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Insurance Coverage: Noteworthy Recent Decisions

By: Carl L. Blumenstein
09/14/06

Insurance coverage opinions don’t usually appear on anyone’s summer vacation reading list. But, vacation is over. We briefly summarize several notable cases that remind policyholders, their risk managers and their counsel of the need to be vigilant in protecting their insurance assets.

APPLICATION FRAUD BY ONE OFFICER TORPEDOES COVERAGE FOR ALL

The CFO of a publicly traded company signed a policy application for D&O coverage, attaching a 10-Q that he knew to be false. When the derivative and securities class actions were filed, the insurer sought to rescind the policy due to misrepresentations in the application.

Although the effect of misstatements made by one insured in the policy application has long been a murky area, the appellate court here spoke with crystal-clarity: Where one officer misrepresents facts, the insurer is entitled under California Insurance Code §650 to rescind coverage for innocent officers and directors as well. The policy language here was not sufficient to come within the statutory exception to preserve coverage for the other directors and officers. (TIG Ins. Co. v. Homestore, Inc. (2006) 137 Cal.App.4th 749)

Practice note: At the time they purchase D&O coverage, corporate policyholders should negotiate more favorable language to protect innocent directors and officers in these circumstances.

EMPLOYMENT PRACTICES EXCLUSION INAPPLICABLE TO ANOTHER COMPANY’S EMPLOYEES

Contemporary CGL policies routinely exclude coverage for employment-related lawsuits, but a recent case demonstrates there are limits on how far the exclusion will reach.

The policyholder, a commercial janitorial service, subcontracted with another company to provide janitors in Target Stores. Claiming they were falsely imprisoned when locked in stores to work at night, the subcontractor’s employees sued both companies. The CGL insurer relied on the employment-related acts exclusion to deny a defense to its policyholder; the appellate court disagreed. Because the language of the exclusion did not plainly apply to claims brought by the employees of an independent contractor, the insurer was obligated to defend. (North Amer. Building Maint. Inc. v. Fireman’s Fund Ins. Co. (2006) 137 Cal.App.4th 627)

Practice note: Because "borrowed" and "leased" employee arrangements are becoming increasingly common, businesses are advised to explicitly document the responsibility for compliance with employment regulations — and for employment-related claims that may arise. Risk management decisions may then be made based on those arrangements.

EQUITABLE CONTRIBUTION – NO LONGER JUST AN ESOTERIC MATTER BETWEEN INSURERS?

Where a claim is potentially covered by multiple insurers construction defect, asbestos, products liability and environmental claims are common examples recalcitrant insurers may owe a duty to contribute to participating insurers. But why do policyholders care about contribution rights among insurers?

Policyholders that settle coverage disputes with one of their insurers often agree to indemnify the settling insurer for contribution claims. Those policyholders need to understand the burdens – and the opportunities – that arise in the contribution arena. Two recent decisions are instructive:

  • After a policyholder was named in environmental cleanup actions, it obtained $24 million in settlement of its coverage claims against several insurers. As a condition of the settlement, the policyholder agreed to indemnify the settling insurers. When the same policyholder was later named in toxic tort suits, another primary insurer defended, and then sought contribution from insurers that had settled earlier. The appellate court held that insurers’ settlement with the policyholder did not exhaust their policy limits and did not terminate their contribution obligations to the co-insurer (obligations that now rested with policyholder). (Employers Ins. Co. of Wausau v. Travelers Indem. Co. (2006) 141 Cal.App.4th 398)
  • When construction defect cases were brought against various construction companies, two primary insurers defended and settled the cases, while a third insurer refused to participate. The two settling insurers were entitled to contribution if they established the underlying claims were potentially covered. Unlike the usual case where actual coverage must be shown to establish a right to indemnity, the court held that, in a contribution setting, the burden shifted, so that the recalcitrant insurer had the burden of showing that settled claims were not covered. (Safeco Ins. Co. v. Superior Court (2006) 140 Cal.App.4th 874)

Practice note: Contribution claims are a substantial peril in settling complex coverage disputes. Policyholders should evaluate not just "benefits" received at the time of settlement, but the potential future "costs" of future contribution claims. As a condition of such settlements, the policyholder is well-advised to obtain an assignment of the settling insurers’ contribution rights – rights that could provide valuable leverage in a future contribution battle.

Carl L. Blumenstein, a Nossaman partner, specializes in insurance coverage and complex business litigation disputes.  He can be reached at cblumenstein@nossaman.com.

Nossaman attorneys have established a national reputation in the representation of policyholders, with a track record that compares favorably with any law firm practicing in the area.  The firm has been involved in some of the most significant cases in the country and has achieved groundbreaking wins at the trial and appellate levels.  To date, we have recovered well into the hundreds of millions of dollars in coverage for our clients.  Our clients include publicly traded companies in the aerospace, high tech, steel, aluminum, and waste recycling areas, as well as public entities.

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