A unanimous panel of the Illinois Appellate Court recently held that three insurers have a duty to defend any case in which the bare underlying allegations - if proved - would render their insured liable, regardless of extrinsic facts. This sweeping ruling confirms that the duty to defend is a form of "litigation insurance," protecting the insured against the costs of being wrongly sued, however groundless the claims against it may be. The case is Illinois Tool Works Inc. and ITW Finishing LLC v. Travelers Casualty and Surety Company, et al.
Monday, we published our client alert A Boost for Business: Time to Reaffirm or Secure Terrorism Insurance. The Alert discusses H.R. 26, a bill signed into law on January 12, 2015 by President Obama enacting the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA of 2015). TRIPRA provides a federal backstop for insurance against risks of terrorism and extends until 2020 the Terrorism Insurance Program established under the Terrorism Risk Insurance Act (TRIA) of 2002, which expired at the end of 2014. The measure lifts a cloud of uncertainty that was proving difficult for property owners, especially in major metropolitan areas, as there was insufficient capacity in the private insurance market to meet their needs.
The Texas Supreme Court confirmed that it will decide an issue of Texas law that was certified to the Court by the U.S. Court of Appeals for the Fifth Circuit. The case is McGinnes Industrial Maintenance Corporation v. The Phoenix Insurance Company; The Travelers Indemnity Company. The issue is whether the receipt of Potentially Responsible Party (PRP) letters and unilateral administrative order, issued pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), from EPA Region 6 is a "suit" that triggers a duty by the insurers to defend, investigate and settle.
New Jersey's Appellate Division recently reversed a trial court's dismissal of a general contractor's claim against a performance bond, holding that the bond must cover the general contractor as the intended obligee, even though the general contractor was not expressly named in the bond.
In Allied Building Products Corp. v. J. Strober & Sons, LLC, et al., A-1113-12T4 (NJ App. Div., September 5, 2014), Dobco, Inc. ("Dobco") was the general contractor for a science hall renovation project at William Paterson University. J. Strober & Sons, LLC ("Strober") bid for and was awarded a roofing subcontract on the project. The subcontract between Dobco and Strober required Strober to obtain payment and performance bonds, in the form annexed to the Dobco-Strober subcontract (which required that Strober be named obligee on the bonds).
New Jersey Appellate Division Orders Reformation of Surety Bond Consistent With Terms of its Principal's Contract
New Jersey's Appellate Division recently reversed a trial court's dismissal of a general contractor's claim against a performance bond, holding that the bond must cover the general contractor as the intended obligee, even though the general contractor was not expressly named in the bond.\n\nIn Allied Building Products Corp. v. J. Strober & Sons, LLC, et al., A-1113-12T4 (NJ App. Div., September 5, 2014), Dobco, Inc. (\"Dobco\") was the general contractor for a science hall renovation project at William Paterson University. J. Strober & Sons, LLC (\"Strober\") bid for and was awarded a roofing subcontract on the project. The subcontract between Dobco and Strober required Strober to obtain payment and performance bonds, in the form annexed to the Dobco-Strober subcontract (which required that Strober be named obligee on the bonds).
The United States District Court for the District of Oregon held that property damage incurred to a condominium project resulting from a myriad of construction defects constituted just one occurrence under the relevant excess general liability policy.
In Chartis Specialty Ins. Co. v. American Contractors Ins. Co. Risk Retention Group et al., Case No. 3:13-CV-1669 (D. Ore. Aug. 12, 2014), the owners association of a condominium complex sued its developers for property damage incurred to the condominium as a result of numerous and distinct construction defects. The owners association alleged that the developers failed in their duties as developers to build the condominium complex free from defects. The alleged defects included errors in the construction of the roof, fire sprinklers, insulation, and windows and doors, resulting in total damages of $3.6 million.
Zurich has updated its "Litigation Management Guidelines" to give the insurer an unprecedented level of control over defense counsel's activities. The new Guidelines adopt the Recommended Case Handling Guidelines for Insurers created by The Defense Research Institute, and also append an extensive Addendum covering business policies, expense and professional fee payment, and other administrative points.
The Guidelines purport to impose a sweeping waiver of attorney-client privilege and work product protection, even though the law in most states imposes significant limitations on an insurer's access to privileged or protected information developed by defense counsel - especially where the insured is entitled to so-called Cumis or independent counsel as a result of conflicts of interest with its insurer. Zurich's Guidelines mandate almost complete and constant transparency in case development and strategy, stating "counsel should provide a significant development report to immediately communicate important case developments to the claims professional, such as settlement overtures by other parties, codefendant strategies or developments, new information obtained through discovery, etc." The Addendum also requires counsel to "enunciate the impact of the information being conveyed," specifically on "case strategy, evaluation, posture, and resolution opportunities." Zurich essentially attempts to coerce insureds to waive the attorney-client privilege and work product protection by expressly stating that Zurich reserves the right to review defense counsel's files and will not pay for defense activities for which Zurich is not given access to "full" explanation and documentation.
On June 23, 2014, the Second Circuit Court of Appeals issued a decision in the case Dormitory Authority of the State of New York v. Continental Casualty Company (2014 WL 2808073), a declaratory judgment action filed by a building owner against the architect's insurance carrier over the faulty design of a dormitory. The issue in this case was whether two design defects in the structure of the building were "related." The owner sought a declaration that the design flaws were two separate defects because, if so, two separate policies would have responded to the claims, but if not, there would not have been sufficient limits to remediate both defects. Although this decision has not received much attention yet, the importance lies in the Second Circuit's agreement that the defects were separate, notwithstanding policy language that attempted to group related wrongful acts.
Second Circuit - Architect's Faulty Designs Were Two Separate Defects
On June 23, 2014, the Second Circuit Court of Appeals issued a decision in the case Dormitory Authority of the State of New York v. Continental Casualty Company (2014 WL 2808073), a declaratory judgment action filed by a building owner against the architect's insurance carrier over the faulty design of a dormitory. The issue in this case was whether two design defects in the structure of the building were \"related.\" The owner sought a declaration that the design flaws were two separate defects because, if so, two separate policies would have responded to the claims, but if not, there would not have been sufficient limits to remediate both defects. Although this decision has not received much attention yet, the importance lies in the Second Circuit's agreement that the defects were separate, notwithstanding policy language that attempted to group related wrongful acts. \n\n\n
How confident are you that the payment bond your subcontract required you to obtain falls within your state's payment bond statutory scheme? In Hard Hat Workforce Solutions, LLC v. Mech. HVAC Servs., Inc., 406 S.C. 294, 296, 750 S.E.2d 921, 922 (2013), the Supreme Court of South Carolina reversed the Special Circuit Courts decision granting summary judgment relief for a surety defendant on the theory that the plaintiff, a fourth-tier subcontractor, need not provide notice as required by statute because the bond at issue was a common-law, not statutory, bond. (Full write up, after the jump.)
On Thursday, March 13, a California Court of Appeal found substantial evidence that State Farm General Insurance Co. (State Farm) had a duty to defend North Counties Engineering Inc. (North Counties) under a policy that included products-completed operations coverage notwithstanding that the policy also included a professional services exclusion. The Court, in North Counties Engineering Inc. v. State Farm General Insurance Co., Case No. A133713, ordered State Farm to cover North Counties' defense costs in two lawsuits filed in 2004 in connection with construction of a dam that had been completed in 1999 for Lolonis Winery (Lolonis). It reversed the trial court's order granting State Farm's motion for a directed verdict and, among other things, reconfirmed that the insurer "owes a broad duty to defend its insured against claims that create a potential for indemnity" and "any doubt 'as to whether the facts give rise to a duty to defend is [to be] resolved in the insured's favor.'" On remand, judgment will be entered confirming that State Farm had a duty to defend North Counties.
One of the first tactical lessons most litigators learn is not to overstate your position. Another lesson is to always remain civil, even in the face of an un-civil opponent. These lessons are sometimes difficult for young lawyers, brimming with aggression, to digest. Most of the time when one of those lawyers inserts unfortunate language in a brief--say, openly mocking the opponent's argument--cooler heads prevail and a sage senior lawyer excises the offending language.
"There are good reasons not to call an opponent's argument "ridiculous," which is what State Farm calls Barbara Bennett's principal argument here. The reasons include civility; the near-certainty that overstatement will only push the reader away (especially when, as here, the hyperbole begins on page one of the brief); and that, even where the record supports an extreme modifier, "the better practice is usually to lay out the facts and let the court reach its own conclusions." Big Dipper Entm't, L.L.C. v. City of Warren, 641 F.3d 715, 719 (6th Cir.2011). But here the biggest reason is more simple: the argument that State Farm derides as ridiculous is instead correct."
Ouch. Whatever feeling of satisfaction that lawyer had when he wrote "ridiculous" in his brief must have felt worlds away when he read that opinion.
There's another lesson here: Always carefully review defined terms in your insurance policy. In Bennett, "The question presented is whether Bennett was an "occupant" of the Fusion--as that term is defined by State Farm's policy--at the time she was on the vehicle's hood. If she was, then she is entitled to coverage for the injuries she sustained there; if not, then not." The policy defined "occupying" as "in, on, entering or alighting from." Since Mrs. Bennett was "on" the car, she was "occupying" it as defined by the policy.
One last lesson for insureds: Don't give up too easily. It would have been very easy for Mrs. Bennett to hang her head when State Farm denied her claim because she was on the hood, and wasn't an "occupant" of the car. But she stuck with it and pressed her case. Good for her.
You'd be surprised at how often we find mistakes at the beginning of projects that, if not caught, would put most of a client's insurance coverage at risk. Clients frequently ask us to review their controlled insurance programs (often referred to as "CIPs" or "Wrap-Ups") before implementing them. Brokers do much of the heavy lifting in structuring these programs, but many of our clients like to have coverage attorneys review them for some nuances that lawyers who litigate coverage issues will pick out. The issues get pretty esoteric, but some esoteric issues can be worth a lot of money. Lately, I've been seeing one particular type of exclusion in Wrap-Ups that, if it remained and were enforced, could jeopardize much of the coverage the client thought they were buying in the Wrap-Up: a "Cross-Suits" exclusion.
Under a Wrap-Up, the owner (under an "Owner Controlled Insurance Program or "OCIP") or general contractor (under a Contractor Controlled Insurance Program or "CCIP") and all contractors and subcontractors of every tier are named insureds under certain project insurance, typically general liability and workers compensation. When properly administered, a Wrap-Up program can increase project savings, reduce litigation, provide more complete coverage for completed operations, increase Minority and Women Business Enterprise participation, among other benefits.
But Cross-Suits Exclusions are children of a different type of insurance set-up, a more traditional program where individual contractors and subcontractors buy their own insurance and some are required to make others additional insureds. This exclusion precludes coverage for claims brought by one insured against another insured. A typical Cross Suits Exclusion provides: "This insurance does not apply to: . . . Suits brought by one insured against another insured." These would, for example, avoid the "moral hazard" of a parent company suing its own subsidiary to trigger liability coverage.
But in a Wrap-Up, this doesn't make any sense. Remember, in a Wrap-Up, the owner, general contractor and all subcontractors are all named insureds. So a Cross-Suits exclusion would bar coverage for any liability the general contractor may have to the owner for losses arising from it or its subcontractors negligence. That's a significant part of the coverage that an owner would want its contractor to have on a GL policy. If a Cross-Suits exclusion remained and were enforced, the only liabilities covered would be to third parties--parties that have nothing to do with the project.
A similar limitation is created when a Cross Suits Exclusion is included in a CCIP. Although in that circumstance there may be coverage for a contractor's liability to the owner (if the owner is not a named insured), contractors will not be able to trigger coverage for their own losses arising from the negligence of another contractor/subcontractor on the project. For example, the general contractor will not be able to trigger the Wrap-Up program for losses it incurs as a result of its subcontractors' negligence.
This is just an example of an exclusion that plainly doesn't belong in a Wrap-Up program, but that we've seen almost inserted in them recently. Make sure to have a reputable broker review your programs before implementing them and consider investing a small amount to have a coverage attorney review it. Prior planning prevents poor performance.