Insurance Recovery Law

California Court Recognizes Named, Additional Insureds May Have Different Expectations

Why it matters
While the holding sounds straightforward – the reasonable expectations of an additional insured about the scope of an excess liability policy may differ from the reasonable expectations of the named insured – the implications of a recent California appellate court decision are significant. After the named insured had litigated and received coverage for three underlying environmental lawsuits, the additional insured sought coverage based upon the court’s holding in that case. But the appeals court held that it will look to the additional insured’s reasonable expectations about coverage under the policy, rather than the named insured’s. In so doing, the court refused to collaterally estop an insurer from challenging coverage based upon rulings in another action regarding the named insured’s reasonable expectations.

Detailed Discussion
Vulcan Materials Company purchased a commercial excess and umbrella liability insurance policy from Transport Insurance Company. The policy included an endorsement naming R.R. Street & Co., Inc., as an additional insured with respect to its distribution or sale of perchloroethylene, or PCE, a solvent used in the dry cleaning industry.

The schedule of underlying insurance listed nine primary policies issued to Vulcan, although the company also had other coverage.

Three lawsuits were filed against Vulcan and Street over their manufacturing, distribution, and sale of PCE to dry cleaners in the Modesto, California, area. According to the complaints, PCE leaked into the soil and groundwater, causing environmental contamination and property damage.

Transport previously had brought a declaratory relief action to determine the scope of its obligations to Vulcan. In that case, the court held that the term “underlying insurance” as used in connection with the umbrella coverage was ambiguous. Therefore, the issue had to be resolved in favor of the “reasonable expectations of the insured,” i.e., Vulcan, limiting the term “underlying insurance” to mean only the policies explicitly stated as underlying insurance on the policy’s Schedule.

Potentially on the hook for Vulcan’s defense, Transport then filed a second declaratory action to determine its rights with regard to Street. Transport argued that its duty to defend had not been triggered, because all of the primary policies issued to Vulcan had not been exhausted.

Street pointed to Transport’s earlier litigation with Vulcan, arguing that the excess insurer was collaterally estopped from arguing that the term “underlying insurance” referred to anything other than the policies listed on the underlying insurance schedule.

The panel disagreed with Street that collateral estoppel applied, distinguishing the focus of the earlier litigation, which was on Vulcan. “When the party claiming coverage is an additional insured, it is the additional insured’s objectively reasonable expectations of coverage that are relevant, and not the objectively reasonable expectations of the named insured,” the court wrote.

The “unique” status of an additional insured means that although it is not a party to the insurance contract, its “intent is relevant to the construction of that contract because the intent of the named insured in requesting the added coverage is directly dependent on the bargain that the additional named insured made with the named insured.”

Although the court agreed with Transport and reversed the trial court’s grant of summary judgment for Street, whether the outcome is advantageous to an additional insured will depend on their reasonable expectations of coverage.

“Street, an additional insured, and not Vulcan, a named insured, was the party claiming coverage,” the court said. “Thus, the trial court erred when it failed to consider Street’s objectively reasonable expectations of coverage and, instead, relied on Vulcan’s objectively reasonable expectations of coverage.”

To read the decision in Transport Insurance Company v. R.R. Street & Co., click here.

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Indemnification Required For Antitrust Settlement, Says Sixth Circuit

Why it matters
The Sixth U.S. Circuit Court of Appeals held that a settlement for the recovery of unpaid wages in an antitrust case was simply payment of wages and not disgorgement – meaning the insurer had to indemnify the deal. Taking a look at the allegations in the complaint brought by two nurses against several hospitals, including William Beaumont, the federal appellate court said the hospital never gained possession of the wages illegally because the nurses never had the wages in the first place; instead, the hospital simply retained them and the settlement constituted damages.

Detailed Discussion
Two nurses instituted a class-action suit against eight hospitals in the Detroit area, including William Beaumont Hospital. The class alleged that the hospitals violated the federal Sherman Act by exchanging information regarding the nurses’ compensation and conspiring to depress their wages. The case later settled for $11.3 million.

Beaumont sought indemnification from Federal Insurance Company for the settlement pursuant to a policy that expressly provided coverage for loss from antitrust claims. As defined by the policy, “loss” included “the multiple portion of any multiplied damage award” but excluded disgorgement. The insurer advanced Beaumont $9 million of the settlement, but reserved its right to reimbursement.

Federal took the position that it was not obligated to indemnify Beaumont because the settlement constituted disgorgement, which was not covered, rather than compensation, which was covered. The hospital gained a profit to which it was not entitled by engaging in the antitrust activities, Federal argued, and the settlement reflects disgorgement of the value of the advantage of paying below-market compensation to its nurses.

Beaumont told the court the nurses had requested compensatory damages and that money unlawfully retained is different from money wrongfully acquired.

The court agreed, noting that the policy specifically states that only disgorgement is not a covered loss and explicitly covers treble damages as an insurable loss. “Federal wrote the policy using the term disgorgement without mentioning reimbursement; a court construes policies strictly in favor of the insured,” the panel wrote. “Moreover, as Beaumont points out, Federal used the term restitution elsewhere in the policy, so it should be aware of the difference between the two terms.”

The Sixth Circuit concluded that the damages paid in settlement of the nurses’ claim did not constitute disgorgement.

“[W]e find the hospital never gained possession of (or obtained or acquired) the nurses’ wages illicitly, unlawfully, or unjustly. Rather, according to the nurses’ complaint, Beaumont retained the due, but unpaid, wages unlawfully,” the court said. “This is not mere semantics. Retaining or withholding differs from obtaining or acquiring. The hospital could not have taken money from the nurses because it was never in their hands in the first place. While the hospital’s alleged actions are still illicit, there is no way for the hospital to give up its ill-gotten gains if they were never obtained from the nurses.”

Federal’s fallback position, that Michigan public policy should prohibit Beaumont from benefiting from its own wrongdoing, also failed to persuade the court. Insurance coverage for the hospital would not encourage moral hazards, the court said. The conduct at issue was not per se illegal and Beaumont “did not unlawfully obtain anything from the nurses,” the panel wrote. “Rather, it allegedly unlawfully withheld compensation from them.”

To read the decision in William Beaumont Hospital v. Federal Insurance Company, click here.

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Ninth Circuit CERCLA Subrogation Ruling Stands After Supreme Court Cert Denial

Why it matters:
Last year the Ninth U.S. Circuit Court of Appeals issued a noteworthy decision addressing the subrogation rights of insurers under the federal Comprehensive Environmental Response, Compensation, and Liability Act in Chubb Custom Ins. Co. v. Space Systems/Loral, Inc. According to the Ninth Circuit, an insurer lacked standing to bring a subrogation suit under CERCLA because the insurer did not directly incur environmental response costs and did not allege that the insured was a “claimant” or that it had made a claim to the Superfund or to a potentially liable party, as required by the CERCLA statutes. Thus an insurer can maintain a subrogation action against potentially liable parties only if the insured has made a written demand for a sum certain to the allegedly liable party. In that case, the insured had not made such a demand, leaving Chubb unable to recover the money it paid for the required environmental cleanup. Chubb appealed the decision, filing a writ of certiorari to the U.S. Supreme Court. But in January the justices denied the writ without comment, leaving the Ninth Circuit opinion in place as good law. As a result, insurers may seek to obligate policyholders to make such written demands (perhaps through adding language in the policy) to potentially liable parties, allowing insurers the ability to recover for environmental costs.

Detailed Discussion
In the Ninth Circuit case, Chubb made insurance payments under an environmental insurance policy to its insured, Taube-Koret Campus for Jewish Life, for $2.4 million in cleanup costs incurred in remediating soil and groundwater contamination on its property. After paying the claim, Chubb then filed suit against previous owners of the property, arguing that they were jointly or severally liable for the costs.

Chubb asserted subrogation rights against these previous owners under two sections of CERCLA. First, the insurer argued that its action could be maintained under § 112(c). Section 112(c) provides that “any person” who has paid compensation to a “claimant” for “damages or costs resulting from a release of hazardous substances” is subrogated to all rights “that the claimant has” under CERCLA. A “claimant” is one who makes a written demand for reimbursement of monetary costs under the statute.

Although § 112(c) does not specify to whom the demand must be made, the Ninth Circuit rejected Chubb’s contention that Taube-Koret’s insurance claim constituted a written demand under the statute. Instead, the federal appellate panel held that a claimant must demand reimbursement from either the Superfund or a potentially liable party.

Therefore, the court determined that Taube-Koret was not a “claimant” under § 112(c) and Chubb could not in turn pursue subrogation against the prior owners.

Section 107(a) also failed to support Chubb’s subrogation claims, the panel concluded. That provision provides that potentially responsible parties are liable for the costs of response “incurred by” any person under certain conditions. But the court said § 107(a) applies only to a person who, through his or her own actions, has become statutorily liable for cleanup costs or remediation.

Taube-Koret was liable as the property owner, but Chubb could not allege that its own actions had rendered it liable for any response costs. An insurer “that is only obligated to reimburse the insured for cleanup costs does not itself incur response costs,” the court explained.

As an alternative argument, Chubb pointed to § 113(f), which permits a potentially responsible party to pursue contribution where it has not directly incurred its own costs of response but has reimbursed response costs by other parties. This provision demonstrated to the court that Congress already expressly created the remedy proposed by the insurer. Allowing an entity to pursue recovery under both § 107(a) and § 113(f) would therefore be contrary to congressional intent and could lead to other problems, like double recovery, the panel said.

“CERCLA was not enacted to benefit insurance companies; rather, it was enacted to promote the timely cleanup of contaminated waste sites, impose liability on those responsible for polluting the environment, and to encourage settlement through a complex statutory scheme,” the court said.

To read the decision in Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., click here.

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New York Federal Court Allows Excess Insurer’s Bad Faith Claim Against Primary To Proceed To Trial

Why it matters
An excess insurer may be able to recover its contribution to an insured’s settlement where the primary insurer engaged in bad faith by failing to offer the policy limits, a New York federal judge has ruled. The court found the facts of the case demonstrated “substantial evidence” of the primary insurer’s bad faith efforts to settle an underlying negligence suit. The judge sent the case to trial for a jury determination of whether or not the primary insurer’s settlement efforts were made in bad faith. This decision provides policyholders and their insurers with knowledge regarding the manner in which a court will review an insurer’s claims handling and emphasizes the need for prompt and proactive claims handling.

Detailed discussion
After contracting to perform construction work in Queens, N.Y., Cole Partners purchased a $1 million policy from Indian Harbor Insurance Company and a $10 million excess policy from Scottsdale Insurance Company. An employee on the site fell 18 feet from a wall while conducting demolition work, fracturing his right leg and requiring multiple surgeries.

When the employee filed a negligence suit, Cole turned to Indian Harbor and Scottsdale for coverage. Early on in the claims process, Indian Harbor determined that the case did not pose reasonable potential for exposure beyond the policy limit and that liability was not reasonably in dispute. The preliminary assessment of Cole’s exposure was in the $350,000 to $500,000 range.

After the court granted summary judgment on the liability issue to the employee, he made a settlement demand of $2 million. However, Indian Harbor made no attempt to engage in negotiations for nine months. A mediation between the parties was unsuccessful, with Indian Harbor making no higher offer than $200,000. Plaintiff’s counsel later testified that he told the insurer he was willing to accept $1 million to settle the case.

Although Indian Harbor approved settlement authority up to $950,000, it never increased its offer despite being aware that the employee might need back surgery, potentially increasing his damages. When the employee ultimately underwent back surgery, he increased his settlement demand to $4 million.

Indian Harbor eventually tendered its policy and Scottsdale took over settlement negotiations, agreeing to pay an additional $1.5 million to settle with the employee.

Scottsdale then filed suit against Indian Harbor, alleging that it had the opportunity to settle the underlying litigation within the primary policy limit of $1 million and the failure to do so constituted bad faith under New York law.

The district court applied a two-part standard: whether Indian Harbor exhibited “gross disregard” for the interests of Scottsdale and whether the gross disregard caused the loss of an actual opportunity to settle the case within the primary policy limit.

Using a multifactor test, the court found “substantial evidence to support Scottsdale’s handling of [the employee’s] case met the standard for gross disregard and bad faith.”

The potential magnitude of the damages rose significantly after the employee’s back surgery, the court noted, a potentiality that Indian Harbor was aware of. “Considering the fact that, by all accounts, [the employee’s] back surgery dramatically increased the potential settlement value . . . it would have been reckless for Indian Harbor to ignore the possibility that failing to settle the case promptly could, were [he] to require surgery, expose Scottsdale to significant liability,” the court wrote.

A review of the case chronology also supported the judge’s determination, offering a jury substantial evidence to find that Indian Harbor approached the settlement of the case with gross disregard for Scottsdale’s interests.

Although a dispute existed about whether the employee’s lawyer said he would accept $1 million or $1.2 million to settle, the parties were “either $50,000 or $250,000 apart on what it would take to settle the case,” Judge Engelmayer said. “Yet Indian Harbor let the case languish for four-and-a-half months, never offering [the employee] more than $200,000. Under the circumstances, a reasonable jury could regard the $200,000 offer as a non-starter. Such a jury could therefore view this evidence as signifying that Indian Harbor deliberately placed greater importance on its own $50,000—i.e., the difference between the $950,000 at which its outside counsel recommended settling and Indian Harbor’s $1 million primary policy limit—than on the risk that a jury would ultimately return a verdict that could expose Scottsdale to substantial liability.”

Other evidence: an eight-month period where literally nothing happened in the case file, “implausible” denials from Indian Harbor’s claims handler that she never received any of the settlement letters sent by the employee’s lawyer (even though the letters were received by the insurer’s mailroom, with date and time stamps), and the failure to ever increase the settlement offer from $200,000.

Despite the evidence in support of Scottsdale’s bad faith claim, the court denied summary judgment to the excess insurer because of controverted testimony about the amount the plaintiff would have accepted to settle the case.

Given these factual disputes, the court said a jury should decide the issue, scheduling trial for later this year.

To read the decision in Scottsdale Insurance Company v. Indian Harbor Insurance Co., click here.

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