Author Archives: David Rossmiller

Oregon Enacts Major Changes to Environmental Insurance Laws

Oregon insurance and environmental contamination law has undergone major and far-reaching changes in favor of policyholders and landowners with the enactment of Senate Bill 814. The bill went into effect on June 10, 2013 after it was signed by Governor Kitzhaber. The bill had overwhelming support from the Oregon Legislature. In fact, it  passed both chambers of the Oregon Legislature with only two votes against. Importantly, SB 814 applies not only to new environmental claims, but to existing and even past claims, as long as no final judgment was entered on the claim before the bill became law.

The key changes from the new law include:

  • It gives policyholders a right to sue insurers for bad faith and to collect up to three times the actual damages for a number of reasons, including failing to quickly investigate or pay a claim, wrongfully denying a claim, delaying payments for policyholders’ lawyers and environmental consultants, refusing to engage in nonbinding mediation and failing to pay interest on money the insurer owes. This is a dramatic change from previous Oregon law, which did not allow bad faith lawsuits against insurers except in very limited circumstances. The right to sue for bad faith is sure to tip the scales to policyholders in many disputes against insurers, as occurred in Washington when its bad faith laws were expanded several years ago.
  • Policyholders have the right to retain independent counsel at the insurer’s expense in almost all pollution cases. This overrides the provision found in virtually all liability insurance policies that allows insurers to appoint counsel of their choice, usually without consulting the policyholder. “Independent counsel” means policyholders get to chose their own attorneys and that those attorneys represent only the policyholders’ interests and are not controlled or directed by insurers. The new law does not completely strip insurers of input in the selection of counsel, and policyholders and their attorneys will still have a duty to cooperate with insurers, but the effect of this provision will be a wider range of attorneys available to policyholders and a significant increase in the rates attorneys charge insurers.
  •  Provisions in liability policies that bar coverage for pollution on the policyholder’s or landowner’s own property cannot be enforced if that pollution presents any possibility of damaging a neighbor’s property or the state’s waterways and underground water. This “owned property” exclusion is sometimes, but not always, stated as a reason insurers should not pay the entire cost of a clean-up. This part of the new law makes it clear that when the pollution could migrate and cause future damage to wetlands, waterways or neighbors, it is part of the damage that insurers must pay for.
  • Insurers cannot rely on so-called “anti-transfer” clauses to prevent policyholders from settling with claimants and assigning their rights under the policy. In years past, when an insurer refused to provide a paid defense to a policyholder who was sued, policyholder defendants who had limited resources frequently settled with plaintiffs in return for an agreed judgment and rights to sue the defendant’s insurer. This practice almost totally stopped, however, after a 2006 Oregon Supreme Court case said insurers could enforce provisions in policies that voided such transfers and that prevented plaintiffs from being able to sue insurers directly until they had obtained a judgment in court. The new law allows such settlements and assignments of policy rights, even where an insurer is actually providing a defense. This goes beyond the law in most states that allow such assignments – those states usually say the insurer must have first breached the contract by wrongfully failing to provide a defense.

The new law is the latest amendment to several existing Oregon statutes known as the Oregon Environmental Cleanup Assistance Act – Oregon Revised Statutes 465.475 to 465.480. The previous provisions relating to insurance coverage were enacted in 1999 and were much more limited. Because the new law applies mostly to insurance policies that are 30 to 50 years old or more, many anticipate that the law will be challenged as an unconstitutional retroactive impairment of existing contracts. Both the United States and Oregon constitutions contain prohibitions on legislative modification of existing contractual obligations. These constitutional provisions were enacted due to the experience of the fledgling United States under the Articles of Confederation that preceded the national constitution. Under the Articles of Confederation, state governments frequently favored debtors by passing laws that voided contracts after the creditor had performed under the contract.

The proponents of SB 814 said that the bill is constitutional because  it does not take away all value of the insurance policies from insurers, the public policy behind the law is more important than the rights being taken away, and  insurance is a highly regulated field where insurers expect significant oversight and involvement by state regulators and legislators.

Proponents also say the law’s “savings clause” makes it constitutional. That clause says that any part of the law that conflicts with “the intent of the parties” is void. This language, proponents claim, “saves” the law from being unconstitutional because it can never truly bar enforcement of the sections of an insurance contract discussed above if it is clear that the insurance company and the policyholder agreed on the meaning of terms and conditions in the policy. However, insurance policies are standard form contracts where insurers and policyholders seldom negotiate over what is in the policy and what it means. This leads to frequent disputes between insurers and policyholders, and requires courts to interpret what the policy’s terms mean. When Oregon’s Supreme Court says what certain language in a policy means, that settles the issue for others who have exactly the same dispute, because insurance law is governed by state rather than federal law, and the Oregon Supreme Court is the final arbitor of state law. But few disputes are exactly the same as the one in a particular court case, insurance policies and language change over time and often change from insurance company to insurance company. Small changes in language, or the addition of new sections of the policy, mean a court might make a different decision in another case.

Insurers are certain to challenge the new law on many different grounds, but it remains the law until a court rules otherwise. If the new law stands, it will fundamentally alter the relationship of insurers and policyholders for many environmental claims. Remember, however, that the new law applies only to environmental cleanup cases, and not to any other kind of liability claims. 

This is a brief overview of the portions of the new law that will most directly affect policyholders and landowners. The law contains other provisions that will also be significant in many cases, but many of these are more complicated and won’t go into all of them here. Here is a link to the press release from the Oregon Legislature on this new law. The press release is not within its particular spin, of course. 

I testified about this bill in the Oregon House and have analyzed its provisions pretty carefully. This is a very, very significant change for Oregon, a state that essentially had no bad faith law (except for excess verdicts) and where the tripartite relationship has long reigned. It won’t be long before we see this bill come up in environmental matters across the state, and I suspect the boundaries of what environmental contamination consists of will also be tested.  If anyone has any questions about the bill and its effects, feel free to contact me.  


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Goodnight Irene

Chad Hemenway is out with a new piece on about Hurricane Irene and whether we will see any wind vs. water or anti-concurrent cause litigation. His verdict: no. The damage is mostly just flood damage. 

Of course, that didn’t stop cases such In Re Katrina Canal Breaches Litigation from happening several years back when New Orleans flooded due to storm surge. The essence of those consolidated cases was the contention that although water damage and even certain causes of water damage were excluded from coverage, policies generally did not explicitly exclude coverage for losses caused  human negligence in construction and maintenance of flood levees. (I wrote about In Re Katrina Canal Breaches here, here and here, among other places).

This human negligence argument has a better chance where an open peril policy excludes causes but does not expressly exclude results, and for some reason it does much better in challenges to earth movement exclusions and some other limitations. However, when it comes to flood or water damage exclusions, human negligence is the Washington Generals to the water damage exclusion’s Harlem Globetrotters. It just gets run off the court, and has its shorts pulled down by Meadowlark Lemon while shooting a free throw. The human negligence argument won out at the District Court level in Canal Breaches, but that was like winning the first quarter —  and it got crushed at the Fifth Circuit. 

Truth is, flood exclusions have been almost always upheld for a long, long time. If you are looking for a reason why flood exclusions fare better than earth movement exclusions, it is because where earth movement exclusions fail, it is generally not in cases of widespread earthquake damage. Instead, the failure usually comes in isolated cases involving mud slides or similar damage. Courts are reluctant to break exclusions that clearly related to low-frequency, high-severity losses, like floods and earthquakes. Depending on the judge, courts are more willing to see ambiguity involving high-frequency, low-severity losses. That’s my explanation, anyway. Maybe someone has a better one.  

OK, enough philosophy for now. Chad writes:

The point here is that any talk about lawyers expecting disputes over wind vs. water is just that—talk…probably from plaintiffs’ attorneys. The case law is plentiful.

As George Simpson, an attorney with North Carolina’s Cranfill Sumner & Hartzog, tells me, “It would be hard to imagine anyone opening a Pandora’s Box of issues that haven’t already been addressed ad nauseum.”

Dude has it right, I think. Read the whole story and see if you agree. Also, thanks to Chad for the shout out.     

Speaking of Irene, this gives me an excuse to talk about Frank Sinatra. Here’s a link to his version of Goodnight Irene. If you can get past the really annoying backup vocals that sound like a mix of drunken cowpokes and coked-up banshees, this song is a good example of what an amazing talent Sinatra was — he could take a song that is otherwise pretty forgettable, or that sucks, and sell it. Sinatra, whose theory of singing was to act the part he was singing, is right at the top of singers who could bring sincerity to their work.    


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Hit and Run Links

Hey, at least it’s an Ethos: This story reminded me of the classic comedy The Big Lebowski, where Walter Sobchak contrasts nihilism with Naziism: "I mean, say what you want about the tenets of National Socialism, Dude, at least it’s an ethos."  An "insurance" company called Ethos, according to the story, apparently sold dirt cheap auto insurance policies with just one significant  drawback: the policies were bogus. The whole thing was fake, and the people who bought the policies were completely uninsured — which is what they call "self-insurance." Makes me wonder if among the scammers was a Big Lebowski fan and there was some irony in the name Ethos — "say what you want about a company that defrauds you, at least fraud is an ethos."    

Vancouver hockey riot: does insurance cover damage from looting and rioting? The Vancouver riot, like many of these things, was carried out by "anarchists." Walter Sobchak would have no respect for these people, they are just barely above nihilists as far as having an ethos. As Little Bill Daggett said in The Unforgiven, they don’t have any character, not even bad character. Plus, their anarchism is fake anarchism. As has been pointed out by others, if there was an actual state of anarchy, so-called anarchists who wear masks, mob up and destroy property would be machine-gunned or sold into slavery by the private security firms that would rule the streets.   

More on Vancouver hockey riot: anarchist looters to be sued. They would be getting off easy. Being sued is still better than being machine-gunned or sold into slavery during a state of actual anarchy, which is what the anarchists want.

Montana — home births rise, covered by insurance.  This story says they have both insurance and a midwife. I was born at home in North Dakota, delivered by my father (my mother also played a large role), no doctor, no midwife, no insurance. So was one of my sisters. People are so extravagant these days. Midwives and insurance are for wimps.  





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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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Filed under Duty to Defend, Duty to Indemnify, Liability Policies

Dumbing down analysis with dictionaries

Generally in insurance analysis when I see a court resort to a dictionary definition to interpret a word or phrase in a policy I figure what’s going to follow will be a fairly facile, superficial explanation. Usually that’s the way it works out. 

The New York Times explores what it says is an increasing reliance on dictionary definitions in U.S. Supreme Court opinions. In May alone, justices cited dictionary definitions eight times, and not always for big words.

All of this is, lexicographers say, sort of strange.

“I think that it’s probably wrong, in almost all situations, to use a dictionary in the courtroom,” said Jesse Sheidlower, the editor-at-large of the Oxford English Dictionary. “Dictionary definitions are written with a lot of things in mind, but rigorously circumscribing the exact meanings and connotations of terms is not usually one of them.”

I can’t speak much to opinions of the U.S. Supreme Court, because I seldom read them, but I read a lot of insurance coverage cases from state appellate courts, federal district courts and federal appeals courts, and I agree with the gist of the Times story.

One issue with using a dictionary definition is which dictionary do you use? There are scores and scores of dictionaries, and the variance among them is sufficient to allow a judge to cherry pick a definition that proves a pre-conceived point. 

In addition, the use of dictionaries tends to support an extra-textual method of analysis that renders a much more limited and less insightful analysis. I’m not saying this is done out of bad motives. I’m simply saying it’s non-textual and not the  best method of analysis. 

Words and phrases in a policy should not be viewed in isolation, outside the context of surrounding terms of the policy, and of the policy as a whole. I strongly advocate analyzing policy language by analyzing the entire context of the policy and attempting to discern what underwriting concern or principle of insurance is being addressed. Also, analyzing sentence structure, punctuation and syntax is much more helpful at discerning meaning, or finding ambiguity, than turning to a dictionary. In reality, although some courts purport to cling to notions that insurance terms are supposed to be understood in the common, everyday usage of the word in the absence of a specific definition within the policy, I think this is unrealistic. Most of the time, words, phrases and clauses in insurance policies have at least some degree of specialized meaning, because the concepts they deal with are specialized, and because the words are usually selected in response to previous judicial opinions. 

I would make one final point: extra-textualism, or non-textualism as it also could be called, is heavily reliant on the deductive method of reasoning, which is inferior to the inductive method in insurance coverage analysis. Deductive logic is prone to misuse because it relies on an initial set of premises that are subject to the bias of the person who creates the premises, and is therefore rigid, and you are less likely to catch your own mistakes or recognize your own folly.

UPDATE: Forgot the link to the NYT, fixed it.



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Blogging, branding and the free-gap

Seth Godin has some insights on game theory, the marketplace of ideas and the demand for free. 

"Radio thirty years ago was simple: everyone hears it for free and a few buy it.

For a time, one could use free to promote an idea and have leverage to turn that attention into paid sales of a similar item (either because free went away or because the similar item offered convenience or souvenir value).

I think that might be changing. As the free-only cohort grows, people start to feel foolish when they pay for something when the free substitute is easily available and perhaps more convenient.

Think about that–buying things now makes some people feel foolish. Few felt foolish buying a Creedence album in the 1970s. They felt good about it, not stupid."

Can’t disagree with anything he says in his post. Especially since this gives me an excuse to give  an obligatory Creedence link as well as a link to the same song in The Big Lebowski, one of the 10 greatest movie comedies of all time. The Dude was, without doubt, one of the laziest men in Los Angeles County, which placed him high in the running for laziest worldwide. 

Godin gives the example of what all this means in the context of, say, Lady Gaga: the music is basically given away, but the concerts cost money.  Lawyer blogging is somewhat similar in theory, and somewhat different. Unlike Lady Gaga, whose product is mainly the same songs she performs in concert, lawyers are selling legal advice, but they don’t actually give away much of it on the internet.  Law is a knowledge-based business: even if you give away a free analysis of what some case means or what some development signifies, you are not really giving away your songs. The application of the knowledge is so fact-intensive and so variable under new circumstances that you are really not giving away all that much, truth be told, that you could put a price on in the first place. 

Instead, lawyer blogging is less about transfers of information from paid to free than it is about branding. I know, a lot of lawyers are completely uncomfortable with talk of branding, selling, marketing, and so forth — bring up the subject and they react like you just set a basket of snakes on the desk in front of them. I  myself see nothing wrong with the concept of selling, because I don’t have a concept of lawyerism as a mystical calling. It’s a hard job in a highly regulated field with a lot of responsibility, but still a commercial endeavor, and all in all, one I’d rather do than what I did in my younger years: hauling hay bales, driving tractors and cleaning cow manure out of barns with a pitchfork. As the economist John Kenneth Galbraith said, if you’ve ever worked on a farm, nothing else ever seems like work. Selling legal services is as much a part of being a lawyer as writing briefs and arguing to judges.  

The concept of branding is increasingly important to legal work these days, and this is something that has to be thought through, because the days of low hanging fuit in the legal business are done.  Blogging or some other promotional activity is an integral part of branding, because increasingly, as is clear from the Godin post, if you aren’t giving some information away it will be assumed you don’t have anything anyone wants, either for free or to pay for. You have to be part of the mix, a player. How you differentiate yourself,  and if you can, is something you have to give thought to. The first step is to ask yourself what you have to sell that someone would want. It’s a hard question, and uncomfortable for many. If the answer is you don’t have anything, you have to get something. You can’t sell something if you don’t have anything to sell that someone would buy. Asking yourself this question is pretty uncomfortable, because the answer may involve making changes, perhaps some big ones.    

I formed many of my ideas about legal marketing from Joe Gerber of Cozen O’Connor. When I read this speech he gave about the subject, it was a thunderbolt, a Road to Damascus moment, one of the most amazingly true things I’ve ever read.  Joe is one of my heroes, a guy with ideas as well as a guy who does stuff, he’s the Legal Ayatollah of Rock’n’Rolla. Over the years I have re-read this speech at least two dozen times and handed it out to lots and lots of people. Not sure how many have read it, but I’ve handed it out.     

I think I’ll conclude by noting something else Godin said in his post:

"Does the game theory of the market make it likely that those in search of discovery will accelerate the use of free to get attention? Of course."

This point is something to ponder. The implication of it for lawyers, as I’ve said, is that people have to know who you are and that you are selling something. But Joe Gerber says, "don’t just do it." If you’re going to do it, don’t do it because someone is telling you to or just to go through the motions, do it with passion and creativity and because you believe in what you are selling. For Joe, any and all marketing is good marketing — if it works. If it works, it can be quantified on the bottom line. If it can’t be measured on the bottom line, it’s not marketing. It might be something else, such as a social activity you enjoy, or perhaps just a complete waste of time that you are deluding yourself with to try to look like you are doing something, but it isn’t marketing.        


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Hit and Run Links

Florida: new hurricane damage model suggests damage inland will be much worse than previously predicted.

Beat It: Insurer says policy on Michael Jackson tour is void because of misrepresentations about Jackson’s history of drug use.

Drought: A lot of places have flooding. In Southwestern Kansas the problem is drought. Crop insurance will only cover part of the losses. I wrote about crop insurance and its heavily subsidized nature, here, almost five years ago.

Snake Bit: Some homeowners insurers won’t insure you if you have certain snakes. Good. I hate snakes and I think owning snakes is weird. We have enough problems to worry us without having to deal with insuring weird snake people. I saw a guy walking around Home Depot one time with a big ol’ snake draped on him like a shawl. They told him to leave. Guess they didn’t have snake insurance either. 

Health Insurance: Parents don’t want offspring in their 20s on their policies. 

Bizarre, job-destroying rules:  Back in the New York groove. New York City issued rules earlier this year requiring general liability insurance sold to contractors in the city cover the following:

  • The contractor’s completed work
  • Explosions, collapses and work performed underground
  • The contractor’s agreement to pay for liability claims against another party
  • Claims against another party for an injury to the contractor’s employee
  • Work on residential properties
  • The use of a controversial finishing system [EIFS] for buildings’ exteriors

Exclusions are in policies because insurers have found the cost of underwriting the risk isn’t worth it. Some things are business risks where the moral hazard of insuring contractors for them provides an incentive to do shoddy work and subsidizes firms that do bad work. Other things, like EIFS, or Exterior Insulating Finishing System, have proven to be lawsuit magnets.  Multi-unit residential exclusions have been standard for seven years, and Employer’s Liability exclusions go way, way back. You can try to mandate insurers to cover certain things, but they won’t willingly lose money on selling insurance, so either they jack premiums sky-high or withdraw from the market. Good contractors who can’t afford high insurance go out of business. Big companies and fat cats like rules like this, because it drives out small fry and middle fry competitors and provides a barrier to entrance to the market for new competitors. Crony capitalism at its finest. Rules go into effect in a few days.  

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Because It’s Wednesday

You don’t need any better reason than that to watch gloating and boorish Nazis get their comeuppance and being drowned out by the greatest song in the history of Earth, La Marseillaise. C’mon, hit the link, you know you want to, you know you deserve to. Five words: Ingrid Bergman and Humphrey Bogart.


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Insureds, Intent, Indemnity and the Briar Patch


I grew up about 20 miles from the Canadian border and know quite a lot about Canada, but shamefully, not that much about Canadian insurance law. 

So this story in a Canadian legal publication caught my eye — it’s about a series of Canadian court decisions that say that if one family member or another insured burns down the house or otherwise intentionally destroys the insured property, the policy’s exclusion for intentional acts keeps even an innocent co-insured from recovery.

As the story indicates, this is a vexing issue to try to balance. As with many things about insurance coverage, trying to resolve questions often requires one to think pretty deeply about human nature and human conduct. There is an argument that if an innocent insured can collect for the intentional acts of another, there is an incentive for fraud or collusion. With acts like actually torching a house, this moral hazard is somewhat lessened, I think, because arson is a serious crime and volunteering to take up residence at the graybar hotel so your co-insured can collect insurance proceeds is, 999 times out of 1,000, going to act as a pretty powerful disincentive. Most of the time, the criminal will seek to benefit himself and any benefit to a co-insured will be incidental or unplanned. Besides, collusion is not really what the issue is here. This question posits a co-insured who is not colluding or engaging in fraud, but instead is the victim of aggression or criminal plotting by a crooked or nutty current or former spouse or some such sleaze; or possibly the victim of bizarre or crazed conduct by a drug-addicted, emotionally whack or otherwise out-of-control family member, such as a teenager. Maybe the co-insured just doesn’t know what some dirtbag family member is up to. Hey, don’t scoff, if you’ve ever known dirtbags, you do your best to tune them out. 

In the United States, how innocent co-insureds are treated varies. In my totally unscientific, quick and dirty survey of four jurisdictions and some texts and periodicals, I found most courts looked to give a recovery to the the co-insured, particularly because it was often the intention of the destroyer to deprive the victim of both property and security, if not life itself.  Remember, no one is saying the slimeball arsonist should get anything except an extended working vacation at the rock pile. The question is whether the innocent co-insured should get zero, half (or other proportionate share) or all the recovery.   

In Yerardi v. Pacific Indemnity, 436 F.Supp.2d 223 (2006), a federal district court in Massachusetts said there could be no recovery for the wife where there was an accusation she colluded with her husband to commit arson, because the policy unequivocally said no co-insured could recover for the intentional acts of another. Same result, the court said, for intentional misrepresentation by a co-insured — bango, you’re both done. Might the court have had a different take if there was a clearly innocent co-insured? It looks to me like the answer is yes. The court cited an older Massachusetts case that was a hit before your mother was born, a real golden oldie, straight from the nostalgia file, back in 1938, that said insureds were joint and nonseparable. The court said this had not been revisited, unlike in other jurisdictions. Which suggests to me the court might have given some thought to the feasibility of a different result in the facts presented a more compelling justification. 

Other courts have found, as in Republic Ins. Co. v. Jernigan, 753 P.2d 229 (Colo. 1988), that the "separation of insureds" or "severablility of insurance" clause means that the policy applies separately to each insured as if that insured was the only insured. In Jernigan, the innocent co-insured wife was entitled to half the proceeds of the policy where the husband intentionally torched the house but she didn’t know of the plan. However, there is something a little odd here. It’s like when you look at a movie where they are supposed to be playing chess and the board is cockeyed, with a white square at the far bottom left of the player instead of the far bottom right. Your chess board is wanked, your game is going to be wanked too.

Here, the "severability" clause relied upon by the court actually is in the Conditions of the liability section of the policy, not in the first part of the policy, which deals with property insurance. In the Conditions following the property section, sometimes there is a statement that if "you" or "any insured person" intentionally harms the property "for the purpose of obtaining insurance benefits," then the policy is void. Now, this leaves a lot of room for coverage for destruction caused by a vindictive spouse or messed up kid, because they are burning the place down to deprive someone of property or maybe even trying to kill them. But it would apply where, as in the case here, it appears the husband wanted to collect on the insurance.

Other times, such as in the standard HO3 homeowners policy, it won’t say anything like that in the property coverage Conditions, but it will say no insured can be paid more than his or his interest in the property, and one of the exclusions will preclude coverage if committed by "an insured" with the intent to cause "a loss." It will also say, in a section of Conditions that apply to both property and liability coverages, that any material misrepresentation by an insured, before or after a loss, voids the entire policy. It seemed odd that the Colorado court would rely on on the Conditions for third-party liability coverage when the issue was first-party property coverage — for example, I wouldn’t try to apply the anti-concurrent cause language from the first-party property section of the policy to the liability section, it just wouldn’t make sense, and that is why the policy has different sections, because not all stuff applies to everything. In coverage, there usually is no one clear right answer, but there is rather a range of answers that range in credibility from high to Anthony Weiner.   

Another court noticed this, the cockeyed chess board. In Montgomery Mutual Ins. Co., 170 F.Supp.2d 618 (W.D. VA 2001), the court said the Conditions in the liability section, such as the severability clause, could not be applied to a first-party property loss. However, the standard HO3 intentional acts exclusion had been replaced by a Virginia-required endorsement: instead of saying no loss was insured if inflicted intentionally by an insured, the exclusion said there was "no coverage for an insured who commits or directs an act with the intent to cause a loss." The court therefore allowed a mother to recover after her son set fire to the house, after firing a gun at the home and before driving a pickup into the flames. The son couldn’t have recovered, but the mother could.

Voquardson v. Hartford Ins. Co. of the Midwest, 264 Neb. 337 (2002), gives a pretty good discussion of how courts tend to break these things down: if the policy unambiguously says that loss caused intentionally by "an insured" or "any insured" is excluded, it precludes coverage for everyone. But courts look for just about any way they can find around this. Sometimes, the policy conflicts with a statute or there is a colorable argument that it conflicts, and the court will pounce all over that and find for an innocent co-insured. 

Not scientific at all, really. As with most coverage questions, there is a high degree of art involved. But then again, why else do coverage law if not for the art? I always tell newer people who are just learning the field, we are not computers, we are artists. One of my names for insurance coverage is the Briar Patch, not only because it is full of thorns that will hang you up, and not just because it is easy to get lost if you don’t keep a detailed record of your analytical trail, but because there is always another level, another thicket, beyond where your analysis is. The goal is to go so deep in the Briar Patch, to understand the policy so thoroughly, to understand the philosophy so completely, that arguments will be many layers beyond those of an opponent and will ring with credibility and logic, rather than mere partisanship. Easy to say, hard to do.

 (Image above found at

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Today’s Hit and Run Links

Scurvy Dogs: Piracy along west coast of India leads Lloyd’s to hike insurance premiums 300-fold; India appeals. India has stepped up naval patrols. Serious question: where are the pirate-killing drone aircraft?

What if they threw a pre-existing condition insurance plan and nobody came?  More here, from Megan McArdle of The Atlantic. 

Terrorism exclusion: Pakistani journalists demand life insurance from bosses after 21 killed covering War on Terror. Sounds like the least they could do for them.

Nebraska flooding: It may already be too late to get flood insurance. A 30-day post-purchase exclusion applies. Also, flood insurance doesn’t cover finished basements or stuff in them, which kind of figures, but it’s a bummer.

The Trashing of the Kiwi: New Zealand teen tenants run amok, destroy house, party with 200 of their closest friends leaving drug paraphernalia, cigarette butts and dog feces strewn about. I feel sorry for the owners, who are in their 80s. They tried to get the tenants out but the process takes a long time. "We are devastated. We won’t get insurance because we didn’t know we needed to have separate insurance for damage by tenants."

Floridians push hurricane-related tax breaks: I admit it, I miss Gov. Charlie Crist. It was always such fun to tear into him when I was writing about the last Florida insurance crisis.

Coverage for the Dreaded Lurgies: I’ve never heard it described this way — a story from South Africa.

Worst timing for insurance fraud evah: Takeaway — it’s not a good time to talk on the telephone about insurance fraud while the feds just happen to be wiretapping your buddy for investigation of other alleged crimes. 


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