New Decision Impacts Opioid Coverage Issues 

The opioid epidemic, recently recognized as a "national emergency," has a far greater breadth than even the daily media storm suggests. This multifaceted crisis has spawned litigation reminiscent of the fight against " Big Tobacco. " A new wave of lawsuits have emerged against drug manufacturers, distributors, pharmacies, and health care providers, including individual class actions; municipal lawsuits seeking costs of public services; criminal prosecutions; and shareholder actions, which impact general liability, professional liability, and D&O policies.

 

Beneath the surface of the opioid epidemic, quietly lie less-publicized, but no less impactful, coverage disputes. Rulings on coverage for municipal lawsuits offer conflicting results. For example, on November 6, 2017, a California appellate court upheld a finding of " no occurrence " in connection with municipal lawsuits against a drug manufacturer. See Traveler’s Property Casualty Co. of America v. Actavis, Inc. et al., 2017 WL 5119167 (Cal. App. Ct., Nov. 6, 2017). The court held that municipal lawsuits against drug manufacturers did not allege an " accident " because they were based on intentional marketing of opioids. In absolving the insurer of a duty to defend, the court relied on allegations that manufacturers knew that (1) opioids were unsuited for long-term, non-acute pain treatment and (2) opioids were highly addictive and subject to abuse. The court reasoned that it was not unexpected that opioid marketing " would lead to increased opioid addiction and overdoses " and " a resurgence in heroin use. "

 

In reaching its decision, the court distinguished rulings against distributors finding an " occurrence. " See Liberty Mut. Fire Ins. Co. v. JM Smith Corp ., 602 Fed. Appx. 115 (4th Cir. 2015); Cincinnati Ins. Co. v. Richie Enter., LLC, 2014 WL 3513211 (W.D. Ky. July 16, 2014). As the Travelers opinion highlights, it is important to evaluate each case based on its specific facts in connection with applicable jurisdictional precedent. Courts addressing other coverage issues have also reached disparate results. Compare Travelers Prop. Cas. Co. of Am. v. Anda, Inc. , 90 F. Supp. 3d 1308 (S.D. Fla. 2015) (finding damages were not " for " bodily injury) with Cincinnati Ins. Co. v. H.D. Smith, LLC. , 829 F.3d 771 (7th Cir. 2016) (finding damages because of bodily injury).

Missouri Enacts Favorable Legislation 

for Insurers

 

Two statutes of particular importance to insurance companies took effect in Missouri on August 28, 2017. First,  Missouri Revised Statute §537.058  imposed certain strict requirements for time-limited settlement demands .  If the demand fails to comply with any of the requirements, the settlement demand is not admissible evidence of a reasonable opportunity to settle in any lawsuit alleging extra-contractual damages against the insurer. Missouri previously had no such law. 

 

Second,  Missouri Revised Statute §537.065  created a statutory right of intervention in an underlying lawsuit for insurers within 30 days after receipt of written notice of the execution of a covenant not to execute between the claimant and tortfeasor. More specifically, the amended statute provides that before a judgment can be entered against the insured tortfeasor (and after the insured enters into a covenant not to execute), the insurance company must be provided with written notice and 30 days after receipt of the notice to intervene as a matter of right. The amended statute also expands §537.065 to apply to "personal injuries" in addition to "bodily injuries or death."

New York and Michigan Disagree Over

Whether Direct "Hack" is Necessary to

Trigger Computer Fraud Coverage

 

The Southern District of New York held that a thief's "social engineering" scheme that tricked a Medidata employee into transferring nearly $4.8 million to a fraudulent bank account purportedly belonging to the company's president qualifies as covered "computer fraud" under a Computer Fraud policy. Medidata Solutions, Inc. v. Federal Ins. Co. , 2017 WL 3268529 (S.D.N.Y. July 21, 2017).

 

In that case, the Computer Fraud Coverage Insuring Agreement of Federal's policy provided indemnification for direct loss resulting from "computer fraud." The policy definition of "computer fraud" required the unlawful taking or the fraudulently induced transfer of money resulting from a computer violation. "Computer violation" required the fraudulent entry of data into a computer system or fraudulent change to data elements of a computer system.

 

Rather than considering whether there had been a direct entry into Medidata's computer system by the thief, the court analyzed in detail the technical means by which the thief perpetrated its scheme. The court reasoned that because the spoofed emails were "armed with computer code that masked the thief's true identity," and "changed data from the true email address to Medidata's president's address," as well as added his profile photo, there was a "computer violation" and covered "computer fraud."

 

Distinguishing other case law, the court found that "hacking is one of the many methods a thief can use, and 'is an everyday term for unauthorized access to a computer system.'" Federal appealed the decision to the U.S. Court of Appeals for the Second Circuit.

However, in American Tooling Center, Inc. v. Travelers Cas. Sur. Co. , 2017 WL 3263356 (E.D. Mich. Aug. 1, 2017), a Michigan Federal Court granted summary judgment in favor of the insurer on whether a " spoofed " email that convinced the insured to send payment of $800,000 in outstanding invoices owed to a vendor to a fraudulent bank account constituted " computer fraud. " Siding with the majority of the courts that have addressed computer fraud, the Michigan court found the insured did not suffer a " direct loss " that was " directly caused by computer fraud, " as required by the policy. There had been intervening events between the insured’s receipt of the fraudulent email and the transfer of funds, as well as no infiltration of the insured’s computer system. The court specifically distinguished Medidata based on the fact the Travelers policy required the " direct loss " to be " directly caused by Computer Fraud. "  American Tooling has appealed the decision to the U.S. Court of Appeals for the Sixth Circuit.

The lines are blurring between computer fraud and cyber liability coverage based on the specific facts presented as to what constitutes "fraudulent entry of data," confusing the prior bright lines which distinguished a computer "hack" from computer trickery.

Washington Supreme Court

Narrowly Construes Pollution Exclusion

In Xia v. Probuilders Specialty Ins. Co. RRG , 400 P.3d 1234 (Wash. 2017), the Washington Supreme Court issued a very pro-policyholder decision narrowly construing the pollution exclusion. Coverage was sought for a suit by a homeowner against the homebuilder, alleging that negligent installation of a hot water heater caused her to sustain injuries due to carbon monoxide exposure. The CGL insurer denied coverage based on its pollution exclusion. The court reviewed the history of pollution exclusion decisions under Washington law, noting that, to preclude coverage, the injury must stem from either a " traditional environmental harm or a pollutant acting as a pollutant. "

The court concluded that the pollution exclusion did not bar coverage. Unexpectedly importing a concept utilized mainly in the context of first-party coverage, the court noted that Washington courts have repeatedly rejected attempts to draft exclusionary language to evade the " efficient proximate cause " rule that results in coverage " where a covered peril sets in motion a causal chain, the last link of which is an uncovered peril. " The court noted that the claimant’s injuries were the direct cause of exposure to a pollutant, carbon dioxide. Under the facts before it, however, the court concluded that the " efficient " proximate cause was the insured's conduct that set into motion the causal chain ultimately resulting in the claimant’s injuries, i.e., the insured’s mere negligent installation of the hot water heater. Because the efficient proximate cause was not a pollution event, the court concluded that the pollution exclusion did not apply.

Moreover, the court went a step further and found the insurer’s denial was in bad faith, resulting in an award of costs and attorneys’ fees incurred by the insured in litigating coverage. Despite acknowledging that the court had never before applied the efficient proximate cause rule to a case involving similar facts, the court noted that the allegations of negligent installation ( " a covered occurrence " ) provided a " reasonable and conceivable basis " from which the insurer might have concluded that a non-polluting act potentially served as the efficient proximate cause. Clearly, this is a concerning development with respect to any pollution-related coverage determination under Washington law.

New Jersey Court Expands and Clarifies

Continuous Trigger in

Construction Defect Claims

In Air Master & Cooling, Inc. v. Selective Ins. Co. of America, 2017 WL 4507547 (N.J. Super. App. Oct. 10, 2017), the New Jersey appellate court held the " continuous trigger " of coverage applied to disputes over defense and indemnification for claims involving continuous and progressive " property damage " resulting from defective construction work. Given the well-established history of the continuous trigger in New Jersey – most significantly the Owens-Illinois decision applying that in the asbestos property damage context – this is perhaps unsurprising.

More interesting was the court’s analysis as to the end date of the continuous trigger. The court rejected the insured’s " novel " theory that the end date should be the point in time when a manifested injury can reasonably be linked to the particular conduct of the insured seeking coverage. The court reasoned that this proposed end date would be unfair to insurers and spawn unnecessary litigation. The court concluded the proper end date is the time at which the property damage due to defective construction has sufficiently manifested itself, regardless of attribution of fault for the damage. The court did not provide precise guidance as to what would constitute manifestation sufficient to end coverage. However, the court suggested that while " manifestation cannot be merely tentative " (e.g., mere discovery of water intrusion), it does not require definitive or comprehensive delineation. The court hinted that, in the case before it, " manifestation " could take the form of a consultant report indicating the mechanism of the damage and suggesting the possibility that it was caused by defective workmanship.

Recognizing that this determination is itself fact-intensive, however, the court concluded that the record on appeal did not contain sufficient information to permit the determination of the end date. The court therefore vacated summary judgment for the insurer and remanded the case for further development of the factual record.

Seventh Circuit Reverses

Wisconsin Federal District Decision

 

On August 8, 2017, the Seventh Circuit r eversed the Wisconsin federal district court's decision holding that Fireman's Fund and United States Fire Insurance Company had a duty to defend the insured against allegations that its defective windows caused damage to the claimants' homes, including stained walls and buckled plaster. Haley v. Kolbe & Kolbe Millwork Co., et. al.  866 F.3d 824 (7th Cir. 2017).

 

Relying on the "integrated systems" analysis set forth in  Wisconsin Pharmacal Co., LLC v . Nebraska Cultures of California, Inc. , 876 N.W.2d 72 (Wis. 2016), the district court found that damage to parts of the claimants' homes other than the insured's windows did not constitute "property damage" because, when the windows were installed in the homes they became part of an "integrated system," such that any damage to the homes constitutes damage to the insured's product itself, as opposed to damage to "other property."

 

The Seventh Circuit concluded  Pharmacal  did not apply because in that case, the only loss alleged was to use of the products as a whole (a dietary supplement containing ingredients provided by the insured); and, the claimant did not seek reimbursement for the cost of repairing or replacing the products' non-defective ingredients. In contrast, the claimants in  Kolbe  sought compensation for the repair or replacement of individual components of a larger structure. Accordingly, the Seventh Circuit concluded the Wisconsin Supreme Court's integrated-system analysis in  Pharmacal  did not apply.

Invasion of Privacy Exclusion Precludes Coverage for Spam Text TCPA Class Action

 

The Ninth Circuit recently affirmed a California federal district court’s ruling that Federal Insurance Company had no duty to defend or indemnify a class action lawsuit against the Los Angeles Lakers for alleged violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227 ("TCPA"). Los Angeles Lakers, Inc. v. Federal Insurance Co. , 869 F.3d 795 (9th Cir. 2017). The Lakers sued Federal seeking coverage under the Directors & Officers ("D&O") Liability Coverage Section of an insurance policy, and Federal prevailed on a motion to dismiss. The Lakers appealed.

 

The Federal policy included Corporate Liability Coverage for Wrongful Acts. The policy provided that "[n]o coverage will be available" for a claim "based upon, arising from, or in consequence of . . . invasion of privacy." However, the policy did not include an express exclusion for claims made under the TCPA, as is common in CGL policies.

A Ninth Circuit majority ruled that TCPA claims unquestionably alleged invasions of privacy, falling within the category of intrusion on the "right to be let alone." The court noted the TCPA twice explicitly states that it is intended to protect privacy rights, and contains no other statements regarding its purpose. That the underlying plaintiff seeks only economic damages does not change the nature of the claim. 

Because the underlying action only alleged TCPA claims, and there were no known facts to support any other claim for relief, the court ruled there was no legal theory under which the Lakers could establish Federal breached its policy.

This decision further narrows the types of policies under which coverage can be sought for TCPA claims. Most CGL policies now contain specific TCPA exclusions or have otherwise been interpreted as not covering TCPA claims. This holding also confirms that allegations in the complaint and specific policy language determine a carrier’s initial duty to defend under California law.

The concurring and dissenting opinions are noteworthy in that they demonstrate potential alternate constructions of allegations that impact whether an exclusion applies. The concurring opinion focuses on what was pled — taking the position there is no need to hold that a TCPA claim is inherently an invasion of privacy claim because the underlying lawsuit alleged several times that the text message at issue was an invasion of privacy. The dissenting opinion disagrees that TCPA claims are automatically privacy claims, and further concludes that despite allegations relating to privacy, the underlying action did not seek recovery based on invasion of privacy, such that the policy’s privacy exclusion should not apply to preclude coverage for the Lakers.  

Specificity Required for

Reservation of Rights Letters

 

Some courts recently have held that an effective reservation of rights ("ROR") letter requires more specificity than many insurers typically provide.  Harleysville Group Insurance v. Heritage Communities, Inc., et al. , 2017 WL 105021 (S.C. Jan. 11, 2017); see also Advantage Buildings & Exteriors, Inc. v. Mid-Continent Cas. Co. , 449 S.W.3d 16 (Mo. App. 2014); Dale Osborn, Inc. v. Auto Owners Ins. Co.,  2003 WL 22718194, at *3 (Mich. App. Nov. 18, 2003) . These courts have held that it is not enough to quote policy language and state that rights are reserved based on that language without additional explanation of how the provisions might apply. 

In light of these rulings, an ROR letter should provide an explanation of how specific policy provisions may apply to the facts of the claim based on the information available to the insurer. For example, specific allegations in the complaint that the insurer believes implicate the particular coverage issue or defense could be referenced. The ROR can state that the letter is not intended to provide an exhaustive list of facts or allegations that could impact coverage. As the case develops and more information is received, the ROR should be revisited and revised or supplemented as necessary .

Latest California Montrose Decision Addresses Horizontal Exhaustion of Excess Insurance

How courts treat exhaustion of primary and excess insurance in " long-tail " claims involving continuous property damage or bodily injury has given rise to many California appellate decisions. This is not surprising as treatment of exhaustion issues can have a significant bottom-line effect on how primary insurers, excess insurers, and policyholders share liability for a loss. Under California law, absent a term in an excess policy that specifically describes and limits the underlying insurance, a "horizontal exhaustion" rule applies in continuous loss cases, i.e. all primary policies must exhaust before any " secondary " excess policy attaches.

The California Court of Appeal enforced this position recently in Montrose Chem. Corp. v. Superior Court , 222 Cal. Rptr. 3d 748 (Cal. Ct. App. 2017), the latest appellate ruling from Montrose’s decades-old claim for coverage for underlying environmental pollution. The Montrose court rejected the parties’ requests for a broad rule of horizontal or vertical exhaustion, indicating (as should be no surprise) that whether the rule applies depends on the policy's language. The court held that the excess policy's " other insurance " clauses are an important part of analyzing the policy language.

Montrose requested a ruling from the trial court that it could "electively stack " (vertically exhaust) excess policies, i.e., it could access any excess policy in any year as long as the underlying policies for that year had exhausted. The excess insurers opposed this and many sought a ruling that no insurer had a duty to pay until Montrose first horizontally exhausted all of its lower-lying excess policies in all triggered policy years. The excess insurers prevailed outright and Montrose sought further review.

The Court of Appeal reversed in part, holding that elective stacking is inconsistent with the language of at least some of the policies and was not compelled by California Supreme Court authority. 

The appellate court held that the answer depended on the policy's language including the " other insurance " provision. The court rejected Montrose’s reliance on Dart Industries, Inc. v. Commercial Union Ins. Co. , 28 Cal.4th 1059 (2002) for the proposition that such clauses are relevant only to apportionment among insurers.

Montrose filed a petition for review in the California Supreme Court, so this is not the last word on the subject.

Advancing Our Clients' Interests

 

Matt Fink , Cody Moon , and  Kelly Stoltz recently secured a decisive summary judgment ruling on bad faith claims alleged against our clients.

By way of background, truck owners sued the insured, Donaldson Co., and the truck dealer, Burroughs, for engine damage caused by defective air ducts designed by Donaldson for trucks sold by Burroughs. Burroughs filed a cross-claim against Donaldson to recover reputational damages and lost profits resulting from these claims. The underlying lawsuits were resolved within one $500,000 deductible. The Burroughs cross-claim was ultimately settled for $6 million, funded by our clients under a reservation of rights to reallocate the settlement.

We filed a declaratory judgment action to recover settlement amounts within Donaldson’s deductibles and/or Federal’s excess coverage. Donaldson counterclaimed and sought a declaration that the batch clause endorsement applied to aggregate all property damage as one occurrence under our clients' 01-02 policies and that a single $500,000 deductible applies, and alleged bad faith.



The court held that the batch clause endorsement applied, that damages were caused by two occurrences, and that Donaldson received first notice of injury during the 99-00 policy period. As a result, Donaldson was obligated to reimburse an additional deductible, and Federal will be required to reimburse our clients $2.7 million.

Most recently, the court granted summary judgment in our clients favor against Donaldson’s bad faith counterclaim. It was the last hurdle before we can move for entry of judgment to recover approximately $1 million from the insured and $4.9 million from Federal.

The district court adopted our arguments and its order clarifies Minnesota law regarding bad faith. The court found that our clients did not act in bad faith because they made reasonable, good faith arguments in their coverage positions. Further, the court found that our filing of the lawsuit to seek allocation of the underlying settlement was not a breach of contract, and the reservation of rights did not constitute a per se conflict of interest triggering a duty to notify Donaldson of the conflict and a right to independent counsel.

The full text of the opinion is available  here .

Partners Sara Thorpe & Monica Sullivan 

Earn High Honors

Monica Sullivan and Sara Thorpe were both recognized among the 2017 " Women in Law " by Chicago Lawyer.

Sara Thorpe also   has been named to the 2018 Edition of  The Best Lawyers in America©   in Insurance Law.

Monica focuses on insurance coverage litigation and arbitration for international clients, and advises on pharmaceutical, environmental, construction, professional and product liability claims. 



Sara counsels and tries cases for insurers in complex, high-stakes matters, including those involving excess insurance issues, " Buss " recovery, and bad faith.

Did You Know This About Our Firm? 

 

Our Firm has attorneys licensed to practice in the State of Colorado, where we have successfully represented the interests of our clients in state courts, as well as from the federal district court level to the Tenth Circuit Court of Appeals. Representative cases include: National Union Fire Ins. Co. of Pittsburgh, Pa. v. Intrawest ULC , 213 F.Supp.3d 1333 (D. Colo. 2016) ( " property damage " matter); LNC Communities II, LLC v. Am. Safety Risk Retention Group , District Court City and County of Denver, Colorado, Case No. 11-cv-2997, (D. Colo. Apr. 18, 2013) ("property damage" matter); Dish Network Corp. v. Arrowood Indem. Co. , 734 F.Supp.2d 1173 (D. Colo. 2010), aff’d 772 F.3d 856 (10th Cir. 2014) ( " advertising injury " matter) . 

 

Most recently, on September 19, 2017, the U.S. District Court for the District of Colorado entered an order granting our client's motion to review the taxation of certain costs, increasing the costs awardable after obtaining summary judgment. National Union Fire Ins. Co. of Pittsburgh, Pa. v. Intrawest ULC, et al. , Case No. 13-cv-00079 (D. Colo. Sept. 17, 2017).

Notable Speaking Engagements

Recently, Richard Nicolaides

spoke to insurance industry representatives at the Asia Pacific Insurance Conference (APIC) in Singapore on a variety of liability and insurance coverage issues. The APIC conference hosts insurance industry executives and focuses on issues relevant to the Asia Pacific region specifically, and globally as a whole. APIC is organized by a collection of major insurance related organizations, affiliated under the auspices of the International Insurance Law Association/ Association Internationale de Droit des Assurances (AIDA).

In September, Cody Moon and Mary Licari presented to clients regarding the challenging insurance coverage issues that can arise under Missouri law.

Sara Thorpe , Joe Lang , Mary Licari , and Cynthia Keener presented to clients in October at a seminar on qualifying and challenging experts on claims, underwriting, and other issues.

In October, Richard Nicolaides and Samantha Riley presented "Reinsuring Cyber Risks: Cyber Policies, Claims and Aggregation" and "Lawyers Professional Liability and Cyber Risks" to the Firm's London-based clients.

Appointments and Accolades

As part of her work with the Defense Research Institute’s Appellate Advocacy Committee, Jodi Green was appointed chair of " Writer’s Corner," a monthly column in DRI’s magazine For the Defense . Writer’s Corner is focused on the venerable art of communication in the legal profession. 

Patricia Daza-Luu , in the Firm’s Los Angeles office, was named Litigation Co-Chair of the Women Lawyers Association of Los Angeles (WLALA). WLALA is a respected advocate for female attorneys, persons of color, the disadvantaged, and underrepresented in Southern California, and is one of the largest minority bar associations in California. As Litigation Co-Chair, Trisha will be in charge of the annual Litigators Forum, which brings lawyers from around the county and beyond together for practical education and networking. At last year's event (which Trisha co-chaired), the program focused on gender discrimination during litigation. The panel of speakers included Judge Virginia A. Phillips (Central District of California), Judge Margaret Morrow (now CEO of Public Counsel), and Susan Estrich, with a keynote speech by Lisa Bloom.

Trisha also was recently selected to co-chair the Young Lawyers Committee of the Women in Law Empowerment Forum (WILEF). WILEF is a national organization dedicated to uplifting and promoting women in law firms and corporate law departments in the United States.

Ethan Seibert practices in the Firm's San Francisco office and was selected by his peers for inclusion in the Super Lawyers Northern California 2017 Rising Stars list of top attorneys. Ethan is one of only 25 attorneys designated in the " Insurance Coverage" category. This is Ethan's fifth consecutive year being listed as a Super Lawyers Northern California Rising Star.

Spotlight On:

Jared Clapper

Nicolaides Fink Thorpe Michaelides Sullivan LLP partner  Jared Clapper 's experience includes handling bad faith, construction defect, product defect, commercial transportation, environmental liability, and premises liability claims. He counts among his successes multiple summary judgments won on behalf of his clients. His practice involves claims and lawsuits throughout the United States.

Outside of the Firm, Jared spends most of his time with his wife and his two young daughters, shuffling between swim lessons, ballet, gymnastics, and play dates, always with a grin on his face. Jared has been advised that he is outstanding at tea parties, somewhat subpar at playing princesses, and that he should not sing along to Moana.

 

Jared also enjoys playing tennis, running, drinking good wine, and exploring nature.