5th Circuit Holds Additional Insured Coverage Not Limited by Contract

In its March 1, 2013 decision in In re Deepwater Horizon, 2013 U.S. App. LEXIS 4512 (5th Cir. Mar. 1, 2013), the Fifth Circuit had occasion to consider the extent to which an insurer’scoverage obligations to an additional insured are tied to the contractual indemnity owed by its named insured to that additional insured.  Transocean owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit located in the Gulf of Mexico.  The Deepwater Horizon sank into the Gulf after an onboard explosion.  At the time of the explosion, the Deepwater Horizon was engaged in drilling activities pursuant to a Drilling Contract between Transocean and BP.  BP subsequently faced certain pollution-related liabilities arising out of the sinking of the drilling unit, and BP tendered those liabilities to Transocean’s insurers.  The insurers denied coverage arguing that BP did not qualify as an additional insured under the policies’ language, spawning litigation between BP and the insurers in the U.S. District Court for the Eastern District of Louisiana.

Transocean’s insurers successfully argued in the lower court that its additional insured obligations to BP were limited by the terms of a Drilling Contract between Transocean and BP.  The Contract required that BP “shall be named as additional insureds in each of [Transocean's] policies, except Workers' Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”  With respect to pollution-related liabilities, the Contract contained a separate indemnity provision which required BP to assume full responsibility for any pollution or contamination originating below the surface of the water, whereas Transocean agreed to indemnify BP for pollution or contamination originating on or above the surface of water.  The lower court concluded that because the Drilling Contract did not require Transocean to assume BP’s pollution liabilities pertaining to spills originating beneath the surface of the water, Transocean owed no indemnity to BP for the claim and, correspondingly, BP was not an additional insured with respect to those specific pollution liabilities.

The Fifth Circuit reversed, noting that under Texas law, which governed the interpretation of the policies, “where an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity claims.”  The Fifth Circuit found that the insurance provision in the Drilling Contract was separate and discrete from the indemnity provisions in the Contract.  As such, BP’s rights as an additional insured were not limited by the contractual liabilities actually assumed by Transocean.  In other words, even though Transocean may not have an indemnity obligation to BP for underwater pollution events, this contractual indemnity obligation cannot be read into the insurance policies in order to limit the scope of coverage afforded to BP by the insurers.  Rather, only the insurance policies can impose limitations on coverage.  Thus, because the policies issued to Transocean did not restrict the scope of additional insured coverage to the indemnity assumed by Transocean, the court concluded that BP was entitled to coverage for subsurface pollution liabilities, notwithstanding the indemnity provisions in the Drilling Contract.

Amendments to the Minimum Maintenance Standards - Part 5

This week we continue our review of the amendments to the Minimum Maintenance Standards, which came into effect on January 25, 2013.

Part 5:  New Ice Formation and Icy Roadways Standard

The MMS previously required municipalities to treat icy roadways within a prescribed time after becoming aware that the road was icy.  This remains the standard for roads that have become icy but is now part of a larger, more comprehensive standard for ice prevention and treatment. 

The standard for prevention of ice formation requires municipalities to monitor the weather and patrol as described above.  If, as a result of these activities, a municipality determines that there is a substantial probability of ice forming on a roadway, it must treat the road to prevent ice formation within a specified time, starting from the time it determines is appropriate to deploy resources for that purpose.  Treating a road means applying material, including but not limited to salt, sand or a combination. 

The ice prevention standard provides that roads are deemed to be in a state of repair until the time that the municipality becomes aware that the roadway is icy or the applicable time for ice prevention expires, whichever is earlier.  This should be read in conjunction with the constructive knowledge provision.  The icy roadways standard has also been amended to provide that roads are deemed to be in a state of repair until the applicable time for treatment expires.

As with the snow accumulation standard, the ice prevention standard is a response to the narrow interpretation of the icy roadways standard in Giuliani.  The discretion afforded to municipalities to determine when to deploy resources to prevent ice formation may be subject to challenge in future claims.  Nonetheless, compliance with the standard will assist in defending claims where it is alleged that a municipality failed to anticipate icy road conditions.

California Court Holds Insurer’s Settlement Decisions Not In Bad Faith

In its recent decision in ACE Capital v. Eplanning, Inc., 2013 U.S. Dist. LEXIS 32613 (E.D. Cal. March 8, 2013), the United States District Court for the Eastern District of California had occasion to consider California rules concerning settlement of competing claims to limited insurance proceeds, particularly in a situation where some of the claims are not covered.

Underwriters insured Eplanning under a $5 million claims made and reported professional liability policy.  A number of claims were made and reported during the policy period, the total of which far exceeded the policy’s limit of liability.  While Underwriters initially undertook the defense of Eplanning and settled some of the underlying claims, it eventually interpleaded the remainder of the policy proceeds - just in excess of $300,000 - into the court to be allocated among the various remaining claimants.  At issue in the interpleader was whether Underwriters’ conduct was in bad faith, pursuant to Schwartz v. State Farm, 88 Cal.App.4th 1329 (2001), for not having commenced its interpleader earlier.  This bad faith claim, however, was asserted by underlying plaintiffs who had brought four individual suits not covered under the policy since their claims were first made after the policy’s expiration.   These plaintiffs, as the assignees of the insured, argued that an insurer can still act in bad faith, even where no policy benefits are ultimately due, “where there are numerous covered claims asserted against the policy” and where there is a potential for coverage.  Thus, plaintiffs argued that Underwriters committed bad faith in its settlement of other claims, and that this bad faith cause of action was assignable notwithstanding the fact that plaintiffs’ underlying suits were not otherwise covered under the policy.

The court disagreed, noting that given the claims made and reported nature of Underwriters’ policy, and given the fact that the four suits brought by underlying plaintiffs were commenced after the policy’s expiration, there never was a potential that these particular claims would be covered under the policy.   The court concluded that the decision in Schwartz only extended to claims for which insurers can have a coverage obligation and where this coverage obligation is breached.  Thus, Underwriters were not required to consider plaintiffs’ four suits in making its decisions concerning settlement and interpleader.  The court agreed that Underwriters could have no bad faith exposure to underlying plaintiffs given the correctness of Underwriters’ disclaimer of coverage.  As the court explained, “an insurer cannot be held liable on a bad faith claim for doing what is expressly permitted in the agreement.”

Oklahoma Court Holds Failure to Warn Not a Covered Professional Service

In its recent decision in Hanover Am. Ins. Co. v. Saul, 2013 U.S. Dist. LEXIS 29739 (W.D. Okl. Mar. 5, 2013), the United States District Court for the Western District of Oklahoma had occasion to consider whether a chiropractor’s alleged failure to protect her patient from being sexually assaulted triggered coverage under a medical professional liability policy.

NCMIC Insurance Company insured Dr. Debora K. Balfour, and her practice, Dr. Deborah K. Balfour Chiropractic, P.C, (“DKBC”), under a professional liability policy.  Dr. Balfour and DKBC were named as defendants in an underlying suit, along with Dr. Balfour’s ex-husband, in a matter involving alleged sexual assault, on multiple occasions, of one of Dr. Balfour’s patients, who was a minor at the time.  It was alleged that Dr. Balfour’s ex-husband was the perpetrator of these assaults, some of which took place in the office building in which the DKBC practice was located.   The suit alleged medical malpractice against Dr. Balfour for having allowed her husband access to the premises and for having failed to warn her patient regarding her husband’s “history and propensity to sexually molest under age females.”  NCMIC agreed to provide Dr. Balfour and DKBC with a defense, but subsequently denied coverage.

The NCMIC policy insured “all sums to which this insurance applies and for which an insured becomes legally obligated to pay as damages because of an injury. The injury must be caused by an accident arising from an incident during the policy period. The injury must also be caused by an insured under this policy.”  Notably, the policy defined “incident” to mean:

… any negligent omission, act or error in the providing of professional services by an insured or any person for whose omissions, acts or errors an insured is legally responsible.

Professional services, in turn, was defined as:

… services which are within the scope of practice of a chiropractor in the state or states in which the chiropractor is licensed.

NCMIC argued, among other things, that the policy only insured Balfour, and DKBC, for acts of medical malpractice, such as when a patient is injured while receiving chiropractic treatment.  Dr. Balfour’s alleged failure to have warned her patient of a danger posed by her husband, argued NCMIC, did not relate to chiropractic services and thus fell outside the policy’s coverage.  Dr. Balfour, on the other hand, argued that whether or not she had a medical professional obligation to warn her patient of her husband’s proclivities was an issued to be determined in the underlying action, not in the insurance coverage action.  In other words, Dr. Balfour contended that the court in the declaratory judgment action could not adjudicate the scope of her medical professional duties to her patient.

The court rejected Dr. Balfour’s contention, agreeing with NCMIC that the policy insured Dr. Balfour solely with respect to chiropractic treatment per se.  As the court explained:

The policy provides coverage for injuries such as those that result from a misdiagnosis or a negligently performed treatment, or perhaps even a failure to warn about the consequences of certain physical activity on an injury being treated.

The court agreed that while the plaintiff in the underlying suit alleged that Dr. Balfour breached a duty by failing to protect plaintiff from being assaulted, the duty alleged in the underlying suit was distinct from the medical duties insured under NCMIC’s policy:

Balfour's failure to warn her patient about [her ex-husband] and allowing him to have access to the building where her chiropractic practice was located - may be a violation of some duty, it is not a violation of a professional duty Balfour owed [her patient] as her chiropractor.  

In reaching its decision, the court relied on case law standing for the general proposition that professional liability policies insure services involving specialized skill or knowledge.  The court concluded that warning a person, even a patient, of the harm posed by another person on the premises, does not implicate such specialized skills or knowledge, and thus cannot be considered a professional service for the purpose of an errors and omissions policy.

Amendments to the Minimum Maintenance Standards - Part 4

This week we continue our review of the amendments to the Minimum Maintenance Standards, which came into effect on January 25, 2013.

Part 4:  New Snow Accumulation Standard

The MMS previously required municipalities to clear snow within a prescribed number of hours after becoming aware of the fact that specified snow accumulation depths were reached.  This part of the standard is essentially unchanged, though it now requires municipalities to “address” snow accumulation and “reduce the snow depth” rather than “clear” the snow.   

However, there have been several additions to the standard.  The most significant addition is a provision which states that if the depth of snow accumulation on a roadway is less than or equal to the specified depth for that class of roadway, “the roadway is deemed to be in a state of repair with respect to snow accumulation”.  This provision is clearly intended to address the restrictive interpretation of the snow accumulation standard in Giuliani and should provide municipalities with a strong defence in cases where the standard is met.  The standard also sets out how the depth of snow accumulation on a roadway may be determined and how it may be addressed. 

The requirement that municipalities address snow accumulation after becoming aware of it must be read in conjunction with the constructive knowledge provision in section 1 of the MMS, which provides that a municipality is deemed to be aware of a fact if circumstances are such that the municipality ought reasonably to be aware of the fact.

California Court Addresses Priority of Coverage In Auto Context

In the recent case GuideOne Mutual Insurance Company v. Utica National Insurance Group (4^th Appellate Dist. 2/28/13), the California Court of Appeal considered priority of coverage among primary and excess insurers following settlement of a serious bodily injury claim from a car versus motorcycle accident.  The accident case settled for $4.5 million and the coverage action was subsequently filed to reallocate the settlement payments.

The driver of the car was a pastor for Crosswinds Community Church, which operated under the oversight and control of an organization referred to as CEA.  The accident happened during the course of the pastor’s work for Crosswinds.  The pastor’s personal auto insurance policy, which specifically identified the subject car as a covered auto, paid its $100,000 policy limits toward the settlement.  GuideOne insured Crosswinds under a commercial general liability policy which also covered the pastor as Crosswind’s employee acting in the course and scope of employment.  GuideOne paid its $1 million primary policy limits and its $1 million umbrella policy limits.  Utica National Insurance Group and its affiliate (referred to collectively by the court as “Utica”) covered CEA under a commercial auto policy (and its umbrella policy) for liability as to covered autos, which included nonowned autos.  Utica paid its $1 million primary policy limits and $400,000 out of the $5 million umbrella policy limits.  

GuideOne subsequently sued Utica for contribution from the umbrella policy, seeking reallocation of the settlement shares based on a ratio as to the respective coverage held by the insurers, as was the sharing formula provided for in the other insurance clauses of each policy.  The trial court found in favor of GuideOne on its motion for summary judgment, holding that it was entitled to contribution in the amount of $600,000.

Utica argued on appeal that GuideOne’s policies were primary to both of Utica’s policies because GuideOne insured the pastor, the tortfeasor, while Utica’s policies insured an entity which was only vicariously liable.  The court of appeal agreed with that argument.

The appellate court found that the statute dealing with priority of coverage, Insurance Code §11580.9(d), only established that State Farm was primary because it specifically scheduled the car as a covered auto, and the other four policies were excess.  The priority of coverage for the remaining policies was not subject to the conclusive presumption in §11580.9(d).  In reversing the trial court, the court of appeal relied on the decision in United States Fire Ins. Co. v. Nat. Union Fire Ins. Co. (1980) 107 Cal.App.3d 456, which held, in an airplane accident case, that insurance covering the negligent pilot was primary to insurance covering the pilot’s vicariously liable employer.  The U.S. Fire court looked to general principles of indemnity law which says an employer liable for the negligent acts of his employee is entitled to indemnity from the employee   A Ninth Circuit Court of Appeal case, Canadian Indem. Co. v. U.S. F&G Co., 213 F.2d 658 (9^th Cir. 1954) held similarly.

GuideOne argued that neither of those cases involved Ins. Code §11580.9(d) nor did they involve excess policies.  The court of appeal rejected that argument, pointing out that §11580.0(d) did not apply by its terms, and both GuideOne’s primary and excess policies covered the negligent driver and both of Utica’s primary and excess policies covered the employer who was only vicariously liable.  The court also noted that GuideOne’s policies both covered CEA for its vicarious liability.

Fifth Circuit Holds Direct Action Barred By Insured’s Untimely Claim Reporting

In its recent decision in First Am. Title Ins. Co. v. Cont'l Cas. Co., 2013 U.S. App. LEXIS 4153 (5^th Cir. Feb. 28, 2013), the United States Court of Appeals, applying Louisiana law, had occasion to consider whether an insured’s failure to report a malpractice claim prior to its policy’s expiration precluded the underlying plaintiff’s right to bring a direct action against the insurer.

Continental Casualty Company insured Titan Title, LLC under a claims made and reported legal malpractice policy in effect for the period August 16, 2008 to August 16, 2009.  During the policy period, Titan, and its principal, were named as defendants in a lawsuit alleging they were negligent in issuing title insurance policies on behalf of its client, plaintiff First American Title Insurance Company.  The insureds, however, failed to report the lawsuit to Continental while the malpractice policy was in effect.  First American subsequently learned of the policy and gave notice of the claim to Continental in January 2010.  It later amended its complaint to add Continental as a direct defendant pursuant to Louisiana’s Direct Action Statute. 

The lower court granted Continental’s motion for summary judgment, concluding that First American could not recover under the policy since neither the insureds, nor First American, reported the claim to Continental during the policy period.  In reaching its decision, the lower court reasoned that if the plaintiff could subvert the policy’s claims made and reporting requirement, then the policy would improperly be transformed into an occurrence policy, which would negate the bargained-for-exchange between Continental and its insured.  On appeal, the Fifth Circuit acknowledged the lack of Louisiana state court guidance on the issue, requiring an “Erieguess” on the issue.  The court concluded that the district court properly predicted how a Louisiana court would rule, since Louisiana state courts have held in other contexts that the Direct Action Statute does not alter the scope of coverage under an insurance policy, and that it does not give plaintiffs greater policy rights than enjoyed by insureds.  See, e.g., Anderson v. Ichinose, 760 So. 2d 302 (La. 1999); Robicheaux v. Adly, 779 So. 2d 1048(La. Ct. App. 3d Cir. 2001). 

With this in mind, and given Louisiana’s rigid enforcement of claims made and reporting policy requirements, the court concluded that the failure of the insured to report the claim while the policy was in effect was binding on First American’s right to insurance benefits.  In this connection, the court cited to its earlier decision in Resolution Trust Corp. v. Ayo, 31 F.3d 285 (5th Cir. 1994), noting that “[w]hile the absence of prejudice-preventing notice generally does not bar a third-party action under the Direct Action Statute, the absence of claim-triggering reporting can prevent such an action because relaxing this reporting requirement expands coverage, which ‘constitutes prejudice as a matter of law.” 

In reaching its decision, the court considered First American’s argument that failure to report a claim during the policy period should be considered in the same light as late notice of occurrence or suit under an occurrence policy, which Louisiana courts have held does not operate to the detriment of injured third-parties.  The court rejected this reasoning, drawing a clear distinction between occurrence-based policies and claims made and reported policies:

Unlike occurrence policies, where a third party's claim vests at the time of the injury or occurrence … a claims-made-and-reported policy establishes certain conditions precedent to coverage…Claim-triggering reporting is one of these conditions. By serving as a required element for establishing a claim under a claims-made-and-reported policy's insuring clause, claim-triggering reporting "allow[s] the insurer to 'close its books' on a policy at its expiration and therefore 'attain a level of predictability unattainable under standard occurrence policies.'" … In exchange for the assurance that it will be liable for only those claims that are made and reported to it during the policy's effective term, an insurer may make certain concessions, such as accepting a lower policy premium. In light of the delicate balance in these policies, we strictly construe notice and reporting requirements in claims-made policies because of their important role in defining the scope of different in scope of temporal coverage.

First American’s argument, concluded the court, would improperly expand the policy’s scope of coverage, and the bargained-for-exchange between Continental and its insured.  As such, the Fifth Circuit concurred with the lower court’s reasoning that allowing First American to recover under the policy under such circumstances would effectively transform the policy from a claims-made policy into an occurrence-based policy.