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Insurance Coverage: A Year in Review

By: Carl L. Blumenstein
01/30/06

In 2005, California appellate courts decided a number of cases involving the availability and scope of insurance coverage for claims commonly encountered by policyholders. Several involved insurers’ ongoing efforts to limit the indemnity coverage afforded by commercial general liability policies to lawsuits—thus foreclosing their duties to provide coverage for liabilities imposed by administrative orders. Other cases highlighted the need for policyholders to be vigilant in protecting their invested premium dollars by making full disclosures in their applications, by carefully monitoring and reporting potential claims, and by ensuring that subsequent mergers or other circumstances do not adversely affect coverage.

IS A LAWSUIT REQUIRED TO TRIGGER COVERAGE UNDER CGL POLICIES?

Last year’s most high profile insurance coverage decisions focused on the dispute over whether CGL insurers can limit their indemnity obligations to cases where the policyholder is named in a lawsuit, or whether indemnity must be afforded for other proceedings.

Four years ago the California Supreme Court held that, under standard CGL policy language creating a duty to indemnify the policyholder for "damages," the insurer’s indemnity obligations were limited to those arising from lawsuits in a court of law—they did not extend to administrative proceedings. (Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal. 4th 945 ("Powerine I"))

In 2005, the California Supreme Court returned to this issue in two cases decided the same day. Powerine II involved language in other CGL policies that the court found to be broader than that at issue in Powerine I. The court distinguished the disjunctive indemnity clause – which required an insurer to indemnify for "damages and expenses" – and held that such a clause could encompass expenses incurred as a result of an administrative cleanup order. (Powerine Oil Co, Inc. v. Superior Court (2005) 37 Cal. 4th 377)

On the same day, the court ruled that a nonstandard CGL indemnity clause was similar to the language of Powerine I, and thus the duty to indemnify was limited to "damages" ordered by a court. (County of San Diego v. Ace Property & Casualty (2005) 37 Cal. 4th 406) As a harbinger that the Supreme Court may have more to say on this issue, of the six justices who participated in that case (Justice Brown was en route to the DC Circuit), three issued separate concurrences expressing the view that Powerine I should be reconsidered. With Justice Carol Corrigan now joining the court, the continued viability of Powerine I is uncertain.

Practice Note: At least until the Supreme Court speaks further on this issue, policyholders must carefully review their CGL policies to determine if coverage terms resemble those in Powerine I or those in Powerine II. And even if they are like those in Powerine I, consider whether actions can be taken to come within its requirement of a lawsuit in a court of law, thereby preserving coverage.

ACCURACY AND COMPLETENESS ARE IMPORTANT IN APPLYING FOR INSURANCE

In two cases last year, California appellate courts found that "material" misrepresentations or concealments in the application process (whether intentional or inadvertent) justified rescission of the insurance policy. Both define the standard for "materiality" as being "whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms."

In one, an applicant for life insurance failed to disclose that she had an existing $2.9 million policy. The Court held this to be material omission and thus the insurer was entitled to rescind. (West Coast Life Ins. Co. v. Ward (2005) 132 Cal. App. 4th 181)

In a second, the policyholder made misrepresentations concerning size of space, history of fire code violations, and presence of a burglar alarm in an application for a property insurance policy. Here too, the court permitted the insurer to rescind the policy. (Mitchell v. United National Ins. Co. (2005) 127 Cal. App. 4th 457)

Practice Note: These decisions underscore the need for accuracy and completeness in policy applications. The insurance is only as good as the representations made to secure it.

IF YOU HAVE A "CLAIMS MADE" POLICY, BE VIGILANT ABOUT REPORTING CLAIMS

In what the court described as a professional’s "worst nightmare," an attorney was sued for malpractice three days before the Sunday on which his malpractice policy expired. A reporter who had seen the complaint called on the same day to seek the attorney’s comment. After the weekend, and after the policy expired, the attorney learned of the claim and immediately notified his insurer, which denied coverage because the claim was not reported within the policy period. Although the trial court denied coverage, the appellate court – emphasizing the narrowness of its decision – invoked its equitable powers to excuse compliance with the notice provision. (Root v. American Equity Specialty Ins. Co. (2005) 130 Cal. App. 4th 926)

Practice Note: Reporting requirements are a trap for the unwary. Both individual and corporate policyholders need to be vigilant about monitoring and reporting potential and actual claims.

WHEN ACQUIRING OR MERGING BUSINESSES, INSURANCE SHOULD BE ON YOUR CHECKLIST

Many policyholders are not versed in the coverage issues that can arise when businesses are merged, acquired or dissolved. One case last year arose from a manufacturer’s acquisition of a company that manufactured liquid latex carpet backing. The acquiring entity was then named in a products liability suit that alleged injuries for products shipped both before and after the acquisition. The CGL insurer for the surviving business denied coverage, relying on an exclusion precluding coverage for products shipped by the predecessor entity. Because the lawsuit alleged claims based on products shipped by both entities, the court held the insurer liable for defense expenses. (Travelers Casualty & Surety Co. v. Employers Ins. of Wausau (2005) 130 Cal. App. 4th 99)

Practice Note: In many mergers and acquisitions, insurance policies can be a hidden asset, often yielding considerable value when claims arise years later. As a result, thorough evaluation of insurance should be on the merger and acquisition checklist.

STATUTE OF LIMITATIONS

In a case arising from the 1994 Northridge earthquake, the court clarified the application of statutes of limitations under first party property policies. First, where a policyholder knows or reasonably should know that her property has suffered appreciable damage, the statute of limitations begins to run (even if the extent or cost of repair is not fully understood until later). Second, the statute is equitably tolled during the time the insurer is considering the claim, up until the unconditional denial of the claim. Third, and distinct from equitable tolling, an insurer will be equitably estopped to rely on a limitations defense based on its own conduct – for example, misrepresentations to the policyholder or the failure to comply with applicable regulations governing the claim. (Doheny Park Terrace Homeowners Assn., Inc. v. Truck Ins. Exchange (2005) 132 Cal. App. 4th 1076)

With regard to the duty to defend under third party CGL policies, the statute of limitations applies differently. A policyholder’s claim for breach of the duty to defend arises when the insurer denies a defense. But, significantly, the limitations period is equitably tolled until the underlying action is finally resolved. Further, and with regard to excess CGL insurers, the limitations period for breach of the duty to defend only begins to run when the underlying insurance has been exhausted. (Eaton Hydraulics Inc. v. Continental Casualty Co. (2005) 132 Cal. App. 4th 966)

Practice Note: Here, too, a policyholder must be vigilant in monitoring and reporting claims. Failure to commence a coverage action within the applicable statute of limitation may necessitate a favorable exercise of a trial court’s equitable discretion.

MAY A POLICYHOLDER CONSULT ITS BROKER – IN CONFIDENCE -- ABOUT CLAIMS ISSUES?

After being named in consumer lawsuits alleging false advertising and related claims, the policyholder’s in-house attorneys sought assistance on coverage and claims issues from the company’s insurance broker. When coverage litigation ensued, the federal district court held that the broker was a third party whose presence vitiated the attorney-client privilege. (Sony Computer Entm’t Am., Inc. v. Great Am. Ins. Co. (N.D. Cal. 2005) 229 F.R.D. 632)

Practice Note: On occasion, in-house and outside counsel consult with and seek assistance from the broker on tender of claims and other coverage matters. Counsel should proceed with caution and implement safeguards to provide greater protection to these communications.

COVERAGE AS AN ADDITIONAL INSURED

During the course of contract negotiations, one party often agrees to indemnify the other and have it named as an "additional insured." In some cases, the scope of the indemnity agreement may vary from that of the policy. Where the policy language is more expansive, it may provide coverage regardless of the scope of the indemnity agreement. (American Casualty of Reading v. General Star Ind. (2005) 125 Cal. App. 4th 1510)

Practice note: Contracts often provide that companies should be added as an additional insured but there is no follow-up to ensure this happens. Also, as was the case here, the insurance may well exceed that contemplated by the contract.

OTHER CASES OF INTEREST

  • Insurance broker negligently failed to advise policyholder of material exclusion in CGL policy and failed to advise that additional coverage could have been purchased to fill in the gap. Although policyholder prevailed in obtaining coverage in litigation, broker was nonetheless liable for attorneys’ fees and other expenses that policyholder suffered due to its negligence. (Third Eye Blind, Inc. v. Near North Entertainment Ins. Services, LLC (2005) 127 Cal. App. 4th 1311)
  • Excess insurer not entitled to seek contribution against excess umbrella insurer where latter provided broader scope of coverage. (Carmel Development Co. v. RLI Ins. Co. (2005) 126 Cal. App. 4th 502)
  • Where CGL policy provided coverage for "accidents," rather than "occurrences", policyholder had burden to show that accidents caused appreciable and material injury above and beyond that associated with non-accidental events. (Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal. App. 4th 187)

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