Some Decisions Policyholders Can Be Thankful for this Year

Bryan J. Coffey | Pillsbury Winthrop Shaw Pittman LLP | November 27, 2017

It’s that time of the year when Americans gather together, enjoy a feast, and fall asleep in front of the TV. But before the tryptophan kicks in, we also like to give thanks for the good things that have happened in the past year. Corporate policyholders can share in the tradition, as this year has produced a number of court decisions that favored insureds and protected their coverage expectations. Here are a few of the cases we are most thankful for:

This case out of the South Carolina Supreme Court gave generously to policyholders in a number of ways this year (giving us the opportunity to post in this blog again and again and again). The case involved defective construction claims against a developer. The developer’s insurer, Harleysville, provided a defense under a vague reservation of rights letter. After the underlying plaintiffs were awarded verdicts against the developer, Harleysville sued to avoid covering the judgments. The court ruled against Harleysville on four issues:

  1. Harleysville’s vague, general reservation of rights letter did not effectively reserve its rights to contest coverage under the terms and exclusions in the policy;
  2. Where the underlying verdicts did not apportion the damages between covered and uncovered losses, the insurer bore the burden of proving amounts allocable to uncovered losses. Where the insurer failed to meet that burden, it had to cover the entire verdict;
  3. Punitive damages awarded in the verdicts were found to be covered under Harleysville’s policy; and
  4. The owners’ association, which was asserting the dissolved developer’s coverage rights in the case, had standing to challenge the insurer’s reservation of rights letter.

Harleysville is a case that just keeps on giving.

The duty to provide a defense, or reimburse defense costs, is one of the most important features of liability insurance. You could say it’s the stuffing, where indemnity is the turkey. The Delaware Superior Court emphasized that obligation in Verizon to the tune of $48 million in defense costs that the insurer had refused to pay. This decision was important because it rejected the insurer’s attempt to define the vague term “securities claim” narrowly to avoid its obligation to pay defense costs. More broadly, the court upheld the pro-policyholder interpretative doctrine of contra proferentem, rejecting the insurer’s argument that the doctrine should not apply where the insured is a large, sophisticated corporation. Applying the doctrine, the court held that unless it can be shown that the insured had a hand in drafting the policy language, ambiguous terms should be interpreted against the insurer. A more detailed analysis of the decision by this firm can be found here.

All State Interior Demolition Inc. v. Scottsdale Insurance Company and McMillin Management Services v. Financial Pacific Insurance Company

Thanksgiving dinner is always better with more guests. Additional Insured endorsements in policies extend the invitation to more parties that may require a seat at the table of insurance protection. This is especially important in the construction context, where developers and general contractors rely on numerous subcontractors’ insurance policies to protect them from liability arising from those subcontractors’ work. These two decisions rejected insurers’ attempts to narrow the application of additional insured endorsements.

In All State Interior, previously highlighted here, a New York County trial court interpreted an endorsement broadly, granting additional insured status to companies that didn’t technically contract with the subcontractor, and who weren’t named in the endorsement. The court, in essence, incorporated the terms of the contract between All State and the subcontractor into the endorsement to trigger additional insured coverage for the project owner, site lessor, and construction manager as All State’s “partners, directors, officers, employees, agents and representatives.”

In McMillin, the insurer’s policy granted additional insured status to McMillin, the general contractor of a project, for “liability arising out of [the subcontractor’s] ongoing operations,” and excluded additional insured status for the insured’s completed operations. The insurer denied defense coverage on the basis that the subcontractor had finished working on the project. The California Court of Appeal disagreed, stating that the endorsement’s phrase “arising out of” is broader than “during,” and so the liability did not have to arise while the insured was still working on the project.

When it’s time for dessert, allocating the available pie to make sure everyone gets what they deserve can be tricky. This year, Missouri joined the ranks of “all sums” states that maximize coverage for policyholders with long-tail claims stretching over several years. The “all sums” method of allocation allows an insured to allocate all of its damages from long-tail losses to a single year of coverage. This ruling by the Missouri Court of Appeals was based on the plain language of the policies, which promise to indemnify the insured for all sums the insured is legally obligated to pay for occurrences during the policy period. The court also ruled that all triggered primary policies across a period of years need not be exhausted before excess policies in the period selected by the policyholder can be triggered. The court ruled that only the primary policy in one year needs to be exhausted before that year’s excess policies are triggered. For a more thorough analysis of this case, click here.

Rather than brave the stampedes of Black Friday, one can get good deals on holiday gifts on Cyber Monday. But to protect against cyber thieves, make sure your insurance coverage will protect you. In this case, the U.S. District Court for the Southern District of New York interpreted the computer fraud provision of a crime policy to do just that. Policyholder Medidata was the victim of fraud when someone tricked its employees into wiring money overseas, using spoofed emails that looked like they came from the company’s president. Medidata’s insurer denied its claim, stating that the computer fraud clause of the crime coverage required actual hacking into and manipulation of Medidata’s computer system. But the court sided with Medidata, ruling that the spoofing of emails violated the integrity of the insured’s computer system enough to trigger coverage, and actual entry by hackers was not required by the policy language or by precedent.

Insurer’s Attempt to Limit Additional Insured Status Fails

Tred R. Eyerly | Insurance Law Hawaii | November 29, 2017

The court disagreed with the insurer’s attempt to limit additional insured status based upon the contract between the parties. Mays v. In re All C-Dive LLC, 2017 U.S. Dist. LEXIS 185874 (E.D. La. Nov. 9, 2017).

Five employees of C-Dive LLC filed a lawsuit after belng injured in a pipeline explosion aboard a vessel servicing a pipeline owned by Gulf South Pipeline Company. During the work, there was a release of gas that caused an explosion and injured the employees.

Gulf South was a subsidiary of Boardwalk Pipelines LP. Boardwalk Pipelines entered into a Master Services Agreement (MSA) with C-Dive. C-Dive and Gulf South also entered into a Scope of Work Agreement (SWA), whereby C-Dive was to decommission the pipeline. The SWA incorporated the MSA.

The MSA applied to both Boardwalk Pipelines and its subsidiaries, including Gulf South. The agreement was “by and between Boardwalk Pipelines, LP and C-Dive, LLC.” It further stated that “reference to Boardwalk shall also include its subsidiaries, including but not limited to . . . Gulf South Pipeline Company.” The MSA required C-Drive to maintain insurance which would include Boardwalk Pipelines, LP as additional insured.

Gulf South made third-party claims against the insurers as an additional insured under the policies issued to Baordwalk. The insurers moved for summary judgment, arguing that the MSA obligated C-Dive to name only Boardwalk Pipelines as an additional insured and not its subsidiaries.

The court disagreed. The insurers argued that the MSA’s additional insured provision referred to ‘Boardwalk Pipelines LP,” rather than the shorthand, “Boardwalk.” Therefore, Gulf South was not included as an additional insured. But the plain meaning of the MSA meant that the terms “Boardwalk” and “Boardwalk Pipelines” were interchangeable. The agreement first stated that Boardwalk Pipelines LP was “hereinafter referred to as ‘Boardwalk.'” Thus, when the MSA used the phrase “Boardwalk,” it was referring to the entity Boardwalk Pipelines.

Therefore, Gulf South was an additional insured under the policies.

Oregon Supreme Court Confirms Broad Duty to Defend

Theresa A. Guertin and Tiffany Casanova | Saxe Doernberger & Vita PC

The Supreme Court of Oregon issued a decision at the end of last year which perfectly illustrates the lengths to which a court may go to grant a contractor’s claim for defense from its insurer in a construction defect suit. In West Hills Development Co. v. Chartis Claims, Inc.,1 the Court held that a subcontractor’s insurer had a duty to defend a general contractor as an additional insured because the allegations of a homeowner’s association’s complaint could be interpreted to fall within the ambit of coverage provided under the policy—despite the fact that the policy only provided ongoing operations coverage, and despite the fact that the subcontractor was never mentioned in the complaint. The decision is favorable to policyholders but also provides an important lesson: that contractors may avoid additional insured disputes if those contractors have solid contractual insurance requirements for both ongoing and completed operations risks.

An insurer’s duty to defend is typically determined by the allegations of a complaint as compared with the language of the policy. This principle is often referred to as the “four-corners rule” in reference to the four corners of the paper the policy is written on. Some states have relaxed this rule and allow parties to introduce “extrinsic evidence”—that is, facts which are not set forth in the complaint—to establish the duty to defend.2 Oregon, however, has consistently followed the “four-corners rule,”3 with one notable exception: a party claiming additional insured status may introduce extrinsic evidence to prove that they are an insured on the policy.4 In West Hills, the Court reiterated Oregon’s stance on these issues.

West Hills Development Company (“West Hills”) was a general contractor for a townhouse development in Oregon. West Hills contracted with L&T Enterprises (“L&T”) as subcontractor and required that L&T obtain insurance coverage naming West Hills as an additional insured. L&T’s commercial general liability policy with Oregon Automobile Insurance Company (“Oregon Auto”) named West Hills as an additional insured on a standard additional insured endorsement, which insured West Hills “only with respect to liability arising out of [L&T’s] ongoing operations performed for [West Hills].” There was no contractual requirement that L&T provide completed operations additional insured coverage for West Hills, nor did the Oregon Auto policy include such coverage.

Following the completion of the project, the development’s homeowner’s association sued West Hills for construction defects. According to the complaint, West Hills’ subcontractors had negligently used improper means and methods in their construction work that resulted in defects. The association also alleged that West Hills was liable for negligence in hiring, supervising, and failing to oversee and inspect the subcontractors and their work. The Court noted that the “complaint contained very little information regarding the time when the damages allegedly occurred,” although the complaint did allege that the defects already existed and had started to cause damage when the owners purchased their townhomes. Moreover, as is often the case in suits brought by project owners, the complaint did not specifically identify the allegedly negligent subcontractors by name.

West Hills tendered a claim for additional insured coverage to Oregon Auto. Oregon Auto refused to defend West Hills, arguing that: (1) the homeowner’s association only alleged claims against West Hills as general contractor, not the named insured, L&T, and; (2) the claims did not arise from covered ongoing operations. Before the Oregon Supreme Court, Oregon Auto argued that the duty to defend could not be triggered merely because a complaint failed to “rule out” the possibility of coverage. Instead, it asserted that the duty to defend arises only when the complaint explicitly articulates a covered claim.

The Court rejected Oregon Auto’s argument and confirmed that the legal standard was whether the allegations in the complaint, reasonably interpreted, could result in liability for an incident or injury that was covered under the four corners of the policy, regardless of any ambiguity or lack of clarity in the complaint. Specifically, the Court found that the complaint alleged claims against West Hills from which West Hills may incur liability that could be reasonably interpreted to “aris[e] out of [L&T’s] ongoing operations performed for [West Hills],” as required under the additional insured endorsement. The complaint alleged that West Hills’ subcontractors had used “improper construction means and methods” and that West Hills was negligent in preventing them from doing so. Thus, although L&T was not specifically named in the complaint, the Court held that the complaint could reasonably be interpreted as alleging liability for conduct covered by the policy, i.e. L&T’s operations for West Hills. The Court further stated that the complaint alleged damages that occurred by the time the owners purchased their homes, making it possible that the damages occurred during L&T’s “ongoing operations.” In light of this analysis, the Court ruled that Oregon Auto had a duty to defend West Hills.

Thus, the West Hills decision confirmed Oregon’s broad duty to defend standard, a favorable outcome for policyholders. It is interesting to note, however, that the case might never have come about if West Hills had required that its subcontractors provide completed-operations additional insured coverage; if L&T had both ongoing and completed operations additional insured endorsements on its policy, then Oregon Auto’s duty to defend West Hills would have likely been more obvious. Upstream and downstream parties alike must consider case law such as this when developing effective risk management plans suitably tailored to their needs, and should remember to require appropriate additional insured coverage for both ongoing and completed operations from their subcontractors.

1. 360 Or. 650 (2016).

2. For a state-by-state breakdown on the use of extrinsic evidence in the determination of the duty to defend, see SDV Law, Extrinsic Evidence State by State Survey, pdf.

3. Ledford v. Gutoski, 877 P.2d 80, 82 (Or. 1994); Insenhart v. Gen. Cas. Co., 377 P.2d 26, 28-29 (Or. 1962).

4. Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 240 P.3d 67 (Or. 2010).

AIG Must Defend Additional Insureds

Joan Cotkin | Insurance Recovery Report | November 17, 2017

That it took an appellate court to order AIG’s Lexington Insurance to honor its additional insured obligations is a measure of how frequently insurers attempt to dodge this important contractual obligation. The case of McMillin Management Services v. Financial Pacific Insurance, et al., in the Fourth District of the California Court of Appeal, was decided just a few days ago, on November 14, 2017.  The Court reversed the trial court, finding that Lexington had to defend McMillin, a general contractor because of the construction defects potentially caused by the operations of the Lexington insureds, two subcontractors.

Lexington argued that since the homeowners’ claims arose after the subcontractors’ work was done, these claims could not have “arisen out of” the subcontractors’ on-going operations and fit into the exclusion for completed operations. However, the additional insured endorsements were not so limited, and provided coverage for liability arising out of such operations as damage may well have occurred during the construction operations.

McMillin had used a number of subcontractors to work on the subject development, two of whom, Martinez and Rozema, purchased insurance with Lexington and included additional insured endorsements. This may be the first published decision specifically construing such “arising out of” language, which commonly appears in such endorsements.  Although there was a completed operations exclusion, it was not clear when the alleged damages occurred, therefore there was a potential for a defense.

The appellate court relied on the holding of another decision that held the term “arising out of” in this context is to be broadly construed: “… it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.” Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 321, 328.

Lexington argued that McMillin could not have faced liability for the homeowners claims during its insureds’ operations (as there were no damages then—the project was just being built), but the appellate court noted “arising out of” is simply broader than “during.” This court concluded that: “The term “arising out of” in the endorsements granting McMillin coverage for ” ‘liability arising out of [Martinez’s or Rozema’s] ongoing operations,’ ” provides only that McMillin’s liability must be “linked,” through a “minimal causal connection or incidental relationship”…, with Martinez’s or Rozema’s ongoing operations.”  Since it was entirely possible that property damage occurred while the operations were on-going, there was a potential for coverage and a duty to defend.  In effect, the duty to defend continues until Lexington can establish with undisputed and conclusive facts that there were no damages until after the subcontractors’ work was completed.

This opinion establishes for developers and their counsel the importance of carefully reviewing additional insured endorsements to ensure the broadest possible protections against claims arising from the work of the subcontractors.

Privity and Additional Insured Coverage

Larry P. Schiffer and Suman Chakraborty | Squire Patton Boggs | October 5, 2017

When a worker is injured on a construction job and sues the relevant parties, a side battle often ensues over which carrier has the duty to defend and indemnify the owner, general contractor or subcontractor based on the language in the various construction contracts requiring some or all of those parties to be named as additional insureds. When there are multiple subcontracts cascading down

to the injured worker’s employer, determining whether the employer’s policy must defend and indemnify other parties as additional insureds can be confusing. In a recent Summary Order, which does not have precedential effect, the Second Circuit Court of Appeals weighed in on this issue under New York law.

In Cincinnati Ins. Co. v. Harleysville Ins. Co., an employee of a sub-subcontractor was injured and sued the building owner, general contractor and subcontractor. The sub-subcontractor’s construction contract with the subcontractor required the sub-subcontractor to add the subcontractor, general contractor and owner as additional insureds to the sub-subcontractor’s insurance policy. The subcontractor’s carrier sued the sub-subcontractor’s carrier arguing that the latter carrier had to defend and indemnify the additional insureds. The district court granted the subcontractor’s carrier’s summary judgment motion in part by finding that the sub-subcontractor had a duty to defend and indemnify the building owner as an additional insured, but not the general contractor. On appeal, the Second Circuit reversed in part and held that the sub-subcontractor’s carrier had no duty as neither the building owner nor the general contractor were additional insureds under the policy.

According to the court, the sub-subcontractor’s policy had 2 endorsements that addressed additional insureds. The first was the “Privity Endorsement,” which grants additional insured coverage “when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.” The second was the “Declaration Endorsement,” which refers to the declarations section of the policy for a schedule of additional insureds.

In reversing, the court held that the Privity Endorsement did not confer additional insured status on the building owner or general contractor because there was no contractual privity between them and the sub-subcontractor. Simply put, the sub-subcontractor had no direct construction contract with the owner or the general contractor. The court noted that the law in New York was clear on this point and that New York courts had interpreted the identical provision to require contractual privity. The court stated that it did not matter if the sub-subcontractor’s construction contract required the owner and general contractor to be named as additional insureds (this was a matter for breach of contract), that contract could not modify the insurance policy because the Privity Endorsement was clear on its face that the construction contract had to be between the insured and the purported additional insureds. Because the insured had no construction contract with the owner or the general contractor there was no contractual privity and no coverage.

As to the Declaration Endorsement, the court noted that neither party were listed on the schedule as additional insureds. The court also found that a reference to a heading on the Declaration Endorsement that was the same as the Privity Endorsement did not expand the additional insured coverage grant automatically to every party when required in any construction agreement with the insured. Essentially, the court refused to write the Privity Endorsement out of the insurance policy. The court held that the Privity Endorsement modified the automatic status heading language in the declarations, not the other way around. In essence, the court held under New York law that in insurance contracts that require privity for additional insured coverage, the lack of a direct contract between the insured and the party seeking the additional insured coverage precludes extending additional insured coverage.