Insurance Coverage Update
Defense Law Articles
By: Sidney W. Degan
Degan, Blanchard & Nash, PLC
New Orleans, Louisiana
From bad faith litigation to insurers’ defense and indemnity obligations to waiver of attorney-client privilege, courts are continuing to fine-tune insurers’ rights and responsibilities. In addition, with the ever-changing world of technology, new issues are constantly emerging that insurers may want to consider in advance of issuing insurance and in anticipation of possible litigation. As a courtesy, we write to update you on some recent decisions that could impact future insurance coverage disputes.
Statute of Limitations and Bad Faith
In Fils v. Starr Indemnity & Liability Co., et al., the Louisiana Third Circuit Court of Appeal considered the liberative prescriptive period for an insured’s bad faith claim.[1] The insured-plaintiff filed his original complaint in 2015, seeking additional UM benefits and amended his allegations in 2017 to claim bad faith refusal to pay his claim. Reasoning that a contract is not necessary to assert a bad faith claim against an insurer, the court held that a one-year prescriptive period applied to plaintiff’s bad faith claim. The court further held that the prescriptive period for the bad faith claim began to run on the date the original petition was filed.
Waiver of Attorney-Client Privilege
The United States District Court for the Western District of Washington recently held that an insurer's outside coverage counsel's drafting of letters relating to the claims process that were then signed by the insurer to send to the insured resulted in a waiver of attorney-client privilege.[2] In considering whether coverage counsel's actions were related to processing and evaluating the claim or determining whether coverage exists under the law, the court determined that assisting in writing this letter was not a privileged task. Further, because outside counsel engaged in this claim evaluation and gave advice on whether coverage existed under the law, the court held that waiver of attorney-client privilege is likely because these non-privileged tasks implicated tasks that were privileged. Thus, the court found that very few documents at issue in this case would be covered by the attorney-client privilege.
Rock Particles Barred by Absolute Pollution Exclusion
The United States Fifth Circuit Court of Appeals considered whether the discharge of rock fines, which are the smallest particles produced from crushed stone during quarry operations, constituted a “contaminant” under an absolute pollution exclusion.[3] In E. Concrete Materials, Inc. v. ACE American Ins. Co., the policyholder failed to shut off the pumping before stone fines began to be pumped into a stream, causing physical damage to the stream and stream bed by changing the flow and contours of the stream. The Fifth Circuit held that, while rock fines are not hazardous on their own, when looking to the effects of the overall ecosystem, the rock fines were contaminants, as they rendered the creek unfit for use as a habitat for trout and other species.
Late Notice: A Louisiana Win for Insurers
Following a 2016 oil spill in Baton Rouge, Louisiana, oil and gas producer, Apollo Energy, sought coverage under its CGL policy for cleanup costs associated with the spill.[4] The policy contained a pollution exclusion, barring coverage for claims arising out of pollutants, as well as a buyback amendment, which afforded coverage contingent on several conditions. The buyback amendment required Apollo to provide notice of an incident within 90 days. Apollo did not notify the insurer until 153 days after the incident. Apollo argued that since the insurer was not prejudiced, late notice should not bar coverage. The United States District Court for the Middle District of Louisiana, however, held that Apollo’s failure to comply with the buyback amendment’s notice provisions, negated its application and, thus, the pollution exclusion applied to preclude coverage for the claim.
Late Notice: A California Win for Insurers
A California federal court recently considered whether late notice barred coverage for an insured that settled a suit for $42 million without the insurer’s knowledge for consent.[5] The underlying False Claims Act lawsuit was filed by a whistleblower in June 2013 and was sealed until December 2015. Although the insured claimed it did not become aware of this suit until March 2016, evidence showed that the insured received a subpoena from the Department of Justice (“DOJ”) in June 2015, seeking certain documents and requesting that the subpoena not be disclosed until completion of the DOJ’s investigation or the court orders disclosure. In January 2017, the DOJ notified the insured that it would not file criminal charges. The insured did not notify its insurer until April 2017.
The insured argued that its late notice was in compliance with the DOJ subpoena. The federal judge, however, indicated that “[t]o hold [the insurer] equitably liable for that settlement amount would be far more inequitable than the ‘forfeiture’ of Plaintiff’s coverage for the Subpoena and the Whistleblower action based on Plaintiff’s idleness and disregard for the Policy’s reporting requirements.”[6]
Calculating the Flood Deductible in Builder’s Risk Policy, Subject to the Insured Value
The United States District Court for the Eastern District of Louisiana addressed the amount owed by two insurers, each insuring 50% of a hotel renovation project, for damages sustained during a flood that occurred when the renovation was 80% completed.[7] The hotel and contractor argued that the deductible ought to be the minimum required under the policies, or $500,000. The court, however, found that the policies unambiguously required a 5% deductible of the total insured value, which is the total insured value multiplied by the percentage of completion of the project at the time of loss. Thus, the court agreed with the insurers that the policyholders were required to pay in excess of $ 3.4 million as a deductible.
Self-Inflicted Injury and Accidental Death Insurance
Whether a father could collect benefits under his employer’s accidental death and dismemberment insurance after his teenage son was killed during a game of Russian Roulette was addressed by the United States Fifth Circuit Court of Appeals.[8] The policy provided coverage for injuries that were unforeseen and unexpected. Regardless of the fact that there was only one round of bullets in the cylinder and evidence was presented that the teenager was not suicidal, the Court held that death resulting from pulling the trigger of a loaded gun was self-inflicted, not unforeseen.
Ransomware Loss and Coverage
A United States District Court in Maryland recently held that a ransomware attack on a policyholder’s computer, which resulted in a system slowdown and loss of data, was covered under a business owner’s policy.[9] The policy provided coverage for physical loss or damage to covered property caused by or resulting from a covered cause of loss. “Covered property” was defined as electronic media and records, including software. The Court found that the virus, which resulted from the hacking and then spread throughout the policyholder’s computer network, caused damage to covered property. This case demonstrates that not only specialized cyber policies can provide coverage for cyber risks, but traditional insurance policies may also provide that coverage.
Bad Faith Exposure for Insurers’ Third-Party Administrators
After winning a wrongful death action against a nursing home, plaintiff filed suit against the third-party administrator of insurance claims for the insurer of the nursing home, alleging unfair claims settlement practices.[10] Under Massachusetts law, a firm that is in the business of insurance commits unfair claims settlement practices when it fails to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear or refuses to pay claims without conducting a reasonable investigation.[11] The United States First Circuit Court of Appeals affirmed the district court’s finding that the third-party administrator did not violate Massachusetts’ bad faith statutes. Nevertheless, in so holding, the First Circuit made clear that its conclusion was based on the assumption that a claims-management firm is in “the business of insurance” under Massachusetts law and it was not deciding that issue.
Assignee Bad Faith Claims and Prescriptive Period
The Louisiana Supreme Court recently addressed whether an assignee of an automobile policy, who was not timely paid a settlement and then filed suit against the insurer for bad faith, was subject to a tort’s one year liberative prescriptive period or a breach of contract’s ten year liberative prescriptive period.[12] The Court reasoned that the assignee, who stood in the policyholder’s shoes, was bringing a “first-party” bad faith claim. Since bad faith claims arise out of the insured’s contractual relationship with the insurer, the Court held that the ten year prescriptive period applied.
Covenant not to Execute Constitutes “Settlement”
In Indian Harbor Ins. CO. v. The Gray Ins. Co., the United States Fifth Circuit Court of Appeals looked at whether The Gray’s payment of policy limits to the family of the insured’s employee in a wrongful death case in exchange for the family agreeing to only seek judgement against Indian Harbor Insurance Company absolved The Gray of its defense obligations.[13] Indian Harbor argued that the payment was not a settlement because there was no release of liability against its insured. As a matter of first impression, the Fifth Circuit held that the covenant not to execute constituted a “settlement” sufficient to relieve The Gray of its duty to defend under Texas law. Because whether Texas or Louisiana law applied was also at issue, the Fifth Circuit further made an Eerie guess as to how the Louisiana Supreme Court would find, determining that Louisiana law would also find this payment to be a settlement.
Employees of Independent Contractor and CGL Coverage
Two foreign laborers, both with H-2A visas for temporary agricultural work, were hired by Lowry Farms, Inc. to plant sugar cane at a farm in Louisiana, which was operated by Harang Sugars, LLC. Per the terms of its contract with Harang, Lowry was an independent contractor. When the workers were injured by a Harang employee, they filed suit against Harang’s CGL insurer seeking damages for Harang’s negligence.
The United States Fifth Circuit examined whether under Louisiana Workers’ Compensation Act’s manual labor exception, which extends coverage to independent contractors substantially engaged in manual labor, Harang, as the principal to the contract was immune from tort liability for injuries sustained by Lowry’s employees.[14] Because Harang’s contract was with Lowry and not the injured workers, the court declined application of this exception, finding the injured workers were not independent contractors. Rather, the court determined statutory employment law applied and, thus, the workers were not employees of Harang, presumed, borrowed or otherwise. As follows, the CGL insurer remained on the hook for policy limits.
Horizontal Exhaustion on the Horizon
The California Supreme Court is set to determine whether the rule of “horizontal exhaustion” requires an insured to exhaust excess insurance at lower levels for all policy periods before obtaining coverage from higher-level excess insurance in any policy period when continuous property damage occurs.[15] The parties to this case argue two competing theories: the “horizontal method”, under which the insured must exhaust all lower-level insurance for all policy periods before higher-level excess insurance will provide coverage, and the “vertical exhaustion” approach, which allows a policyholder to select any triggered excess policy to cover its losses if the underlying policies of the same year as that excess policy have been exhausted. This case will affect interpretation of liability policies, particularly “other insurance” clauses in continuous property damage and environmental cleanup cases.
“Hacking” under Cybersecurity Law
Plaintiffs filed suit against multiple insurers, claiming that insurers violated federal cybersecurity law by hacking into a California law firm’s external online file-storage system and gaining unauthorized access to plaintiffs’ personal information.[16] Plaintiffs’ claims centered on a violation of the Stored Communications Act, which was enacted to provide privacy to users of “electronic communications services.” Congress defined “electronic communication service” as “any service which provides users thereof the ability to send or receive wire or electronic communications.”[17] The database in question only allowed the law firm to communicate with its clients by uploading and downloading documents. The United States Ninth Circuit Court determined that the plaintiffs failed to state a claim, agreeing that because the database is not an “electronic communication service” in that it does not involve correspondence through the site, the database is not covered by the Stored Communications Act.[18]
“Indemnity” under the Criminal Act Exclusion
In Century Surety Co. v. Seidel, the United States Fifth Circuit Court of Appeals addressed whether a criminal act exclusion barred coverage for an insured-pizza parlor, where the owner drugged and raped an 18-year-old woman.[19] The court reasoned that because the crime and the woman’s injuries resulted from the insured serving alcohol to the under-aged victim, which is a criminal act, the insurer did not have a duty to indemnify the insured. In addition, the court indicated that the trial court’s imposition of punitive damages against the insured, alone, was sufficient to satisfy the criminal negligence element and the owner’s culpable mental state was imputed to the insured under the vice-principal doctrine.
“Decay” under Commercial Property Insurance Policy
When a commercial building in Auburn, Washington collapsed as a result of the failure of part of the roof truss system, the insured-building owner sought coverage under its property insurance policy.[20] Under the policy, coverage was provided for the collapse of all or part of a building due to “decay.” The policy did not define “decay.” The insurer argued, and the trial court agreed, that “decay” requires material decomposition such as rot, which was not present in the failed roof. The appellate court, however, found the insured’s interpretation of “decay” as encompassing the gradual weakening of a structure to be more reasonable. Construing language subject to more than one interpretation in favor of the insured, the court held that the insured’s interpretation was legitimate and remanded the case.
“Client” under Professional Liability Policies
In December 2017, Iberia Bank settled an underlying False Claims Act litigation with the Department of Justice after it was accused, among other violations, of falsely certifying to the FHA that loans submitted to be insured were in compliance with HUD regulations.[21] Iberia Bank then sought coverage under its professional liability policies for the settlement amount. When the insurers denied coverage, Iberia Bank filed suit, asserting its insurers were in breach of the insurance contract. The United States District Court for the Eastern District of Louisiana agreed with the insurers, finding that: (1) HUD was not a “client” under the policies, as it was not paying Iberia Bank for professional services; and (2) claims asserted under the False Claims Act are not predicated on professional services and, therefore, not covered under professional liability policies. Whether HUD was a “client” under the terms of the policies is currently on appeal to the United States Fifth Circuit Court of Appeals.
“Fully Adversarial” Proceedings and Insurer Liability
A Texas federal court recently ruled that an insurer is not bound by an underlying judgment where the proceeding from which it arose was not fully adversarial. [22] A proceeding is considered “fully adversarial” if the insured-defendant “[bears] any actual risk of liability for the damages at the time of the underlying judgment.” Where the insurer withdrew from the insured’s defense and the insured made no effort to obtain alternate counsel, the plaintiff did not face any actual opposition from insured at trial. Because there was no clear opposition, the insurer was not obligated to pay the judgment.
Tripartite Relationship on the Docket
The Florida Supreme Court is scheduled to hear oral arguments, on March 4, 2020, to determine whether insurers can directly bring legal malpractice claims against law firms they paid to defend their policyholders.[23] The trial court found that the insurance company lacked standing to sue the law firm for malpractice because the insurer and law firm were not “in privity” of contract. The appellate panel agreed. However, the insurance company argues that the Florida Fourth District panel failed to consider the unique “tripartite relationship” that exists between an insurance company, the law firm the insurer hires to defend its policyholder, and its policyholder.
No Duty to Defend Employees’ Sexually-Transmitted Disease Claims
In 2015, three former employee-actors of Cybernet filed separate suits in California against Cybernet for damages resulting from their contraction of HIV following their performance of sex acts for Cybernet videos.[24] The United States Ninth Circuit Court held that the State Insurance Compensation Fund had not duty to defend Cybernet based on exclusions 4 and 5 of the employer’s liability policy. Exclusion 4, which bars coverage for claims that fall under the workers’ compensation law, was found applicable to the claim that Cybernet failed to provide a safe workplace as such falls under workers’ compensation law. In addition, exclusion 5, barring coverage for intentional acts, was held to preclude coverage for the claim that Cybernet failed to take proper measures to prevent sexually transmitted disease and intentionally misrepresented its anti-STD initiative to the plaintiffs.
Criminal Acts Exclusion and Automobile Liability Coverage
In Charles v. Safeway Ins. Co., the Louisiana Third Circuit Court of Appeal examined whether an automobile liability policy provides coverage for an accident caused by the insured’s son while engaged in a high speed chase by the police department.[25] The officer initially attempted to stop the insured’s son because of a broken tail light; however, the driver accelerated and refused to pull over. The policy precludes coverage for bodily injury or property damage “intended by, or which may reasonably be expected to result from the intentional or criminal acts of, any insured person.” The Third Circuit reversed the trial court’s finding, determining instead that the accident was cause in the commission of a crime, not a traffic violation.
The “Unavailability Rule” and Coverage for Asbestos Injury
Applying the “unavailability rule,” the Supreme Court of New Jersey ruled that Honeywell International, Inc. does not have to help pay for asbestos injury suits filed after coverage for such claims became unavailable.[26] Under the “unavailability rule,” a policyholder does not have to pay a share of costs attributed to years during which there is no insurance available for purchase.
Despite the insurers argument that an equitable exception should apply to absolve insurers of liability for insureds that continued to manufacture asbestos-containing products after insurance for those products became unavailable, the court held that it would not deviate from the unavailability rule. The court reasoned that the claims for the initial exposure may have been before insurance became unavailable and noted that public policy is concerned with maximizing insurance availability and promoting the purchase of insurance when available.
Coverage for Email Scam Loss
The United States Second Circuit Court of Appeals recently interpreted the scope of “entry of data into the computer system” under a computer fraud insurance policy, where email spoofing resulted in an email scam loss for the insured. [27] Federal Insurance Company argued that the policy only covered hacking, not email spoofing. However, the Court determined that because the email system was a “computer system” and the spoofing required “entry of data,” the loss was covered under the policy. Federal Insurance Company, thus, was made to pay the $4.8 million loss resulting from the email scam.
No Coverage for Email Scan Loss
Conversely, the United States Ninth Circuit Court of Appeals held that an insurer did not have to cover losses from a fraudulent email scheme suffered by its insured.[28] The insurance policy excluded coverage for “loss or damages resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the insured’s computer system.” The insured’s employees changed the wiring information and sent four payments to a fraudster’s account resulting in the loss. Because the employees had the authority to enter the system and input electronic data, the Court found that their acts were barred by the exclusion.
Disability Coverage under ERISA
HCC Life Insurance Company issued a disability policy to the National Hockey League (“NHL”) for the benefit of NHL players pursuant to a collective bargaining agreement with the National Hockey League Players’ Association. Former NHL player Aaron Rome filed suit when he was denied disability benefits after suffering a career-ending hip injury.
The Federal District Court for the Northern District of Texas granted HCC’s motion to dismiss, finding the HCC policy to be an employee welfare benefit plan and Rome’s claim, therefore, barred by the Employee Retirement Income Security Act.[29] The claim was deemed preempted by federal law.
Excess Insurer Recoupment and Breach of Consent Clause
An underlying gender bias class action lawsuit against Costco Wholesale Corporation resulted in an $8 million settlement and court-ordered arbitration proceedings whereby claimants could resolve individual claims. Arrowood Indemnity Company provided coverage for a second excess layer, beyond the $15 million in primary coverage and $15 million in first excess layer coverage. Arrowood ultimately agreed to pay $7.945 million for the balance of the settlement and arbitration costs under a reservation of rights to seek reimbursement.[30]
Arrowood then sought reimbursement based on Costco’s alleged breach of the policy’s consent clause, arguing that Costco’s costs of over $15 million in arbitration to distribute $8 million in settlement proceeds were unreasonable and unnecessary. The United States District Court for the Western District of Washington determined that Arrowood’s challenge of post-settlement expenses is “essentially arguing that the underlying insurers overpaid” and “that is not a valid defense to Costco’s request for payment from Arrowood.”
Duty to Defend and the Louisiana Anti-Indemnity Act
After a natural gas pipeline exploded, injuring a contractor’s workers, the United States District Court for the Eastern District of Louisiana examined whether the insurance and indemnity provisions of the Master Service Agreement (“MSA”) between the contractor and the pipeline owner were void and unenforceable under the Louisiana Anti-Indemnity Act (“LAIA”).[31] The MSA contained mutual indemnity clauses, requiring each party to indemnify the other for personal injury claims of its employees, as well as an insurance provision that required the contractor to name the pipeline owner as an additional insured under its general liability policy.
The LAIA invalidates indemnity and insurance provisions in construction contracts, except where there is evidence that the indemnitor recovered the cost of the required insurance in the contract price. The court found that because the MSA fell under the definition of a construction contract under LAIA and there was no evidence that the pipeline owner paid a premium to be named as an additional insured under the contractor’s policy, the LAIA voided any duty to defend or indemnify the pipeline owner.
Conclusion
Recent decisions regarding the rights and responsibilities of insurers, along with updates on new types of insurance coverage issues are important for consideration as they could impact future insurance coverage disputes. We have included an overview of these current findings and issues. As always, we hope to keep you informed as new law emerges and are here to assist you as issues arise.