Category Archives: Duty to Indemnify

Additional Insurance: When “Ongoing Operations” Coverage Extends To Damages After Completion

One of the areas of insurance coverage law that can make a legitimate claim to being the most challenging is the area of problems arising out of additional insured status. Additional insurance is frequently required in the construction industry by general contractors, and additional insurance arrangements are extremely common. This involves the GC requiring a subcontractor to add the GC to the subcontractor’s insurance policy as an insured to the extent the GC becomes liable for the negligence (sometimes it is stated as the subcontractor’s "fault," a broader concept than negligence, or sometimes simply "acts," "omissions," "conduct," "activities," "operations" or similar word). 

Stemming out of the explosion of construction defect litigation in the 1990s, "long tail" liability for construction defect damages became a frequently litigated reality, and insurers responded with a number of measures including exclusions for injuries in progress, multi-unit construction, losses for which pre-policy notice was provided and stacking of multiple policies. Part of this was designed to bring more certainty to indemnity issues under "occurrence" liability policies, but another part was designed to relieve insurers of the duty to defend in many instances — construction defect cases are often massive and expensive to defend, with defense costs exceeding indemnity exposure in a high percentage of cases. 

Insurers also sought to limit AI responsibilities by producing an endorsement form that specified that the coverage applies to "ongoing operations."  More about that in a minute. One of the great challenges of insurance coverage law is that this field is really just out of its infancy.  Widespread commercial liability insurance is a relatively new product — since about the early to mid-1960s — and has been evolving continuously. As a result, in many states, key questions have not even been addressed by the judiciary, or the decisions that do exist aren’t very helpful and are perhaps not the most sophisticated or insightful analysis that could be done. This is why I call insurance coverage The Great Workshop of the Common Law. It’s a work in progress — an "ongoing operation," if you will. 

Now, back to AI endorsements.  In 1993 and 1997 the Insurance Services Office produced additional insured endorsements that were supposed to limit exposure to damage that occurred during ongoing operations. The problem is that, many times, courts said the language of the endorsement didn’t actually say that: for example, ISO form CG 20 10 03 97 (which as the last four numbers of the form indicate was produced in March 1997) says AI coverage is in respect to "liability arising out of your [the subcontractor’s] ongoing operations performed for [the additional insured]." Some courts have said this language actually covers not just damages that occurred during ongoing operations, but damages that occurred after completion. Because the vast majority of construction defect liability stems from water intrusion and related damages that occur after completion of a project, these cases present a problem for insurers. 

I saw a recent Ninth Circuit case that highlights this language: Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Co. The case was decided under Arizona law. This case appears to me to involve the 20 10 03 97 form, judging by the language the court analyzed. The Ninth Circuit found that the "arising out of ongoing operations" did not limit the GC’s coverage to just liability for damages that the subcontractor caused before completion, but also for damages that occurred after completion, as long as they happened during the policy period. "During the policy period" isn’t as much of a restriction as you might think, or the Ninth Circuit appeared to believe — in the absence of a continuing loss or other exclusion, damages that begin during a policy period are usually covered by a commercial general liability policy if they continue after the policy period.  

The Ninth Circuit said that damages that occur after completion necessarily must have arisen out of ongoing operations — if the subcontractor didn’t do any ongoing operations, there wouldn’t have been anything completed. The court said it wasn’t going to consider the drafter’s history, which I think is a legitimate call, and was going to hold the insurer to what it actually said. I think there is an argument for what the court said, but there is one aspect of its analysis I think is lacking.  The court examined exclusion (j)(6) in the body of the subcontractor’s policy, it appears, to show that if the endorsement didn’t provide coverage for completed ops damages, there was no coverage at all. Exclusion (j)(6) is the one that precludes coverage for "that particular part of any property that must be restored, repaired or replaced" because the insured’s work "was incorrectly performed on it." There is an exception in the exclusion for damages that occur after completion, meaning it applies only to ongoing operations. I take it the Ninth Circuit’s point is that, if the AI endorsement excludes completed operations and (j)(6) excludes ongoing operations, there is no coverage and that is ridiculous.

If that is what the court is saying, my reaction is this: (j)(6) might indeed limit the subcontractor’s coverage to completed operations only, but as to the additionally insured GC, there is potential coverage for ongoing operations as well as completed ops because the definition of "your work" in a commercial general liability policy has an exception that allows coverage for a GC when work was performed for it by a subcontractor.  In other words, the (j)(6) exclusion will be applied differently to a GC insured as an AI under the policy than to the named insured subcontractor. If this seems weird, don’t forget that there is a Separation of Insureds or Severability of Insureds clause in such policies that instructs you to analyze coverage separately as to each insured. 

Because of case law like this, ISO put out an AI form in 2004 that changes the coverage language and contains an express exclusion for damages that occur after completion. But even seven years after this AI form was produced by ISO, not every insurer uses it. Many still use old forms, or use manuscript forms of their own devising, or modify the ISO form. 

I could go on and on and on about AI insurance, but this is a good place to stop for today. There are something like 28 current ISO AI forms, and many, many old ISO forms, out there. Also, there are dozens if not hundreds of manuscript and adapted forms out there, so this issue is one we will keep seeing being constructed and deconstructed again and again upon our visits to The Great Workshop of the Common Law. 

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‘Partridge’ family reunion: California v. Allstate

I saw this opinion, California v. Allstate, a couple days ago but other things interfered with blogging about it until now. This is a case about coverage for environmental pollution under the "sudden and unexpected" language found in old liability policies, and that is an interesting thing in itself, but what chiefly interested me about this case was the extended discussion of the Partridge case, an influential case that, in days gone by, was in part responsible for the creation of the modern anti-concurrent cause language found in first party policies.

Partridge is not a first party case, of course, but its reasoning resonated beyond the third party liability context, as I discussed in this Appleman’s Critical Issues article on anti-concurrent causation analysis from a couple years ago. (The Partridge discussion starts on page 61).  Partridge was cited in a 1982 Ninth Circuit case, Safeco v. Guyton, that in essence overrode California’s efficient proximate cause analysis in property insurance cases and endorsed a Partridge approach.  (I know that to folks who may not be steeped in this particular aspect of coverage law, this may all sound like secret code at best or Klingon at worst, and maybe it is, but for good or ill insurance coverage has its own specialized language that is an initial barrier to entering the conversation or even following what it is being said.  This is unfortunate in some respects, but it is a fact of life).

What a Partridge approach means is this: whenever two causes of liability exist, as long as one of them is covered, the liability will be covered, even if the covered cause is a subsidiary part of the causation chain and not the efficient or proximate cause. It just has to be a proximate cause.  As the California Supreme Court later found in Garvey v. State Farm, however, the analysis of concurrent causes that might be appropriate for liability cases, where tort law sets the stage for analysis, is not appropriate for first party causation analysis, where the court said efficient proximate cause was the correct analysis. (California is one of just a few states where statutes have been interpreted as mandating efficient proximate cause and precluding the contractual use of anti-concurrent cause provisions). 

But California v. Allstate is a liability case, and Partridge remains good law in California for those kinds of disputes.  Now, it should be said at this point, that not every state has a case like Partridge, and courts in those states may not buy arguments in the liability context based on the reasoning of Partridge, as I have personally found out.  A few words about what Partridge held:  it involved an insured under a homeowners policy that contained, as most or all of them do, an exclusion for liability arising out of the use of a motor vehicle.  The insured committed two negligent acts — filing a gun trigger to a "hair trigger" — so that it would go off with a slight touch, or even, as it turned out, without being pulled at all — and driving erratically, which led to the gun firing and injuring a passenger.  Partridge featured two independent causes, neither one of which could have caused the result by itself.  You can formulate this circumstance in various ways, that is, you can use different words to describe what it is, but the usual way in this context is to say the causes were indivisible, incapable of being separated. 

The Allstate court used the Partridge analysis to find that sudden and unexpected, or accidental,  releases of pollution, which were covered, could not be divided under the facts presented from releases that were gradual and not sudden and which presumably would not be covered.   The court picked this phrase from Partridge as the most apropos: "whenever an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause," liability coverage will exist.  The result, apparently, is that all the pollution liability of the state is covered. 

Before discussing this a little more in-depth, let me just add a curiosity here.  I noted the analysis of the court on the "sudden and unexpected" language with great interest, because in Oregon, a case called Baxter & McCormick has largely read the "sudden" out of sudden and unexpected, and the analysis would have been quite different — if this case occurred in Oregon there probably would not have been a discussion of covered vs. uncovered and concurrent tort causes at all. 

Now, let’s talk a bit about this idea of concurrent cause in the liability context.  I have thought a great deal about this over the past couple years, and there is something intellectually unsatisfying in doing so.  Trying to nail down the analysis in this area is kind of like sticking your arm in water — the refraction makes it appear that your arm has become disjointed and separated from itself.  Likewise, in this area, it can be hard to tell illusion from reality.  One possible conclusion is that there is no reality at all, because the entire concept is artificial and a human construct.  Many things are human constructs, of course, and that does not stop us from thinking of them as reality, or at least reflective of something that is or resembles objectively or empirically observable.  But this area is somewhat different, it seems to me, and less prone to being pinned down, tested or verified.

Consider this, when considering Partridge:  think about the motor vehicle exclusion in the homeowners policy in that case, or a "business pursuits" exclusion in a homeowners policy, or perhaps an earth movement exclusion in a contractors liability policy.  In Partridge, the negligent act of altering the trigger mechanism was found to be a proximate cause. So was the negligent use of a motor vehicle.  But no matter how you see this case, one thing has to be admitted — the use of "negligence" as a cause is particularly prone to manipulation, and I don’t say this with malice, I simply observe that this is so.  Since any court case will involve the actions of human beings, no event that will be considered by a court is untouched by potential human negligence, and this can consume and overwhelm any other attempt at analysis.  If you read the Appleman’s article I linked to above, you can see this, and this was noted by the Fifth Circuit in some of the Katrina cases, such as In re Katrina Canal Breaches Litigation.  

In other words, if a court will let you, you can always attack an exclusion as not really excluding liability because, although it may exclude liability "arising out of" business pursuits, or motor vehicles, or earth movement, it does not specifically exclude human negligence.  So the question arises: is negligence on par with motor vehicle use as a cause? Are these like comparing apples and oranges, or even further apart, like comparing apples to monster truck tires?   Again, I am not taking sides in this, I merely point out that they are not conceptually equivalent.    

One final word, about the Allstate case.  You have reflected by this point in this post that the facts of Allstate and Partridge are not the same.  As the insurers pointed out in briefing, Partridge involved a single, one-time, injury, but Allstate involved various kinds of pollution releases, some sudden and some not sudden, over a period of a number of years.  The court gives an indication it would have given credence to this argument, if the facts would have allowed the court to see the costs of remediation as divisible into costs associated with overflow of the containment pits versus costs associated with gradual seepage from the pits. That is a very hard distinction to make, if you are in the position to have to make it, and all the chemicals come from the same source and are the same chemicals.  It is easier to do this, in environmental work, where, say, one polluter had gasoline at a site, and another had dry cleaning fluid.  Test monitor wells and soil samples will allow a pretty decent estimate of how much of each kind of chemical makes up the pollution mix.  So, not knowing more about this case, on the surface what the court asks to be done sounds incredibly difficult to do.

I do note one other difference with Partridge.  The analysis of the Allstate court does not, at least it appears to me, go nearly as far as some courts do in separating negligence as a cause from actual events, or in other words what we often think of as "causes."  I’m not sure if this different way of approaching the problem is because of the difference in the facts, or if the Allstate court has a somewhat different way of thinking about the issue than did the Partridge court.    

UPDATE: Almost forgot, I saw this case analyzed in a piece by Robert M. Horkovich at the LexisNexis Insurance Law Center.   Full disclosure: I’m on the advisory board of the ILC, so obviously I have a vested interest, I think it’s a good product and I shamelessly plug it when I can.

 

 

         

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McIntosh case punitive damages eliminated, case settled

Holy Cow! The McIntosh case, which I have referred to as the Verdun of insurance litigation, has been dismissed by the plaintiffs’ own motion.  Given this litigation had long been the scene of intense trench warfare, consuming attorney fee dollars like five NFL offensive linemen chowing down on popcorn shrimp at an all-you-can-eat  buffet, it is surprising to see this turn of events.

If you remember, Thomas and Pamela McIntosh v. State Farm is the granddaddy of Katrina litigation, or perhaps more accurately, the Mother of All (Insurance) Battles.   This is the case where Kerri Rigsby of Rigsby sisters "whistleblower" fame approved the flood payment to the McIntoshes, and where, strangely enough, the original engineering report on the damage to the home said the damage was from wind, not flood.  Alexis "Lecky" King, a State Farm catastrophe team leader, found fault with the report and asked the engineers to re-evaluate.  The second report noted the presence of both wind and water damage.  Before we move on with the recap, remember that the first report was done by a man named Brian Ford, because his name will come up again. Ford did not work on the second report. 

Now, the McIntosh claims file was among those taken by the Rigsby sisters and fed to Dickie Scruggs for use in lawsuits he was bringing and planned to bring against State Farm.  This is the case that really started all the public uproar about changed engineering reports, insurer fraud, etc. etc.  Keep in mind that Kerri Rigsby and her sister, Cori, who like Kerri was another claims adjuster working with State Farm, both quit and went directly to work for Scruggs in what federal judge L.T. Senter called a "sham" consultant arrangement — but not before they had performed a massive "data dump," where they and some friends spent the weekend copying State Farm claims files to give to Scruggs and his good friend, Mississippi AG Jim Hood.  (Don’t forget Hood once called Scruggs his "confidential informant" and helped him play keep away with the documents the Rigsby sisters took. Jeez, talk about backing the wrong horse — if you go to the track with Jim, use him as a reverse barometer.)

You may also remember that the Scruggs Katrina Group, besides "employing" the "whistleblower" Rigsby sisters, also discussed hiring Brian Ford as a consultant.  Ford wanted a similar deal to those of the Rigsby sisters, somewhere in the neighborhood of 10-Large per month.  Entrepreneurism at work, you say?  Maybe.  But of course, payments by a party to material witnesses they would be calling to support their case is frowned upon, and in the end, that led Judge Senter to disqualify the Rigsby sisters as witnesses and to disqualify the Scruggs Katrina Group itself as counsel for the McIntoshes. 

Their present counsel, the Merlin Law Group, went a different direction with this than Scruggs did.  Here’s a copy of the motion, and here’s part of what the motion says:   

After engaging in extensive discovery, the Plaintiffs have determined the following:

(a) the McIntosh dwelling was damaged as a result of Hurricane Katrina;

(b) the majority of the damage to the McIntosh dwelling was caused by flooding;

(c) the McIntosh dwelling sustained flood damage of at least $250,000 to the structure and $100,000 to its contents;

(d) State Farm promptly and properly paid Plaintiffs the full policy limits of their flood insurance policy; and

(e) State Farm promptly tendered payment to Plaintiffs for wind damage covered under their homeowners insurance policy prior to the time that the dwelling was inspected by an engineer.

This has got to the most surprising development since those German and English soldiers met on that World War I battlefield for a soccer game during a Christmas truce.

The motion, which was granted yesterday by Judge Senter, dismissed with prejudice all the punitive claims.  That left only the contract claims, and my understanding is that those were settled. 

I’ll discuss this more later. 

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Rigsby sister depositions

Some have been asking that I put the Rigsby sisters’ depositions all in one post for ease of access and research.  OK, here they are.

I’ve talked a lot about these depositions, and don’t have the time right now to go over them in detail again. The only thing I will note for this post is to repeat that in Cori’s latest deposition, she admits accessing the State Farm claims files using a list of the Scruggs plaintiffs, although she says she can’t remember where she got it.  I wonder where it could have come from.  Hmmm. 

If I’ve left off any of their depositions, let me know.

January 14, 2008 — Cori Rigsby (portions under seal)

(Kerri Rigsby’s deposition from around the same date is under seal)

November 19, 2007 — Cori Rigsby

November 20, 2007 — Kerri Rigsby

May 1, 2007 — Cori Rigsby, Part 1

May 1, 2007 — Cori Rigsby, Part II

April 30, 2007 — Kerri Rigsby

May 1, 2007 — Kerri Rigsby

 

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Anti-concurrent cause, Ontario style

I saw an interesting case on anti-concurrent cause language in a liability policy on the blog for the Cavanagh Williams firm in OttawaHere’s a copy of the case, Appin v. Economical Ins. Co., in the Ontario Court of Appeals.  The decision was handed down in mid-February.

The court referred to it by another name — the concurrent exclusion clause — but it is worded more or less the same as the kind of anti-concurrent cause clauses we have discussed at length here, except for one thing: this provision is in the liability form of a Commercial General Liability policy, and is attached to a mold exclusion.

The purpose of the anti-concurrent cause language in the policy appears to be to reinforce the exclusion’s status as an "absolute" mold exclusion — no matter what combination of origins, causes, effects, happenings, events, or whatever word you come up with, the insurer does not intend to pay for any liability if the harm is caused in any way by mold.

To consider this clause in the proper context, let’s broaden our perspective for the moment.  Anti-concurrent cause language, as I’ve written about at length, is merely one way of addressing what I have called the Unbearable Lightness of Causation (with apologies to Kundera).  Causal relationships are among the most intellectually perplexing constructs of human thought, and theories of concurrent and sequential causation are likewise theoretically complex.   I’ve written about it in this article for New Appleman: Critical Issues from last year, and a second article on anti-concurrent causation and Fifth Circuit Katrina cases will come out in the same publication next month.  Anti-concurrent cause language posits an arbitrary analysis of causation — arbitrary in the sense that the areas of inquiry are limited so that, when certain factors are present, the result of the analysis each time will be the same: no coverage.

These clauses were developed to deal with adverse court precedent in first-party property policies, however, and I have expressed some skepticism about how well the language transfers to liability policies.  Consider this: property insurance causation has traditionally been viewed far differently from tort causation — the blurring of the distinction between the two, in fact, resulted in the development of the modern anti-concurrent cause clause. But tort causation is what liability insurance is all about, so whenever anti-concurrent cause language is inserted into the liability portion of a policy, sharp lawyers will look to attack it as incompatible with the underlying concept behind liability insurance — tort law can and does impose liability for concurrent causes of damage, so limitations on that theory of causation, some will say, are inherently ambiguous. 

OK, enough mumbo jumbo, right?  Let’s look at the case, and the language of the exclusion.  Now, I know what any normal person is thinking when they look below: "You expect me to read on past this point when the headline is ‘Fungi and Fungal Derivatives? See you later’."  Quite true, but those interested in reading a post on anti-concurrent cause language are by definition not normal people, and I have every confidence that those who have stuck with me this far won’t let a little fungus deter them from reading to the end.  I have put the anti-concurrent cause language in bold to make it easier to find among the fungi.

This insurance does not apply to:

7. FUNGI AND FUNGAL DERIVATIVES
(a) “bodily injury”, “property damage”, “personal injury”, or Medical Payments or any other costs, loss or expense incurred by others, arising directly or indirectly, from the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, presence of, spread of, reproduction, discharge or other growth of any “fungi” or “spores” however caused, including any costs or expenses incurred to prevent, respond to, test for, monitor, abate, mitigate, remove, cleanup, contain, remediate, treat, detoxify, neutralize, assess or otherwise deal with or dispose of “fungi” or “spores”; or

(b) any supervision, instructions, recommendations, warnings, or advice given or which should have been given in connection with (a) above; or

(c) any obligation to pay damages, share damages with or repay someone else who must pay damages because of such injury or damage referred to in (a) or (b) above.

This exclusion applies regardless of the cause of the loss or damage, other causes of the injury, damage, expense or costs or whether other causes acted concurrently or in any sequence to produce the injury, damage, expenses or costs.

Here, I am not sure the anti-concurrent cause language adds anything to what was already said: we do not cover any liabilities arising in any way from harm caused by mold.   The appellate court agreed with the trial court — both found the exclusion ambiguous and unenforceable. The reason the court did so, is that the insurer denied the duty to defend the insured against allegations that the claimant was harmed by exposure to mold (uncovered) and bacteria (covered). The court explained it this way:

We disagree with the insurer’s position. The language in clause 7(a) is both unclear and ambiguous in its effect. A plain reading of the provision does not support the insurer’s position. Indeed, the clause is worded in a fashion that would leave most people guessing as to its meaning. For example, on another possible interpretation, the clause could be taken to mean that wherever injury from mould is alleged in a claim, even if it is ultimately established that the injury arose solely from a covered peril, such as bacteria, the claim would exclude both the duty to defend and the duty to indemnify. This would effectively extend the exclusion to otherwise non-excluded perils. 

Now, to me, the key is not whether bacteria might ultimately be proven a cause of harm, therefore calling for indemnity.  The key for the duty to defend question is whether, under the allegations, mold and bacteria are concurrent or sequential causes of the harm claimed.  These are terms with highly specialized meanings in insurance.  Concurrent means independent causes that combine to produce a result that would not have occurred but for the existence of one of the causes.   Sequential can be ruled out — it refers to dependent causes, one cause causing the other.  It seems highly unlikely that the allegations were that the mold illness caused the bacterial illness or vice versa. 

So the question for anti-concurrent cause is this — can the allegations be read only one way, that is to say, that no illness at all would have occurred but for the combination of mold and bacteria?  It the allegations can be read to say that harm would have occurred because of bacteria alone, then we are talking about two separate single causes of two separate harms, not multiple causes of one harm.  If the allegations can be read that way, a powerful argument exists that anti-concurrent cause language is not relevant. 

As I mentioned, I’m not sure the anti-concurrent cause language added anything here.  The insurer admitted that if bacterial harm were proven, the insurer would have to pay for the liability.  From what I can see of the allegations from the court’s analysis, it is dubious whether a denial of the duty to defend can stand under such circumstances.  There may be things I don’t know about this case that were not in the opinion, but from what I see here the court’s call is well-reasoned.  I would have liked to see an analysis closer to the one I have explained above — then I could see if my assumptions about the case are correct.  If courts would use an analysis similar to the one I propose here, their jobs would be easier and their opinions clearer and more bulletproof. 

 

 

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Coverage by admission

There are probably three things from my first year of law school I could do without having to think about again.  One is the Rule Against Perpetuities.  The second is the Statute of Frauds.  The third is the parol evidence rule.  I’m pretty safe on the first one, and seldom have to worry about the second.  But the third lurks around insurance coverage law like some kind of heavy-breathing beast at the edge of the firelight.  It may not go by its rightful name, but questions dealing with the admissibility of extrinsic evidence to prove the meaning of terms in an insurance contract are in fact parol evidence rule questions. 

In contract law, the parol evidence rule states that extrinsic evidence, usually of prior negotiations, is not admissible in interpreting a fully integrated contract unless the language of the contract is ambiguous.  Everyone agrees on that. However, the meaning of the word "ambiguous" is subject to debate — you could say the word ambiguous is itself ambiguous — and has produced two main viewpoints. 

The traditional view, of Prof. Samuel Williston, is that an ambiguity must appear on the face of the document before extrinsic evidence is admitted.  This is sometimes called the "plain meaning" approach.  The competing point of view, associated with Prof. Arthur Corbin, is that it is not necessary for an ambiguity to appear on a document’s face: instead, extrinsic evidence can be used to show the existence of an ambiguity.  One more thing: even under the Williston approach, extrinsic evidence is allowed to resolve ambiguity once it is found.  A stricter view of contract interpretation exists, referred to as the "four corners" approach, which says that only what is within the four corners of the document should be used — no extrinsic evidence at all.  Insurance law, which Prof. Michelle Boardman has cogently referred to as "the odd but brilliant prodigy" of the contract law family, has significant differences from regular contract law when it comes to interpretation, particularly the use of the doctrine of contra proferentem. However, because I recently had to research and write a ton on this subject, I don’t feel like going into it in great depth here.  Suffice it to say that many jurisdictions use some version of the Williston or Corbin approach for the initial stages of insurance contract interpretation, and many instead use the four corners approach, including Oregon.  (By the way, I’m going to single Prof. Boardman out for praise for writing one of the relatively few law review articles I can honestly say I have enjoyed reading:  Boilerplate Versus Contract — Contra Proferentem: The Allure of Ambiguous Boilerplate, 104 Mich. L. Rev. 1105 (March 2006).  This article was not only informative, but entertainingly written). 

All of this is a long lead-in to a useful article in the GenRe Research publication Policy Wording Matters written by Randy Maniloff, who has a certain Forrest Gump ubiquitousness — he’s in nearly every publication there is. I wouldn’t be surprised to open up my church bulletin at Mass and find an article by Maniloff in there.  The article is on coverage by admission — examination of changes in policy wording, or perhaps the lack of change, to either show or decide ambiguity. Take a read on the article here — it’s on page 5. I was also impressed by the quality of the entire GenRe publication — and as you know, I don’t hand out praise for writing lightly, I struggle and suffer too much over writing to give anyone else a free pass. 

 

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Do Insurers Intentionally Introduce Ambiguities Into Policies?

Now this is an impressive post on ambiguities in insurance contracts, complete with footnotes, by Chris Robertson, a third-year law student at Harvard. I hesitate to link to it, for fear anyone will expect footnotes from me. If they are waiting for this, they will wait a long time.

The post is well-researched with sources ranging from Judge Richard Posner to Ralph Nader.  The gist of the post is that insurers perhaps intentionally make policy terms and conditions ambiguous as a strategy to deter and intimidate policyholders.  Chris acknowledges that courts decide ambiguities against the insurer, but says insurers may prefer to take their chances knowing that many people won’t sue and that sometimes courts will side with insurers.  Chris wrote this post in a scholarly vein, so I hope he won’t mind if I take issue with it. The post is in line with a lot of popular sentiment, so I want to address it. 

If this is a strategy by any insurance company in this world, let me give you some free advice: give it up, it won’t work.  Instead, don’t put any ambiguities in policies and use the same strategy of refusing to pay no matter what, and you will achieve better results.  Let’s look at the economic argument in the post this way.  Suppose the market is saturated with insurers whose business strategy manual has one page that contains one sentence: AT ALL TIMES, ACT IN BAD FAITH.  They take in premiums but don’t pay. Let’s also just say there are no state regulators who will prosecute them or revoke their licenses to sell insurance in the state.  If I come along and start an honest insurance company, or as honest as I can make it considering I may have to hire employees from companies that trained them to operate in bad faith, I will be able to charge higher prices and still dominate the market, because people know with me, they at least have a chance of getting a claim paid.  Whereas with the other companies, giving them money is like making a loan to your brother-in-law.  Neither I nor the bad companies have any incentive to make policies ambiguous — doing so only gives some judge a free shot at me, and for the other guys, why bother, since they aren’t going to pay no matter what the contract says. 

Not to mention that we know that almost all terms in widely used policies originated with the Insurance Services Office or some other trade group that debated endlessly about language to address specific concerns, in response to specific legal developments, and had a specific intention to broaden coverage to include certain things but not others, or to contract coverage to exclude certain things but not others.   These things are written about as well as they can be written.  Plain English doesn’t work.  The less that is said about a given thing, and the less technical the term, the more ambiguous you can make it out to be. 

In any event, a good, thought-provoking post.

UPDATE: Make sure you check out the comment below from Prof. Seth Chandler.  He gives you two weeks of course work on ambiguity condensed into a 60-second bite, and you don’t have to pay any law school tuition to get it.  

SECOND UPDATE: You’ll also want to read Martin Grace’s post on ambiguity at RiskProf, and check out Ted Frank’s post at PointofLaw.  

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Maniloff’s Top 10 Coverage Decisions Of 2006

It is hard to write excellent legal prose for a number of reasons, not the least of which is the surprising resistance one encounters to good writing from many people who treat legal writing as if it is not an art but merely an industrial process, like bleaching wood pulp. These people treat any attempt at originality, creativity or — heaven forbid — humor as if you had showed up at a job interview with a Harley tattoo on your forehead. In addition, writing anything good is just plain hard, often agonizing, work.  Strangely enough, really good writing does not bear the marks and bruises of all this laboring, but instead reads as if it flowed naturally from the author’s fingertips with little effort.  Good writing glides, turns, shoots and scores like The Great One in his prime.     

So here is an example of legal writing that is really good, by Randy Maniloff, of White and Williams in Philadelphia.  Here is a link to Randy’s upcoming article in Mealey’s Litigation Report: Insurance on the year’s 10 most significant insurance decisions.  When I praise the writing, don’t take that to mean I slight the substance, because good writing is substance.  I place this article in my highest category of legal writing — the Steve Buscemi class — named after the actor who always brings something fresh, surprising and original to a role, who puts maximum effort into each part without letting you see the effort, and who worked as a firefighter for four years before becoming a star, and then showed up for work at his old firehouse the day after 9/11, working 12-hour shifts at Ground Zero while disdaining publicity. 

I can’t quibble with Randy’s case selection — I’ve written about many of them myself — although for sentimental reasons, I found myself wishing at least one of the Hurricane Katrina coverage cases, which I have spent so much time analyzing and of which I have grown so fond, had made the list.  My favorite analysis in Randy’s piece is French v. Assurance Co. of America (4th Cir. 2006), particularly this excerpt that brings clarity to a construction defect issue that often seems murky:

However, the flaw in this argument is that the subcontractor exception to the your work exclusion is not called the subcontractor exception to the occurrence requirement. The French Court recognized this and concluded that, notwithstanding that the EIFS was defectively installed by a subcontractor, such defective application does not constitute an accident, and, therefore, is not an occurrence under the CGL policy. 

My favorite lede from the analysis of the cases is this one, from Standard Fire Ins. Co. v. Spectrum Community Assoc., 46 Cal.Rptr.3d 804 (Cal.App. 2006):

What’s the difference between a John Grisham novel and the continuous trigger? Answer: Nothing.  They are both legal fiction.

And here’s a great short summary of Brannon v. Continental Casualty Co.:

— Supreme Court of Alaska gave an insurer a chilly reception to its argument that the statute of limitations on an insured’s action for breach of the duty to defend began to run from the time of the disclaimer . . . .

Print the article out and read the whole thing.  At 23 pages, it will take a little time, but it’s worth it.

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Filed under Bad Faith, Duty to Defend, Duty to Indemnify, Industry Developments, Liability Policies

Rapper Sues National Union Fire Insurance, Claiming Failure To Pay Indemnity Ordered By Court In 2004

Rapper Dwight Myers, who goes by the name Heavy D, is suing his liability insurance carrier, National Union Fire Insurance Co. of Pittsburgh, saying it has failed to pay him indemnity as ordered by a New York court two years ago.  Heavy D requested indemnity for his liability stemming from an event where he and fellow rapper Sean Combs, who has been known by various names including P. Diddy and Puff Daddy, coached opposing sides at a celebrity basketball game at New York’s City College.  A huge crowd showed up, everyone could not fit in the building, and pushing and shoving led to a stampede in which nine people were crushed to death.

Heavy D is seeking $1.5 million from the insurer, including $791,000 in indemnity, $381,000 in interest and a hefty, or Heavy, $324,000 in attorney fees.  Is it just me, or does that sound like a lot of attorney fees for a dispute over the meaning of insurance contract terms that was decided in a bench trial?

Here’s a link to the underlying case of National Union Fire Insurance v. Heavy D, which the New York court provided on a publicly available, easily accessible website, unlike federal courts that provide access to most of their stuff only through the ECF system.  (Scroll down to the fifth paragraph of the link).  The trial court rejected the insurer’s defense that coverage was precluded by the policy’s exclusion for "promoting activities to the extent of contracting with arenas, halls, theaters and other places for theatrical presentations, whereby the business [Heavy D] is holding harmless aforesaid facility." The court found that Heavy D was not the promoter of the event, Sean Combs was, and that the basketball game was not a theatrical presentation like a musical concert or tour.

 

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This Sounds Like ‘Defective’ Analysis To Me

I’m having a hard time buying the court’s opinion in Stansley Group v. Fru-Con Construction Corp., 2006 WL 2711795 (N.D. Ohio September 21, 2006)(click here for a pdf of the case).   Stansley poured some apparently defective concrete in construction of two bridge pylons, although the concrete it poured for 11 other pylons met pressure standards of 10,000 pounds per square inch.  Stansley was sued by the general contractor, and the issue in the case was whether Stansley’s insurer owed a duty to defend and indemnify.

The court acknowledged that defective work does not constitute an "occurrence" under a Commercial General Liability policy, and that only damage to other work or property could constitute covered property damage.  Then the court went in a direction I did not anticipate.  Now, to finish out this discussion let’s remember that in the construction business wet concrete is called "mud."  It will be more fun and make us feel like construction insiders if, for the rest of this post, we call the concrete "mud."  Let’s also remember that many courts will find that if other property has to be destroyed to tear out defective work, the damage to the non-defective work is covered.

Strangely, to my way of thinking, the court said an issue of fact precluded summary judgment for the insurer.  It was unclear, the court said, if all the mud poured for the two pylons was bad mud, or if some good mud was mixed in with the bad.  If some good mud was in the pylons, the court said, destruction of the defective pylons resulted in damage to non-defective property.   I am not agreeing with this.  If I give you a beverage that is 98 percent coffee and 2 percent poison, I am not giving you a drink that is mostly good coffee and a little bad coffee, I am giving you poison.  If I pour some loads of good mud and some loads of bad mud in a pylon, I am not giving you partly a good product and partly a defective product, I am giving you one whole product that is no good.  To my mind, the whole pylon is uncovered defective work.

UPDATE: We’re not afraid of dissenting opinions at this blog.  Here is another point of view on Stansley, which focuses on different things about the case, but calls the analysis "great." 

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