Insurance Recovery Law

Ammonia Release Constitutes “Direct Physical Loss” Under Policy

Why it matters
A New York federal court recently ruled that the discharge of ammonia at a manufacturing plant – causing a facility shutdown for several days – constituted “direct physical loss” pursuant to the insured’s policy and required payment from the insurer. In addition to seriously injuring one employee, the release of ammonia required the plant to close for several days and be cleaned by a remediation company before operations could resume. The insurer refused to pay for the policyholder’s damages, arguing that no “direct physical loss of or damage to” as required under the policy, had occurred at the facility. Although there was no actual physical change or alteration to the property, the court reasoned that the presence of ammonia rendered the facility physically unusable, so the discharge inflicted the necessary “direct physical loss of or damage to” property to trigger coverage under the policy.

Detailed Discussion
Gregory Packaging, Inc., makes and sells juice cups. While preparing a new factory for production of its product, a refrigeration system malfunctioned, releasing ammonia gas into the facility. The release and continued presence of the gas rendered the facility “physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.” A third party was engaged to remediate the contamination.

Gregory Packaging sought coverage under a policy issued by Travelers Property Casualty Company. The policy provided that the insurer “will pay for direct physical loss of or damage to Covered Property,” defined to include the new facility.

Travelers denied coverage on multiple grounds, including that "physical loss or damage" necessarily involves "a physical change or alteration to insured property, requiring its repair or replacement."

The court disagreed with Travelers, finding that the presence of ammonia gas in the facility, which rendered the facility uninhabitable and inoperable for seven days, constituted “direct physical loss of or damage to Covered Property.” The court based its ruling on case law from New Jersey state and federal courts, as well as the law of other jurisdictions. (The court found no conflict between the law of New Jersey, the corporation’s home state, and that of Georgia, the location of the damaged property.)

The phrase “direct physical loss of or damage to” was not defined by the policy, but the court found that the ammonia discharge satisfied the term under either New Jersey or Georgia law.

The court explained: “In the present case, there is no genuine dispute that the ammonia release physically transformed the air within Gregory Packaging’s facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipated.”

While Travelers argued that genuine disputes of material fact precluded a grant of summary judgment to Gregory Packaging, the court found that none of those disputes -- as to whether the ammonia leak caused an explosion and whether the facility was rendered inoperable and required repair — were material to the question of whether "the ammonia-induced incapacitation” constituted 'direct physical loss of or damage to' Gregory's packaging facility.

To read the opinion in Gregory Packaging, Inc. v. Travelers Property Casualty Co., click here.

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New York Appellate Court Broadens Common Interest Protection, Eliminates Litigation Requirement

Why it matters
In an opinion from a unanimous New York appellate panel, the court expanded the state’s previously narrow view to recognize that litigation is not required for protection of the common interest privilege. The court held that the common interest doctrine applies even though the subject communications occurred in a purely transactional context and not in anticipation of litigation. In doing so, the court departed from prior decisions by other New York courts that had limited the common interest protection to communications involving pending or anticipated litigation. The court based its ruling on the needs of parties to transactions to share common legal advice "in order to accurately navigate the complex legal and regulatory process involved in completing the transaction."

Detailed Discussion
Financial guaranty Ambac Assurance Corporation sued Countrywide Home Loans and Bank of America Corp. (BAC), its successor-in-interest, asserting claims related to mortgage fraud. The basis for the claims asserted against BAC arises from a merger between a BAC subsidiary and Countrywide Financial Corp. (CFC), a Countrywide entity. Ambac claimed that between 2004 and 2006 Countrywide fraudulently induced the insurer to enter into agreements that guaranteed payments on certain residential mortgage-backed securities issued by Countrywide.

Prior to signing a merger agreement, BAC and CFC entered into a common interest agreement. Further, the merger agreement provided that all information exchanged between BAC and CFC “was subject to confidentiality provisions.”

Ambac filed a motion to compel several hundred documents composed of communications between Countrywide, BAC, and their counsel during the premerger time period. BAC claimed that the communications were protected by the common interest doctrine because, among other things, BAC and CFC “shared legal advice from counsel together in order to ensure their accurate compliance with the law and to advance their common interests in resolving the many legal issues necessary for successful completion of the merger.”

The court reviewed the history and purpose of the attorney client privilege (from which the exception derives), public policy interests and federal precedent, and concluded that the better policy requires that we diverge from the former approach requiring that before the common interest doctrine can be invoked the communication must affect pending or anticipated litigation.

Specifically, the court stated: “These [former] cases provide that when two parties with a common legal interest seek advice from counsel together, the communication is not privileged unless litigation is within the parties’ contemplation; on the other hand, when a single party seeks advice from counsel, the communication is privileged regardless of whether litigation is within anyone’s contemplation. We cannot reconcile this contradiction, as it undermines the policy underlying the attorney-client privilege.”

Imposing a litigation requirement would discourage parties with a shared legal interest – such as the merger agreement between BAC and Countrywide – from seeking and sharing advice, the panel noted, and could result in regulatory or private litigation because the parties lacked sound guidance. “This outcome would make poor legal as well as poor business policy,” the court stated.

The panel remanded the case for the trial court to conduct a review to determine which, if any, documents are subject to the privilege.

To read the order in Ambac Assurance Corp. v. Countrywide Home Loans, click here.

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In a Divided Opinion, New York Appellate Court Rules Noncumulation Clause Limits Parties’ Lead Paint Exposure Coverage to Single Policy Limit

Why it matters
A New York appellate court recently decided that an insurance policy’s noncumulation clause limited the amount of coverage available to a single policy period where multiple plaintiffs from different families alleged exposure to lead paint in the same apartment in different policy periods. The noncumulation clause provided “[a]ll bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.” In a divided opinion, the court continued the trend in New York of enforcing insurance policy noncumulation clauses in order to limit the definition of occurrence in toxic tort personal injury lawsuits. The court rejected plaintiffs’ argument that the alleged injuries were separate losses under the policies because they didn't result "from continuous or repeated exposure to the same general conditions." The majority reasoned that “[p]erhaps they were not exposed to exactly the same conditions, but to say that the ‘general conditions’ were not the same would deprive the word ‘general’ of all meaning.”

Detailed Discussion
The underlying facts involved lead paint bodily injury sustained by children of two different families during two different periods of time, but at the same rental unit. The first child lived in the apartment with her family from November 1992 until September 1993. During that time, a test revealed elevated lead levels in the child's blood.

In response to notification from the Department of Health, the landlord made some repairs and the Department advised him in August 1993 that the violations “have been corrected.” When the family moved out, another couple with two children moved in, and again one of the children was found to have an elevated blood lead level.

Separate lawsuits were filed on behalf of the two children. The first of the suits was settled for $350,000. This settlement prompted the question of whether the maximum amount recoverable to the second claimant was $150,000 – representing the $500,000 limit of liability less the $350,000 paid to the first claimant – or $500,000. Allstate argued that as a result of the noncumulation clause, the second claimant’s maximum recovery was $150,000.

The noncumulation clause stated: “Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.”

The second claimant pursued a declaratory judgment action against Allstate. The New York Supreme Court granted the declaration, holding that the children in the two actions were not injured by exposure to the same conditions.

On appeal, plaintiffs contended that the two children were not injured as a result of “continuous or repeated exposure to the same general conditions.” The Court of Appeals rejected plaintiffs’ argument, noting that both children were exposed to the same hazard –lead paint – in the same apartment.

The court explained that the children may not have been exposed to exactly the same conditions, but to find that they were not exposed to the same general conditions would deprive the word “general” in the noncumulation clause of all meaning. The court went on to note that the plaintiffs did not claim a new lead paint hazard had been introduced to the apartment between the tenancies. Rather, the only logical conclusion, according to the court, was that the landlord’s initial remediation efforts were not completely successful and the children were exposed to the same general conditions for which only a single $500,000 policy limit was available.

Two members of the court filed a dissenting opinion, disagreeing with the majority on two grounds. First, the dissent concluded the children in the two actions were not exposed to the same general conditions because the landlord took remedial steps to address the lead paint conditions and was told by county officials that those conditions had been corrected. Second, the dissent wrote that the majority’s position was inconsistent with reasonable expectations of the insured because “ [i]f the insured knew that his later policies would not cover lead paint injuries occurring after his remediation efforts, he surely would not have continued purchasing the insurance at essentially the same premium from the same insurer.”

To read the opinion in Nesmith v. Allstate, click here.

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Adding to the National Debate, an Illinois Federal Court Holds Collusiveness Not Necessary for Insured v. Insured Exclusion

Why it matters
A federal court in Illinois ruled that an insured v. insured exclusion in a directors and officers liability policy barred coverage in a lawsuit filed by the named insured, a bank, against the bank’s chairman, also an “insured,” because neither Illinois law nor the policy required a showing of collusiveness for the exclusion to apply. The decision reflects the struggles of courts to apply the insured v. insured exclusion in the wake of the financial crisis and litigation by and against failed banks, often with the FDIC as a receiver. Decisions have varied from a finding that the exclusion is ambiguous as applied to suits brought by the FDIC and therefore does not preclude coverage for the directors and officers of a failed bank to a ruling where the court said the exclusion was inapplicable because the FDIC was not suing on behalf of an “insured” but rather the bank’s depositors and accountholders. On the other end of the spectrum, however, a California court held that the exclusion did apply in a suit brought by the FDIC against former bank directors.

Detailed Discussion
Andrew Bernhardt, the former CEO, president, and chairman of Town Center Bank (TCB), was the subject of a negligence and breach of fiduciary duty lawsuit filed by the bank in 2013. The bank alleged that during Bernhardt’s tenure he accepted and approved 26 questionable, high-risk commercial loans but failed to follow the applicable underwriting and lending policies and procedures. The loans subsequently went into default and TCB claimed it lost in excess of $3 million as a result.

Bernhardt, as an insured under a policy issued by Travelers Casualty and Surety Company, submitted a claim for coverage, but Travelers rejected the tender, asserting that the insured v. insured exclusion, among others, applied.

Bernhardt argued that the bank must allege a collusive suit in order for the insured v. insured exclusion to apply, but the court disagreed. The court acknowledged that such exclusions arose to prevent liability insurance from being used as business-loss insurance when a company tried to recover for losses resulting from directors’ or officers’ business mistakes, but clarified that the historical context did not impose a duty on the insurer to prove collusiveness without policy language to that effect.

“Here, the language of the insured-versus-insured exclusion is clear and unambiguous and there is no requirement pursuant to the terms of the policy (or in Illinois law) that requires a showing of collusiveness for the exclusion to preclude coverage,” the court wrote.

The court granted Travelers’ motion for summary judgment that the insurer owed no duty to provide Bernhardt with a defense.

This opinion reinforces the fundamental principle of policy interpretation that extrinsic evidence should not be used to disturb policy language that the parties bargained for and that is unambiguous on its face.

To read the opinion in Travelers Casualty and Surety Co. v. Bernhardt, click here.

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