractual obligations.  The costs would include all of the costs of Cora's defence except for those incurred exclusively to defend claims that do not arise from Collingwood's performance or non-performance of the contract.  Cora was entitled to separate counsel given there were distinct claims against the two parties, which meant there would be an inherent conflict between them.

Second Circuit Considers Excess Insurer’s Duty to Defend

In its recent decision in Preferred Constr., Inc. v. Ill. Nat'l Ins. Co., 2012 U.S. App. LEXIS 18395 (2d Cir. Aug. 30, 2012), the United States Court of Appeals for the Second Circuit, applying New York law, had occasion to consider when an excess insurer’s duty to defend is triggered, particularly in the context of New York’s anti-subrogation rule.

Preferred Construction was a subcontractor on a construction project involving a cemetery owned by the Diocese of Rockville Center.  One of Preferred Construction’s employees was injured while on the job, and brought suit against the cemetery, the Diocese, and the project’s general contractor.  Each of these entities tendered their defense to Preferred Construction, which was insured under a primary general liability policy issued by Nova Casualty Company and an excess liability policy issued by Illinois National.  Nova undertook a defense of each of these entities.

Each of these three parties subsequently asserted third-party claims for contribution and indemnification against Preferred Construction, but only for “any recovery that plaintiff may obtain in excess of the primary policy limits of [Preferred Construction].”  Presumably, the third-party complaint was alleged in such a fashion so as to circumvent New York’s anti-subrogation rule, which prohibits one insured from suing another insured under the same policy for amounts within the policy limits.  Nova tendered the third-party complaint directly to Illinois National, asserting that Illinois National had a duty to defend Preferred Construction because the third-party complaint sought amounts only in excess of the Nova policy, i.e., amounts that only could be paid under the Illinois National policy.

In considering Illinois National’s duties to Preferred Construction, the Second Circuit observed the general rule that an excess insurer’s obligations are not triggered until exhaustion of underlying limits, and that while an excess insurer may elect to participate in the defense of its insured, it generally has no obligation to do so.  Such duties were clearly stated in the language of Illinois National’s excess policy.  Thus, the court concluded, Illinois National’s obligations under its policy, including its duty to defend, could only be triggered upon full exhaustion of the Nova policy.  That the third-party complaint sought amounts only in excess of the Nova policy’s limits was irrelevant, as the court explained:

The fact that the third-party complaint seeks indemnification only for "any recovery that plaintiff may obtain in excess of the primary policy limits" does not change this result. Requiring Illinois National to defend in these circumstances would effectively permit any claim of excess damages to preemptively trigger the excess insurer's duty to defend—regardless of when (or whether) the limits of the primary policy are exhausted. Such a result would appear to eviscerate the general rule that the excess insurer "may elect to participate in an insured's defense to protect its interest, [but] . . . has no obligation to do so."

In reaching its holding, the court considered Nova’s and Preferred Construction’s argument concerning New York’s anti-subrogation rule, which states that “[a]n insurer… has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.”  N. Star Reins. Corp. v. Cont'l Ins. Co., 604 N.Y.S.2d 510 (1993).  The Second Circuit acknowledged that pursuant to the anti-subrogation rule, Preferred Construction could only be sued by the additional insureds under the Nova policy for amounts in excess of that policy’s $1 million limits.  The court nevertheless concluded that this rule did not trump the more basic rule of underlying exhaustion:

Whatever effect the anti-subrogation rule might have on Nova's duty to defend (an issue on which we express no opinion), it is clear enough for our purposes that the rule cannot operate to defeat the reasonable expectations of Preferred Construction and Illinois National. We find no authority permitting us to depart from New York's well-settled rule that an excess carrier has a right, not an obligation, to assist in the defense of its insured when the primary insurance has not yet been exhausted.