Liability Insurance Coverage: Basic Principles

Peter Selvin | Ervin Cohen & Jessup

There are certain core principles that must be applied in analyzing coverage under a liability insurance policy.

This two-part article sets out those principles. It also explores some counter-intuitive situations in which such coverage may come into play.

Insurance Liability

  • Hidden opportunities to obtain coverage in liability cases
  • Sometimes counter-intuitive
  • Often obscured by jargon and complexity
  • What strategies will assist in uncovering these opportunities?

The 8 Key Points

1. Law Tilted in Favor of Policyholders

Liability insurance provides protection (i.e., indemnity) in respect to a claim, but also funding for the insured’s defense to litigation. It also imposes a duty on the insurer to settle the case for its insured. The law heavily favors policyholders. In this regard, grants of coverage are construed broadly, whereas exclusions are construed narrowly. In addition, an insurer must give as much consideration to its insured as its own interests.

Where the policy provides a duty to defend, there are three important features: (1) the duty to defend is extremely broad; (2) where there is a duty to defend, the carrier is obligated to defend both covered and uncovered claims; and (3) a carrier that breaches the duty to defend may face huge penalties for doing so. California courts have repeatedly found that remote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty. Thus, California law does not require that the insured’s conduct proximately cause the third-party claim in order to trigger the defense duty.

2. The specific causes of action in a complaint do not define or limit the scope of coverage.

The duty to defend is not limited by the causes of action that are pled by the plaintiff. “…That the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable or otherwise known, the complaint could be fairly amended to state a covered liability.” Scottsdale Ins. Co. vs. MV Transportation, 36 Cal.App.4th 643, 654 (2005); Hartford Casualty vs. Swift Distribution, 59 Cal.4th 277 (2014).

3. The duty to defend has surprising breadth.

Under California Civil Code § 2778(4), the duty to defend is in all liability insurance contracts unless the policy clearly and unambiguously excludes such a duty. One of the most basic cornerstones of modern insurance law is that the duty to defend is broader than the duty to indemnifyAn insurer must provide a complete defense to its insured even where some causes of action may be outside coverage. Thus, if any claims in a third party complaint against a party insured under a CGL policy are even potentially covered by the policy, the insurer must provide its insured with a defense to all claims.

4. An insurer may be obligated to fund the prosecution of affirmative claims

Insurer responsibility for funding the prosecution of affirmative claims of an insured usually arises in the context of cross-complaints initiated in response to the underlying liability claim. Thus, in some instances, an insurer may be obligated to fund the prosecution of an insured’s counterclaim for affirmative relief where the request for that affirmative relief is inextricably intertwined with the defense of the covered action.

5. Opportunities for securing coverage are enhanced by the penalties flowing from an insurer’s wrongful failure to defend.

Consequences of an Insurer’s Wrongful Failure to Defend:

Waiver of Exclusions to Coverage. Where the carrier wrongfully fails to defend, it will be deemed to have waived any exclusions to coverage under the policy that it otherwise would have had with respect to its obligation to indemnify. If a carrier denies the insured a defense and it is ultimately determined that a defense was owed, the carrier can be subjected to a claim of bad faith and may ultimately be required to provide indemnity even where no duty to indemnify exists

Waiver of Right to Reimbursement for Defense of Uncovered Claims. An insurer that breaches its duty to defend is liable for the costs incurred in the insured’s defense and is precluded from pursuing a reimbursement claim or otherwise allocating between covered and non-covered fees and costs.

Waiver of Right to Insist on “Panel” Rates. An insurer that breaches the duty to defend is precluded from arguing that Civil Code § 2860 should limit its insured’s recoverable fees. “If [a] plaintiff is able to establish breach of the duty to defend, its damages are not limited by California Civil Code § 2860.” Atmel Corp. v. St. Paul Fire & Marine, 426 F. Supp. 2d 1039, 1047 (N.D. Cal. 2005).

Unreasonable Delay By Carrier In Paying Defense Costs Can Constitute Breach Of The Duty To Defend As Subjecting Carrier To Claim For Bad Faith

In Travelers lndem. Co. of Connecticut v. Centex Homes, 2015 WL 58369 47, at *4 (N.D. Cal. 2015), the court held that “[a] failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer’s duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured.” Id. at *5. In Okada the court found that the specific language in the policy required the insurer “must make contemporaneous payments for legal defense on claims covered by the policy.” Okada v. MGIC lndem. Corp., 283 (9th Cir. 1986).

Public Policy Reasons Supporting The Imposition Of Penalties on Insurers That Breach The Duty to Defend

These seemingly harsh results advance the policy of incentivizing insurers to vigorously search the underlying claim for the purpose of finding a duty to defend. “If the insured elects to proceed in tort, recovery is possible for not only all unpaid policy benefits and other contract damages, but also extra-contractual damages such as those for emotional distress, punitive damages and attorney fees”. Archdale v. American International Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 467-68, n. 19 (2007).

Recent Developments in Bad Faith Liability

Recent case authority suggests that an insurer may be liable for bad faith even if it offers up its full policy limits to settle a third party liability claim. In that case the Court held that notwithstanding its offer of full policy limits, the insurer was unreasonable in refusing to agree to the inclusion of language in the settlement agreement which would have preserved the insured’s right, without offset, to court-ordered restitution from the tortfeasor. In those circumstances, the court allowed the insured’s bad faith case to proceed.

6. The “leverage” created by the duty to settle.

Once the duty to defend attaches, the insurer also has an obligation to settle the claim within policy limits. If the carrier rejects a reasonable settlement offer from the claimant that is within policy limits, it may be liable for any judgment that is in excess of the policy limits. Importantly, in rejecting such a settlement offer, the carrier may not take into account or consider any defenses it may have to coverage for the claim. In order to establish a claim for bad faith, the insured must demonstrate that the policy obligated the insurer to indemnify the insured for the underlying loss. Liability carrier has affirmative duty to negotiate toward a settlement on behalf of its insured, even in the absence of an offer or demand by the claimant.

7. Amounts ostensibly paid as restitution for “ill gotten gains” may in fact represent covered “damages”.

Whether amounts paid by policyholders to fund settlements are covered under an insurer’s duty to indemnify is often a contested issue. See, e.g., TIAA-CREF Individual & Institutional Services, LLC, et al. v. Illinois National Insurance Company, et al., Case No. N14C-05-178 JRJ (Delaware Superior Court, October 20, 2016) (finding that settlement amounts paid to settle class actions alleging unfair business practices did not represent uninsurable disgorgement). See also U.S. Bank v. Indian Harbor Insurance Company, 2014 WL 3012969 (D. Minn. 2014) (bank was entitled to coverage under its professional liability insurance for restitutionary amounts it paid in settlement of an overdraft fee overcharge class action).

8. Unexpected coverage opportunities in IP and commercial disputes

Utilizing coverage for “personal injury” or “advertising injury” in business disputes. In lawsuits involving claims of infringement, misappropriation or the violation of the right of privacy, the key portion of a CGL policy is the “personal injury” or “advertising injury” coverage found in Coverage B. That coverage section will typically contain language providing as follows:

1. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages…

2. This insurance applies to “personal and advertising injury” caused by an offense arising out of your business but only if the offense was committed in the “coverage territory” during the policy period.

“Accidental” conduct is not required for coverage for personal or advertising injury. Coverage for personal or advertising injury does not depend on the existence of an “occurrence,” which typically is defined in terms of “accidental” conduct. Thus, coverage for personal and advertising injury is not limited to negligence and may even cover intentional torts.

Arbitrator Snooze … You Lose? A Reminder To Raise Specific Objections To An Arbitrator First, Or Risk Forfeiting Them On Appeal

Gregory N. Heinen | Foley & Lardner

You represent a business owner who ends up arbitrating a dispute with a supplier.  After spending tons of time and money preparing for the 5-day evidentiary hearing, you look up to hear snoring from the arbitrator – he fell asleep for part of the proceedings!  Surely you’ll be able to get the result vacated by the circuit court on appeal, right?  Well, no – not if you slept on your objection by failing to first specifically raise it with the arbitrator, according to the Wisconsin Court of Appeals’ recent decision in Loren Imhoff Homebuilder, Inc. v. Lisa Taylor, et al., No. 2019AP2205, 2020 WL 6495102 (Wis. Ct. App. Nov. 5, 2020).   

The underlying facts of Loren Imhoff, a remodeling dispute between homeowners and a builder, are commonplace.  But the case took an unusual turn after the arbitration hearing, when the homeowners asked the arbitrator to recuse himself, alleging, among other reasons, that he had been sleeping (or at least drowsy) during parts of the hearing.1   Loren Imhoff, 2020 WL 6495102, *2.  The arbitrator rejected the request, and issued a decision in the builder’s favor, which the homeowners persuaded the circuit court to vacate on the ground (under Wis. Stat. § 788.10(1)(d)) that the arbitrator had “imperfectly executed” his powers.  Id. *2-3.  The Court of Appeals reversed, holding that the homeowners had forfeited their objection by failing to raise it during or after the arbitration hearing.  Id. *3.

The opinion includes a lengthy discussion of Wisconsin law involving arbitration, as well as forfeiture of objections.  The key point was that, just as a potential appellant generally forfeits arguments not first presented to the trial court, parties to an arbitration generally forfeit objections not first raised before the arbitrator.  Id. *5-9.  The Court found additional support for this holding in the fact that appellate standards of review are very deferential to arbitration decisions.  The fatal flaw for the homeowners was that they did not specifically present to the arbitrator the issues that his sleeping caused, but raised it for the first time in the circuit court.  They thus snoozed on (and forfeited) their objection. 

Careful readers may protest, noting that the homeowners had asked the arbitrator to recuse himself on this basis.  That was not enough.  Instead, the homeowners needed to point to what evidence the arbitrator slept through, and ask him to resolve any issues that his naps had caused in his final decision.  Id.  They didn’t do this, so their arguments about making “reasonable attempts to rouse the arbitrator” while “trying to be subtle about it” were unavailing.  Id. *10.  Perhaps an air horn next time?  In all seriousness, practitioners should note that in any litigation, particularly in arbitration, they need to raise objections soon as possible, and make them as detailed as possible, pointing to exactly what errors they allegedly caused.  Otherwise, your hopes of delivering your client a win may be nothing but a dream.


1 One of the funnier aspects of the opinion is that its citations reveal this is not the first – or third, or fourth – time an appellate court has needed to confront issues arising from a dozing arbitrator.  See id. *9.  Parties to arbitration may want to consider spicing up their presentation of the evidence.or at least making sure salads are served at lunch?

The Right to Arbitrate and the Risk of Losing It

Katherine H. Blankenship and J. David Pugh | Buildsmart

The Alabama Supreme Court recently found that a party was in breach of an arbitration agreement for declining to pay the fee schedule set forth by the American Arbitration Association (AAA) and thus lost the right to compel arbitration. This case serves as a reminder to follow the orders of arbitral institutions or risk losing the opportunity to arbitrate your dispute. The Alabama Supreme Court’s decision further enforces the sage advice to draft arbitration agreements carefully and meticulously to protect and ensure your rights and preferences in the adjudication of a dispute.

In Fagan v. Warren Averett Companies, LLC, the parties disputed the applicability of the Employment Arbitration Rules in regards to a dispute arising from a personal service agreement (PSA). Upon review of the plaintiff employee’s arbitration demand, the AAA determined the arbitration would be administered in accordance with the Employment Fee Schedule that required the defendant employer to submit a substantially higher filing fee than the employee.

When the employer declined to pay the AAA filing fee, the AAA closed the case. The employee then filed suit against the employer in state court, and in response, the employer filed a motion to dismiss and compel arbitration. The employer argued that the AAA’s administrative ruling applying the Employment Fee Schedule violated the PSA. The employee responded that the employer was precluded from enforcing the arbitration provision in the PSA because it had declined to participate in the arbitration.

The Alabama Supreme Court agreed with the employee holding that the employer’s refusal to pay the filing fee constituted a default of the arbitration agreement in the PSA and that, based on its breach, the employer had lost the right to compel arbitration.

What can you learn from this decision? First, if you elect arbitration as your means of binding dispute resolution, then the rules, decisions, and procedures of the chosen arbitral institution should be followed or you run the risk of losing the right to arbitrate altogether. That risk is not to be taken lightly. Arbitration is intentionally selected as a means of resolution for any number of reasons, but all of them important to the party so choosing. Arbitration can provide an arbitral tribunal that is expert and well versed in the subject matter and industry providing parties with crucial expertise they may not have access to in state or federal courts. It may also offer a more expedient and efficient means of resolution. But, whatever the motivations for selecting arbitration, the parties most likely want to preserve and protect that right. To preserve the arbitration remedy and all its accompanying benefits, adherence to applicable rules and procedures is important.

The second key takeaway from this case is to carefully and precisely draft your contracts. In this case, if the parties had specified they would split all costs and fees 50/50 in the arbitration agreement, the court may have decided differently. Enlisting legal help for an assiduous contract review may not sound appealing, but it is a task that can save you much heartache and expense down the road. Ensuring that your priorities, intentions, and requirements are codified clearly and unambiguously in a binding document is money well spent.

State Farm Pilot Uses Sensors to Detect Wiring Defects That Can Cause Fires

Jim Sims | Claims Journal

State Farm is sending sensors that can detect hazards in electric wiring to 40,000 homeowners in California, Arizona and Texas as part of a pilot project that will measure potential savings and customer acceptance.

Mike Fields, a State Farm vice president and leader of the insurer’s Red Labs team, said during an interview Friday that customers who sign up for the project will receive a Ting sensor for free and up to $1,000 for electrical repairs if any problems are detected. The devices, manufactured by Whisker Labs, retail for $349. One Ting plugged into a wall socket can detect loose connections, damaged wires or faulty appliances.

“We know it works in the home,” Fields said. “We want to know the acceptance rate for homeowners.”

State Farm said electrical fires make up 13% of all home fires and cause about $1.3 billion in damages annually in the United States. Electrical fires cause $100,000 in damages, on average.

“No one wants to see those fires,” Fields said.

The Ting software detects tiny electrical arcs, which are precursors to imminent fire risks, Whisker Labs says on its website. If a malfunction is detected, the Ting device sends the homeowner an alert via smart phone.

“The device is simple,” Fields said. “We wanted to wait and make sure that there was an easy and simple way for customers to install it.”

Fields said the Ting device can detect defects not only in wiring inside the home, but also in the transformer outside. That device converts electricity from high-voltage power lines to a lower voltage for household use.

Often transformers are mounted on power poles and can cause wildfires if they shoot off sparks. Investor-owned utilities in California have been ordered to pay billions for damages caused by wildfires ignited by their malfunctioning equipment.

Fields said State Farm chose to market the pilot project to policyholders in areas of California, Arizona and Texas that have a greater wildfire risk specifically to gauge its impact. He said if a Ting device detects a problem with a transformer, it will alert the homeowner, who hopefully willnotify the utility.

Field said State Farm started the project in 2019 by installing 2,000 Ting devices in homes owned by its employees and agents. Since September, the carrier has sent another 11,000 sensors to customers.

He said only about 22 alarms have been set off so far. He said 10 of those alerts were for problems with transformers. The Ting devices also detected an electric heater that was overheating, a sparking outlet, and defective circuit breakers.

State Farm Ventures, the carrier’s investment arm, has an ownership stake in WhiskerLabs, although Fields said that is separate from the partnership for the pilot project. The company, headquartered in Germantown, Md., launched Ting in 2017. The company said that while fundamentally different, the closest market analog to Ting for electrical fire safety applications is the Arc-Fault Circuit Interrupter (AFCI), which was incorporated into the U.S. electrical code in 2010. AFCI’s have a global market of $4 billion, WhiskerLabs said in a press release last year.

Fields said State Farm has also field tested devices that detect water leaks — which are another common cause of property damage claims. He said customers found that it was expensive to install devices that both detected leaks and shut off water to the house, leading to a low “turn-on rate,” except for a small segment of high-income customers. He said devices that detect leaks but can’t shut the water off are easier to install, but most customers wanted devices that shut off the water supply.

The Changing Fact of Additional Insured Coverage

J. Blake Hunter | Butler Weihmuller Katz Craig

As a coverage attorney, I often find myself representing the liability insurers of both general contractors and subcontractors.  When representing a carrier for a general contractor, one of the first questions the client usually asks us to explore is whether its named insured may qualify as an “additional insured” on a policy issued to one of its subcontractor under an additional insured endorsement.  Correspondingly, when representing a carrier for a subcontractor, one of the first questions the client usually asks is whether the client owes additional insured coverage to the general contractor.  The answer to this question of whether the general contractor qualifies as an additional insured on the subcontractor’s policy may more frequently be “no,” in light of a recent decision from the Federal District Court for the Southern District of Florida, Amerisure Insurance Company v. Seneca Specialty Insurance Company, No. 20-20442, 2020 WL 3317035 (S.D. Fla. June 18, 2020). 

In Amerisure, when entering a Walmart, a family was struck by large quantities of wet cement that poured through a gap in the ceiling.  The family sued Walmart alleging that Walmart was directly negligent for failing to maintain the store in a reasonably safe condition and failing to warn plaintiffs of the dangerous condition.  Id.  A final judgment was entered against Walmart.  Id.  Walmart and Amerisure Insurance Company (“Amerisure”) entered into a settlement agreement and assignment of claims wherein Amerisure agreed to pay the judgment entered against Walmart, and Walmart assigned its rights to Amerisure against both the subcontractor on the concrete project and the subcontractor’s insurer, Seneca Specialty Insurance Company (“Seneca”). 

Amerisure sued Seneca arguing that Walmart was an additional insured under Seneca’s policy, but Seneca filed a motion to dismiss arguing that it did not have a duty to defend Walmart.  Id. at *3.  Seneca’s policy provided additional insured coverage to any person or organization shown in the Schedule as required by a written contract, but “only with respect to liability for ‘bodily injury’ … caused, in whole or in part by” the subcontractor’s acts or omissions.  Id. at *1.  

Critically, the court held that the complaint did not allege vicariously liability against Walmart, yet the additional insured endorsement only provided coverage to Walmart as an additional insured for its vicarious liability for actions or inactions of the concrete subcontractor.  Id. at *5.  The court then analyzed Garcia v. Federal Insurance Co., 969 So. 2d 288 (Fla. 2007), explaining: 

The Supreme Court of Florida found that the phrase “because of” in the additional-insured endorsement was “relevant” and that “there is a more circumscribed meaning to ‘because of’ than merely being a sequential link in the chain of events….  The phrase appears to include persons or organizations held in by way of vicarious liability for derelictions of [the named insured].”  Id. at 293 (emphasis added) (quoting Long Island Lighting Co. v. Hartford Accident & Indem. Co., 350 N.Y.S. 2d 967, 972 (N.Y. Gen. Term. 1973)). Thus, the Florida Supreme Court reasoned that “[t]he omission  of the words ‘but only’ in [the insurer’s] policy [did] not materially change the limitation of the additional insured provision to instances of vicarious liability.”  Id.  (emphasis added).  The Florida Supreme Court further explained that “the presence of the words ‘because of’ in [the insurer’s] policy require[d] that an additional insured’s liability be ‘caused by’ the acts or omissions of the named insured.”  Id.  (emphasis added).  In short, the Florida Supreme Court held that the insurer’s policy did not cover the additional insured’s “independent acts of negligence” and that “[b]ecause the accident victim’s suit against [the additional insured] sought recovery only for her direct negligence, and did not allege any liability based on acts or omissions of [the named insured], [the additional insured] [was] not entitled to coverage.” Id. at 294.

Id.  The court further explained that federal courts applying Florida law to additional insured endorsements similar to the one in Seneca’s policy consistently hold that the endorsements do not provide coverage where the underlying lawsuit fails to allege that the additional insured is vicariously liable for the negligence of the named insured.  Id. at *6.  See also, King Cole Condo. Ass’n, Inc. v. Mid-Continent Cas. Co., 21 F. Supp. 3d 1296, 1299 (S.D. Fla. 2014) (holding that no coverage existed because the underlying complaint only alleged direct negligence against the additional insured and the additional insured endorsement only provided coverage for injuries caused, in whole or in part, by the named insured); United Rentals, Inc. v. Mid-Continent Cas. Co., 843 F. Supp. 2d 1309, 1312 n.6 (S.D. Fla. 2012) (same); Mid-Continent Cas. Co. v. Constr. Servs. & Consultants, Inc., No. 06-CV-80922, 2008 WL 896221, *3 (S.D. Fla. March 31, 2008) (not reported) (same). 

Coverage attorneys for insurers of general contractors usually rely on Mid-Continent Casualty Co. v. Royal Crane, LLC, 169 So. 3d 174, 179-83 (Fla. 4th DCA 2015), when seeking additional insured coverage.  The case held that the phrase, “caused, in whole or in part by” the named insured should not be construed narrowly to only provide coverage for vicarious liability of the named insured.  Amerisure was no exception.  However, the court distinguished Royal Crane, explaining: 

Although Royal Crane  provides some support for Amerisure’s argument, that case is inapposite here.  Not only did Royal Crane  openly apply a “relaxed standard,” Id. at 184, but also, it did not address the Florida Supreme Court’s ruling in Garcia, see generally id. – which might be because Royal Crane “ did not involve an additional insured endorsement, but rather only found that there was no ‘insured contract’ within the meaning of the policy” and thus there was no duty to indemnify under the policy’s indemnification provision.  See Cmty. Asphalt Corp., 2017 WL 4712199, at *9 (declining to follow Royal Crane).  In any event, Royal Crane  runs against the Florida Supreme Court’s ruling in Garcia  and the weight of authority in this District. 

Id. at *8. 

What does this all mean?  This was a good result for the defense.  Additionally, when evaluating additional insured coverage, coverage counsel needs to pay specific attention to the causes of action alleged in the underlying complaint and the provisions of the additional insured endorsements.