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Iowa Supreme Court Hears Case on Meaning of "Occurrence" in Construction Defect Context
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A case currently before the Iowa Supreme Court could have important consequences for insurers in connection with the definition of "occurrence" in construction defect cases. Specifically, the court will examine whether defective subcontractor work constitutes an "occurrence" under a general liability policy; and whether defective work itself, or damage caused by defective work, constitutes an "occurrence." Nat'l Sur. Corp. v. Westlake Investments, LLC, 872 N.W.2d 409 (Iowa Ct. App. 2015).
The appellate decision affirmed a ruling that water damage resulting from faulty subcontractor work could constitute an "occurrence" because: (1) subcontractor exceptions to "your work" and other exclusions indicate faulty subcontractor work could be covered; and (2) damage was alleged beyond the subcontractors' faulty work itself. The appellate decision distinguished the Iowa Supreme Court's last "occurrence" decision, Pursell Construction, Inc. v. Hawkeye Security Ins. Co., 596 N.W.2d 67 (Iowa 1999), on the basis that Pursell did not address coverage for damage beyond the insured's work, and acknowledged a split with another appellate decision, W.C. Stewart Construction, Inc. v. Cincinnati Ins. Co., No. 08-0824, 2009 WL 928871 (Iowa Ct. App. Apr. 8, 2009).
The insurer's application for further review argued that construction defects and any resulting damage cannot constitute an "occurrence," which the insurer described as the "established approach." The application may create a comparison between a "middle-ground approach" (where damage resulting from construction defects may be an "occurrence," but the defects themselves are not), and an "extreme approach" (where both defective work and resulting damages may be an "occurrence"). This could be the first time a court has ever adopted such a distinction, which could have a significant impact on the amount of limits available, number of retentions that must first be paid, and number of insurers or policies implicated.
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Texas Federal Court to Address Novel Cyber PCI Coverage Issues
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Does a cyber policy's payment card industry coverage provision cover attorneys' fees to pursue affirmative claims against card processors to recoup withheld funds? The U.S. District Court for the Southern District of Texas will address this issue in Spec's Family Partners, Ltd. v. The Hanover Ins. Co., Case 4:16-cv-000438. According to the complaint filed by the retailer (Spec's), after two separate data breaches of Spec's payment card network, MasterCard issued two "assessments" to Spec's card processor, FirstData. FirstData demanded that Spec's indemnify it for $9.5 million. FirstData allegedly withheld from Spec's $4.2 million in daily credit card settlements.
Hanover acknowledged a duty to defend Spec's, and consented to counsel and payment of defense expenses incurred in connection with the claim. Spec's then sued FirstData in Tennessee federal court for breach of contract relating to FirstData's withholding of the assessments. Spec's alleged that Hanover must pay as defense expenses the costs that Spec's incurred in its affirmative efforts to obtain the withheld funds.
This litigation raises novel questions under cyber PCI coverage agreements. The case may also provide guidance for drafting coverage position letters with regard to acknowledging a "defense" obligation under the language of a PCI coverage grant.
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The Sum of Its Parts? Wisconsin Supreme Court Rules in Favor of Insurers
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In a fascinating 3-2 decision, the Wisconsin Supreme Court ruled in favor of the commercial liability insurers of two probiotic suppliers, Nebraska Cultures of California and Jeneil Biotech, Inc., finding they do not have to defend or indemnify their insureds in a breach of contract action stemming from the recall and destruction of health supplements that contained the wrong ingredient. Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, No. 2013AP613, 2013AP687, 2016 WL 785203 (Wis. Mar. 1, 2016).
The court employed an "integrated system analysis," a concept derived from the economic loss doctrine that bars recovery of contract or warranty damages in tort actions. Under this analysis, damage to the integrated whole caused by incorporating the wrong ingredient in the tablet is deemed damage to the product itself, and not covered damage to other property. In so ruling, the court reiterated that CGL policies are intended to cover risk if the insured's goods, products, or work cause damage to property other than the insured's product or completed work; CGL policies are not performance bonds.
Addressing the second prong of the property damage definition, the court found that the damages sought were not for loss of use of tangible property that had not been physically injured, but were for the loss of the value of the tablets and, therefore, not covered. The court also held that the insured's faulty workmanship in supplying the wrong ingredient did not constitute an accident. Finally, the court found that both policies' business risk exclusions preclude coverage.
The result in Wisconsin Pharmacal illustrates a thoughtful analysis of the interplay between property damage (covered under CGL policies) and economic loss (not covered).
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New York Court of Appeals Enforces Arbitration Agreement In Insurance Policy Under California Law
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New York's highest court recently gave a boost to insurers' ability to enforce arbitration provisions in insurance contracts. The Federal Arbitration Act (FAA) requires that when parties agree to arbitrate, they must do so rather than go to court. However, the federal McCarran-Ferguson Act provides that no federal statute may be construed to "invalidate, impair or supersede" state insurance law unless the federal law specifically relates to the business of insurance. In the event of a conflict, McCarran-Ferguson creates "reverse preemption," and state insurance law prevails.
The New York Court of Appeals recently enforced an arbitration agreement over a challenge based on "reverse preemption." In In re Monarch Consulting Inc., et al. v. National Union Fire Ins. Co. of Pittsburgh, Pa.
, Case No. 08 (N.Y. Feb. 18, 2016), the insureds argued that arbitration agreements in workers compensation policies were unenforceable, because McCarran-Ferguson and California Insurance Code Section 11658 reverse preempted the FAA. Section 11658 requires insurers to file workers' compensation policies with the California Commissioner of Insurance. The insurer did not file the relevant agreements, which allegedly contained a New York arbitration clause that delegated to the arbitrator even the issue of whether the dispute must be arbitrated. The insureds argued that compelling arbitration under the FAA, even though the agreements were not filed, would impair and undermine Section 11658. Thus, McCarran-Ferguson should prohibit enforcement of the arbitration clause.
The New York Court of Appeals disagreed, holding that the FAA applies because it does not "invalidate, impair, or supersede" Section 11658 or any other California law. Further, the parties had delegated the question of arbitrability and enforceability to the arbitrators. Accordingly, the court granted National Union's petition to compel arbitration.
This decision from an influential appellate court should help insurers enforce arbitration provisions in insurance contracts.
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District of Oregon Holds Settlement of Trademark Infringement Claim Does Not Implicate "Advertising Injury" Coverage
In February, the U.S. District Court for the District of Oregon granted summary judgment to our client, Allied World Assurance Company (U.S.) Inc., finding Allied World and its fellow insurers had no duty to indemnify the insured for its settlement of a trademark infringement and breach of contract lawsuit.
In Willowood USA LLC, v. Allied World et al., Civ. Case No. 6:15-cv-01050-MC, the court addressed whether the insurers had a duty to indemnify an agricultural pesticide distributor for money paid to settle an underlying lawsuit in which the court had previously determined that the insurers did not have a duty to defend. The court concluded there was no duty to defend because the claims against Willowood were predicated on its unauthorized use of its former business partner's trademark, not its advertising activity. Thus, the requisite causal connection between the advertising injury and advertising activity was missing.
Turning to the duty to indemnify, the court considered the insured's declaration that it settled the lawsuit because it believed it was vulnerable to liability for what it believed was a covered claim. The court agreed with Allied World that the declaration was insufficient to constitute evidence creating a question of fact. Thus, the court concluded there was no coverage for the claim.
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Massachusetts Supreme Court Rejects Selective Tender Rule
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| Our client, the Insurance Company of the State of Pennsylvania, secured a significant appellate victory in the Massachusetts Supreme Court last month in Insurance Company of the State of Pennsylvania v. Great Northern Insurance Company, No. SJC-1187, 2016 WL 884691 (Mass. Mar. 7, 2016). The supreme court's ruling resolved a question of first impression certified from the First Circuit Court of Appeals, establishing that worker's compensation co-insurers are required to share equitably in covering a loss even if the insured selectively tenders the claim to one insurer.
This dispute arose from an injury sustained by the insured's employee while traveling on an overseas business trip. The court held that even though the insured had tendered the subject work-related claim only to ICSOP, ICSOP had the right to equitable contribution from Great Northern. In so finding, the court overturned the district court's targeted tender ruling, noting that the selective tender doctrine is not in accord with Massachusetts law governing general liability insurance policies, and is contrary to public policy because it rewards insurers that ignore their coverage obligations at the expense of those that conscientiously honor them.
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Seventh Circuit Upholds Recission on Basis of Material Misrepresentations
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| In Essex Insurance Co. v. Galilee Medical Center, et al., No. 14-1791, 2016 WL 8515688 (7th Cir. Mar. 4, 2016), the Seventh Circuit Court of Appeals affirmed summary judgment in favor of our client, Essex Insurance Company, holding that Essex properly rescinded a medical malpractice policy based on material misrepresentations in the application.
The insureds represented in their applications that they did not use drugs for weight reduction, and did not use experimental treatments. They then sought coverage for a lawsuit that was brought by a patient alleging injury resulting from mesotherapy, which involves the use of non-FDA-approved injections to dissolve fat. They argued there had been no misrepresentation, because mesotherapy is used for "size reduction" rather than "weight loss." They also argued that they did not "use" mesotherapy at the clinic, because the doctor recommended it at the clinic but administered it at his home.
The Seventh Circuit agreed with the district court that the weight reduction-versus-size reduction argument was "disingenuous, at best." The court found that the applications contained misrepresentations, and that they were clearly material because the use of mesotherapy led directly to the claim.
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Expanding Footprint, Enhancing Service
We continue to expand our national appellate practice with the addition of
Kim Hartman, a seasoned practitioner with an impressive track record of briefing and oral arguments in actions across the United States. Kim has almost 15 years of experience representing clients during the post-trial and appellate stages of civil litigation in a variety of areas, including construction, product liability, professional liability, insurance coverage, premises liability, and first-party property.
We are delighted to announce that
Jared Clapper,
Ian Cooper,
Katherine Mast, and
Matthew Sorem were elected to the partnership in January 2016.
This year,
Super Lawyers Magazine designated the following partners as Super Lawyers, a distinction received by no more than 5% of practicing lawyers:
Matthew Fink,
Robert Marshall,
Barbara Michaelides,
Richard Nicolaides, Jr.,
Sara Thorpe, and
Jonathan Viner. In addition, we were so pleased to see these attorneys named Rising Stars:
Daniel Graham, Jr.,
Jodi Green,
Joseph Lang,
Cody Moon, and
Ethan Siebert.
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Recent Event
April 2016: Jonathan Viner addressed issues that arise after an insured settles and seeks indemnity from its insurer in a presentation entitled "That Settles It" at the DRI's annual Insurance Coverage and Claims Institute in Chicago.
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A Minute to Meet...
Kim Hartman
You've just joined Nicolaides, what attracted you to the firm?
The firm has an excellent reputation both in the insurance coverage field as well as in broader appellate practice. Working together with, and across the aisle from, the firm I have seen great people doing superb legal work for an impressive stable of longtime clients. Those three qualities are so important in determining fit.
What is an important or emerging issue you see in your practice?
One issue that we see more and more relates to settlement agreements entered into by plaintiffs and insureds without the participation of insurers. The plaintiffs' bar is increasingly aggressive and secretive in entering into these potentially collusive deals, often punctuated by a stipulated judgment, when insurance coverage is disputed and/or the insurer is not controlling the defense. The agreements typically involve a settlement of stipulated judgment for policy limits, which the plaintiff agrees to execute only against insurance proceeds. The lack of any adversarial relationship can greatly inflate damages, especially in cases where liability should be disputed. Insurers can challenge such agreements based upon the insured's failure to comply with policy conditions, application of policy exclusions, and the settlement's lack of reasonableness. The results of such challenges vary across jurisdictions.
What do you enjoy doing outside of the courtroom?
I love spending time with my family-my husband and twins. And I love reading, gardening, and being outdoors.
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For questions or comments about these articles, or any other legal issues, please feel free to contact your primary relationship partner or Insurance Insights editor, Sara Thorpe, at:
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Nicolaides Fink Thorpe Michaelides Sullivan LLP is a global law practice dedicated to representing the interests of insurers and reinsurers. From offices across the U.S., the firm counsels its clients and litigates complex coverage disputes around the world. The firm's market-leading appellate practice prosecutes and defends a broad spectrum of appeals nationwide, and frequently participates in high exposure trials.
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