Commentary and analysis on the
law of insurance coverage
Author: Carl A. Salisbury
1. Templo Fuente De Vida Corp. v. National Union Fire Insurance Co., 224 N.J. 189 (2016). (Get a copy of the opinion here.)
New Jersey has long been a jurisdiction in which there was a very high bar for a carrier to nullify coverage on the basis of late notice of a claim. Most liability policies that provide coverage for an “occurrence” require the insured to notify the insurer about a claim “as soon as practicable” after the claim has been made against the insured. The rule in New Jersey has, for many decades, been that an insurer may not deny coverage for failing to provide notice “as soon as practicable” unless it could prove that the untimely notice caused “appreciable prejudice” to the insurer’s ability to defend the underlying claim against the insured. The New Jersey Supreme Court essentially kicked that requirement to the curb in Templo Fuente. More troubling still was the reason for dispensing with the prejudice requirement in this case. The court opined that the prejudice rule exists to protect “unsophisticated” insureds from the consequences of failing to understand the notice requirements in a complex contract of adhesion. “Those equitable concerns based on the nature of the parties,” according to the Court, “do not control in our analysis of the ‘as soon as practicable’ notice requirement of the Directors and Officers ‘claims made’ policy here, where the policyholders ‘are particularly knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers.’ In this arena, insurers are ‘dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing.” Significantly, there was no evidence in this case that the small, fourteen-employee company had ever tried to negotiate the terms of its coverage, that it could have negotiated the terms if it had tried, or that it had any particular expertise in the complex and highly specialized field of insurance policy interpretation. The court’s reasoning potentially opens up a whole new area of conflict between carriers and policyholders in New Jersey that did not exist before: Is the insured sufficiently “sophisticated” to justify dispensing with the prejudice requirement in a notice dispute? For a closer look at the Templo Fuente case, see the blog post here.
2. In re: Viking Pump, Inc., 27 N.Y.3d 224 (N.Y. 2016). (Get a copy of the opinion here.)
In this case involving the ever-present question in long-tail liability claims of how to allocate coverage among multiple triggered policies, the New York Court of Appeals held that the “all-sums” language of the standard liability policy insuring agreement provides that each of an insured’s policies can be held liable for an entire loss. The court rejected the “pro rata” method of allocating among policies — an approach that applies liability proportionally among all triggered policies — which everyone who practices in the insurance coverage space assumed was the allocation method that applied in New York. The basis of the decision does provide carriers with an argument to distinguish Viking Pump in future cases. The court was influenced by the presence of “non-cumulation” and “prior insurance” provisions in the policies at issue. A non-cumulation clause provides that only a single policy limit is available for a loss covered under multiple policy periods. A “prior insurance” provision reduces the coverage available in one policy by the amount of coverage available under earlier policies. The Court of Appeals found those provisions to be incompatible with the pro rata allocation method. The decision also permitted the policyholder to access the coverage of excess policies in a “vertical” exhaustion method per policy period, rather than requiring “horizontal” exhaustion of coverage in successive policy years. Together, these allocation rules potentially give policyholders access to a great deal more coverage than would be available under a pro rata method, which can sometimes result in gaps in coverage for multi-year liability claims.
3. Ramara, Inc. v. Westfield Ins. Co., 813 F.3d 660 (3d Cir. 2016). (Get a copy of the opinion here.)
There are two methods for determining a liability insurance company’s duty to defend. The first method, which the majority of states apply, is known as “the four corners” rule: the duty is determined solely by comparing the allegations in the four corners of the complaint against the insured with the provisions in the four corners of the insurance policy. If there is a possibility that the allegations fall within the coverage, the carrier must defend. The second method modifies the four corners rule to permit one party or the other to reference facts outside the complaint in determining the duty to defend. Pennsylvania is a strict “four corners” rule state. Ramara was decided under Pennsylvania law. It involved figuring out whether Ramara, Inc., the owner of a construction project, was an additional insured under a subcontractor’s liability policy for purposes of deciding whether the carrier had to defend a personal-injury claim that was filed against Ramara by an employee of the subcontractor who was injured on the job. For Ramara to qualify as an additional insured, the employee’s injury had to be caused, in whole or in part, by some act or omission of the subcontractor (which was the employee’s employer). The Pennsylvania Workers Compensation Act prohibited the injured party from suing his employer for his injuries. Accordingly, the complaint against Ramara made no reference to any act or omission by the subcontractor. Looking exclusively at the four corners of the complaint, therefore, the carrier denied Ramara a defense. The United States Court of Appeals for the Third Circuit, however, rejected such a slavish adherence to the four corners rule when there were obvious considerations within the carrier’s knowledge that triggered the duty to defend: “The four corners rule—even under Pennsylvania’s strict construction—does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts. Quite the opposite, knowledge that an injured employee has a claim under the Workers’ Compensation Act must be factored into a determination of whether his allegations in an underlying tort complaint potentially trigger an obligation on an insurer to provide coverage for a defendant in the underlying case.” The case makes my top 5 because the issue whether to peek outside the four corners of the complaint to determine the duty to defend is a vexing issue that arises in a great many cases. By eschewing a rule that would permit “willful blindness” of coverage-triggering facts, the Third Circuit’s decision could be the thin edge of the wedge in introducing facts outside the complaint in four-corners-rule states.
4. Travelers Indem. v. Portal Healthcare Solutions, C.A. No. 14-1944 (4th Cir. 2016). (Get a copy of the opinion here.)
To access coverage under a personal and advertising liability coverage part of a standard commercial general liability policy, an insured has to show, among other things, that it has engaged in “publication” of information that results in offenses such as libel, slander, invasion of privacy, copyright infringement, and misappropriation of advertising ideas. In Portal, the United States Court of Appeals for the Fourth Circuit held that an insurer must defend its insured in an underlying case alleging that the insured had failed to secure a hospital’s medical records that became accessible online. The opinion affirmed a lower-court decision that held that the mere availability of information online equates to a “publication” for purposes of triggering coverage under a personal or advertising injury provision in a general liability policy. The decision is important because it provides policyholders a basis for tapping into data breach coverage in a CGL policy under the right circumstances.
5. Westchester Surplus Lines Inc. Co. v. Keller Transport, Inc., 382 Mont. 72, 365 P.3d 465 (2016). (Get a copy of the opinion here.)
This case makes my list for three reasons. First, it was decided by a state Supreme Court, in this case the Supreme Court of Montana, which makes it more likely that courts in other states will cite it for persuasive authority. Second, it found ambiguity in a policy term that appears in virtually every standard commercial general liability policy. Third, the consequences of the ambiguity were incredibly costly to the insurer: It ended up paying its $4 million “General Aggregate Limit” twice for a claim arising out of the same occurrence.
An insured’s tanker truck overturned on a highway, spilling thousands of gallons of gasoline that contaminated private property adjacent to the highway. This incident triggered coverage under two primary policies, an auto liability policy and a general liability policy. It also triggered coverage under an excess policy after exhaustion of the coverage in the primary policies. The excess policy sat above both the Auto and the GL primary policies. It provided limits of liability of $4 million per occurrence and $4 million in a “General Aggregate Limit.” The term “General Aggregate” was undefined in the policy. The primary Auto carrier paid its $1 million per-accident limit and the excess carrier paid its $4 million per-occurrence limit under the Auto liability part of the policy. The insured then sought an additional $1 million from the primary carrier under the GL coverage part and $4 million more from the excess carrier under its GL liability coverage. The excess carrier pointed to the General Aggregate Limit in its policy and argued that it should only have to pay the $4 million limit once, not twice. Noting that the policy did not define the term “General Aggregate Limit,” the court observed that, although the policy “makes clear there is a $4 million aggregate limit on something, a reasonable insurance consumer might draw two different, but plausible, interpretations. On one hand, the $4 million general aggregate limit might represent the maximum liability of the entire excess policy, so that $4 million exhausted under one coverage would mean there was nothing available under the other coverage. On the other hand, the $4 million general aggregate limit might represent the maximum liability under each coverage, so that $4 million exhausted under one coverage had no bearing on the limits available under the other coverage.” The carrier’s “failure to define ‘general aggregate’ makes one no more plausible than the other.” Accordingly, the excess carrier was on the hook for an additional $4 million for this occurrence.