First-Step Analysis: Bringing Insurance Litigation Proceedings in USA

Mary Beth Forshaw | Simpson Thacher

Preliminary and jurisdictional considerations in insurance litigation


In what fora are insurance disputes litigated?

Most insurance disputes are litigated in state or federal trial courts. An insurance action may be subject to original federal court jurisdiction by virtue of the federal diversity statute, 28 USC section 1332(a). In this context, an insurance company, like any other corporation, is deemed to be a citizen of both the state in which it is incorporated and the state in which it has its principal place of business.

If an insurance action is originally filed in state court, it may be removed to federal court on the basis of diversity. Absent diversity of parties or some other basis for federal court jurisdiction, insurance disputes are litigated in state trial courts. The venue is typically determined by the place of injury or residence of the parties, or may be dictated by a forum selection clause in the governing insurance contract.

Some insurance contracts contain arbitration clauses, which are usually strictly enforced. If an insurance contract requires arbitration, virtually every dispute related to or arising out of the contract typically will be resolved by an arbitration panel rather than a court of law. Even procedural issues, such as the availability of class arbitration and the possibility of consolidating multiple arbitrations, are typically resolved by the arbitration panel.

Practitioners handling insurance disputes governed by arbitration clauses should diligently comply with the procedural requirements of the arbitration process. Arbitration provisions in insurance contracts may set forth specific methods for invoking the right to arbitrate and selecting arbitrators. Careful attention to detail is advised, as challenges to the arbitration process are commonplace. An insurance dispute that originates in arbitration may ultimately end up in the judicial system as a result of challenges to the fact or process of arbitration.

Causes of action

When do insurance-related causes of action accrue?

Insurance litigation frequently involves a request for declaratory judgment or breach of contract claims, based on allegations that an insurer breached its defence or indemnity obligations under the governing insurance policy. Insurance-based litigation may also include contribution, negligence or statutory claims. For any insurance-related claim to be viable, it must be brought within the applicable statute of limitations period, which is governed by state law. In determining whether a claim has been brought within the limitations period, courts address when the claim accrued. For breach of contract claims, the timing of claim accrual may depend on whether the claim is based on an insurer’s refusal to defend or failure to indemnify. When a claim arises from an insurer’s failure to defend, courts typically endorse one of the following positions:

  • the limitations period begins to run when the insurer initially refuses to defend;
  • the limitations period begins to run when the insurer refuses to defend, but is equitably tolled until the underlying action reaches final judgment; or
  • the limitations period begins to run once the insurer issues a written denial of coverage.

When a claim arises from an insurer’s refusal to indemnify a policyholder, courts have held that the claim accrues either when the underlying covered loss occurred or when the insurer issues a written denial of coverage.

A legal finding that a policyholder’s claim is time-barred is equivalent to a dismissal on the merits.

Preliminary considerations

What preliminary procedural and strategic considerations should be evaluated in insurance litigation?

At the outset of insurance litigation, practitioners must conduct a careful evaluation of possible causes of action in light of the available factual record in order to assess procedural and substantive strategies. When an insurance dispute turns on a clear-cut question of law and could appropriately be resolved on a motion to dismiss or a motion for summary judgment, dispositive motion practice should be considered. For example, if an underlying claim for which coverage is sought alleges an occurrence that arose after the insurance policy at issue expired or alleges facts that fall squarely within the terms of a pollution exclusion, the insurer may file a dispositive motion to seek swift resolution of its coverage obligations. In contrast, where an insurance dispute presents contested issues of fact, practitioners should be vigilant about formulating case management orders and discovery schedules. Insurance-related discovery is often contentious, expensive and time-consuming, and may give rise to disputes regarding privilege or work product protection. In this respect, document retention policies must be implemented and in some cases, confidentiality stipulations may be appropriate. Finally, a preliminary assessment of any insurance matter should involve consideration of whether it is appropriate to request trial by jury or whether to implead third parties, including entities such as co-insurers, third-party tortfeasors or insurance brokers.


What remedies or damages may apply?

Many insurance coverage lawsuits seek relief in the form of a judicial declaration that articulates the scope of coverage under the insurance policies in dispute. In essence, one or more parties request that the court enter a ruling that coverage is available or unavailable before addressing the appropriate remedy or damages. If the court issues a ruling declaring coverage to be exhausted or otherwise unavailable, the appropriate remedy or damages may be dismissal of the action with or without costs imposed on the insured.

Where courts find coverage to be available, they often go on to address the issue of remedy or damages in a separate phase of the case. The most common measure of damages in insurance litigation is contractual damages, which may be awarded in connection with a breach of contract claim. The amount of contractual damages is typically based on the coverage due under the relevant policies (or, for a claim of rescission, the amount of premiums to be refunded). In complex insurance litigation, such as that involving multiple layers of coverage with injuries or damage spanning an extended period of time, the damages calculation may be more involved, often requiring expert testimony.

Aside from basic contractual damages, additional amounts may be recovered in certain insurance disputes. For example, some jurisdictions may allow consequential damages based on economic losses that flow directly from the breach of contract or that are reasonably contemplated by the parties. Additionally, some jurisdictions permit attorneys’ fees awards under certain circumstances.

Whether attorneys’ fees awards are available may be governed by state statute, relevant case law or, in some cases, the insurance agreements themselves. Arbitration clauses, in particular, may provide for the payment of the prevailing party’s attorneys’ fees and costs. While attorneys’ fees may be difficult to recover, the threat of an attorneys’ fees award may affect the dynamics of settlement negotiations.

Infrequently, the possibility of tort-based or punitive damages can arise in insurance litigation. These damages may come into play in the context of claims alleging that an insurer acted in bad faith or violated state unfair or deceptive practices statutes.

Where monetary damages are awarded in an insurance action, a corollary issue is the imposition of pre-judgment (or post-judgment) interest. The imposition and rate of interest may be determined by the parties via explicit contractual language. Absent governing language, the question of whether a prevailing party is entitled to pre-judgment or post-judgment interest and, if so, the applicable interest rate, is typically governed by state law. When pre-judgment interest is allowed, determination of the accrual date is paramount because opposing positions can differ by many years, and resolution can have a significant impact on the total damages award. Courts have utilised different events for determining the interest accrual date, including when payment was demanded, when payments are deemed due under the applicable policy and when the complaint was filed.

Under what circumstances can extracontractual or punitive damages be awarded?

Certain states permit policyholders to seek extracontractual or punitive damages when an insurer allegedly has acted in bath faith or violated unfair or deceptive practices statutes. Bad faith allegations frequently relate to an insurer’s refusal to defend or settle an underlying matter, but can also stem from other conduct, such as claims-handling practices. Some jurisdictions do not recognise tort claims arising out of an insurer’s breach of contract. In those jurisdictions, a policyholder’s recovery typically is limited to contractual damages, with no opportunity for punitive damages. Some courts in those jurisdictions, however, may allow recovery of extracontractual damages (eg, lost income or related economic losses) against an insurer if the losses were foreseeable and arose directly out of the breach of contract.

In jurisdictions that recognise bad faith tort claims against an insurer, policyholders face several obstacles when seeking punitive damages. In most but not all cases, a punitive damages claim is not actionable without an adjudication that the insurer has breached the insurance contract. Even where an insurer is held to have breached a contract, and a policyholder has established bad faith or statutory violations, punitive damages are extremely difficult to recover. Most jurisdictions strictly require the party seeking punitive damages to meet a high burden and to prove ‘wilful or malicious’ conduct, ‘malice, oppression or fraud’ or ‘gross or wanton behaviour’ by the insurer. Furthermore, some jurisdictions impose an elevated burden of proof, requiring that bad faith be shown by ‘clear and convincing evidence’.

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18 December 2019

Arbitration Denied: Third Appellate District Holds Arbitration Clause Procedurally and Substantively Unconscionable

Stephen M. Tye and Lawrence S. Zucker II | Haight Brown & Bonesteel

In Cabatit v Sunnova Energy Corporation, the Third Appellate District held that an arbitration clause in a solar power lease agreement was unenforceable because it was procedurally and substantively unconscionable.

In Cabatit, Mr. and Ms. Cabitat entered into a solar power lease agreement (the “Agreement”) with Sunnova Energy Corporation (“Sunnova”). Ms. Cabitat, who signed the agreement, speaks English but does not understand complicated or technical terms. The salesperson scrolled through the agreement language and Ms. Cabatit initialed where the salesperson indicated, even though she did not understand most of what he was saying. The salesperson did not explain anything about the arbitration clause nor did he provide Ms. Cabatit with a copy of the Agreement.

Subsequently the Cabatits sued Sunnova, alleging Sunnova damaged their roof during installation, and that the replacement roof was inferior to the roof they had damaged.  In addition, the Cabatits alleged violations of the California Home Improvement Law, Home Solicitation Law, Unfair Competition Law, and Consumer Legal Remedies Act. Sunnova moved to compel arbitration based on an arbitration clause in the Agreement. The trial court found the arbitration clause unconscionable and denied Sunnova’s motion.

On appeal, Sunnova contended (1) the arbitration clause requires the Cabatits to submit to an arbitrator the question whether the clause is enforceable, (2) the trial court erred in finding the arbitration clause unconscionable, and (3) despite the trial court’s conclusion to the contrary, the rule announced in McGill v. Citibank, N.A. (2017) 2 Cal.5th 945 (McGill) — that an arbitration agreement waiving statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law is unenforceable — does not apply to the circumstances of this case.

In affirming the trial court, the Court of Appeal first discarded Sunnova’s argument that the arbitration clause requires the Cabatits to submit to an arbitrator the question whether the clause is enforceable because Sunnova failed to raise that argument to the trial court. The Court of Appeal then examined the clause itself and the surrounding circumstances, providing a two-step analysis in determining that the Agreement was procedurally and substantively unconscionable.

First, the Court of Appeal determined the Agreement was a contract of adhesion that indicated oppression and surprise. The Court quoted Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1142, for the proposition that “[o]ne common formulation of unconscionability is that it refers to an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (quotation marks omitted). The Court pointed to the following factors in making its determination, that (1) Sunnova drafted the Agreement and the Cabatits had no option other than to take or leave it; (2) Ms. Cabatit did not understand the Agreement; (3) the arbitration clause was not explained by the salesman, and (4) the Cabatits were not given a copy of the Agreement. The Court of Appeal rejected arguments from Sunnova that (1) Ms. Cabatit signed a statement that she had read the terms of the Agreement; (2) the arbitration clause is conspicuous; (3) there were no facts showing Sunnova had superior bargaining strength or that the Cabatits were without a meaningful choice whether to sign the Agreement; and (4) the Cabatits had the right to cancel the Agreement within seven days.

Second, the Court determined the arbitration clause was substantively unconscionable. In doing so, the Court relied upon Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910, for the proposition that substantive unconscionability focuses on whether the terms of an agreement are overly harsh, unduly oppressive, or so one-sided as to shock the conscience. Here, the Court found the arbitration clause to be clearly one sided because Sunnova reserved the right to take most of its claims to court but purported to deny the Cabatits the same opportunity.

Finally, the Court of Appeal rejected Sunnova’s argument that the rule announced in McGillsupra, 2 Cal.5th 945, applied. In McGill, the California Supreme Court held that an arbitration agreement waiving statutory remedies under the Consumers Legal Remedies Act, the unfair competition law, and the false advertising law is unenforceable. (Id. at pp. 951-952.) The Court determined general considerations of unconscionability, independent of the McGill rule, was sufficient to support the trial court’s denial of the motion to compel arbitration.

Cabatit is important for two reasons. First, it demonstrates the high-bar that allows a court to find a contract of adhesion. Second, it demonstrates the need for arbitration clauses not to favor the drafting party.

This document is intended to provide you with information about general liability law related developments. The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

Power Project Development: Aligning the EPC Agreement and Power Purchase Agreement

Matthew A. Sanders | Taft Stettinius & Hollister

Power project developers often negotiate the engineering, procurement, and construction agreement (EPC) at the same time as other project contracts. Depending on the project type and contracting paradigm, a developer (owner) must align key EPC terms with some or all of the following: (1) power purchase agreement (PPA), (2) interconnection agreement, (3) major supply agreements, and (4) operations and maintenance (O&M) agreement.

This article will evaluate the EPC as an exercise in risk allocation, and then highlight issues for alignment with the PPA. In future articles, we will identify areas that overlap between the EPC and other project contracts.

I. EPC Agreement and Risk Allocation

Owners must approach major project contracts holistically and allocate risks to the party who can mitigate that risk. A party that accepts a risk must, in turn, protect against it wherever possible. For example, a party might mitigate risk through price adjustments, more insurance, or further risk allocation to third parties. Any gaps in risk allocation between project contracts may create financing challenges. They may also cause schedule delays, additional costs, revenue losses, contractor disputes, or off-taker liabilities.

The owner looks to the EPC contractor to deliver a timely completed, fully operational, legally compliant, on-budget, revenue-generating power project. Invariably, the engineering and construction phase is fraught with risks concerning schedule, cost, and implementation. Among other things, an owner must anticipate incurring significant capital expenses while laboring under tight timing and financing constraints. Early missteps can undermine viability or erode profitability, long before the project begins to generate revenue.

Thus, an owner may look to the contractor to accept such risks by requiring a fixed contract price, guaranteed completion dates, and performance guarantees. At the same time, the owner will impose liquidated damages and other damages for delays and technical shortfalls. Of course, as the owner pushes risk onto the contractor, the contractor may act defensively through price increases, schedule float, and aggressive change order use.

The owner must weigh whether to accept the pricing premium and longer delivery times in exchange for some price and schedule certainty. The owner must also collaborate with its engineering consultant and the contractor to develop a technical specification that provides clear, achievable project outcomes. And if the owner needs project financing, then the owner will work with lenders and equity investors to ensure the risk allocation leads to a bankable project and project contracts that will work as intended.

II. EPC Agreement and Power Purchase Agreement (PPA)

A PPA is a long-term electricity supply agreement between a power producer and a buyer, or “off-taker.” Ordinarily, this contractual mechanism provides a project with stable cash flows following the commencement of commercial operation.

The off-taker is typically either a load-serving utility, a large commercial or industrial end user, or a power marketer. The off-taker signs up to buy all or a portion of a project’s output for an extended term. To ensure the project will meet the buyer’s power and pricing requirements, the project developer may commit to provide the off-taker with schedule guarantees, expected energy guarantees, and capacity guarantees.

For projects that anticipate construction activities, the PPA addresses two distinct phases: the pre-Commercial Operation Date (COD) construction phase and the post-COD operation phase. The interface between the EPC and the PPA is keenly experienced during the pre-COD period when the schedule is at risk and project performance must be assured.

a. Schedule Milestones – EPC’s Substantial Completion Date and PPA’s Commercial Operation Date

The EPC guaranteed substantial completion date often aligns with the PPA guaranteed commercial operation date. EPC substantial completion usually means that a project is available to begin operation and has met a suite of conditions. Ordinarily, all that remains are “punch list” items, final testing, and other project close-out activities.

PPA commercial operation usually means that the owner has completed all commissioning activities and that the facility is operating at or near its nameplate capacity and expected facility output.

If the owner misses a guaranteed milestone under the PPA or the EPC, each project contract may impose schedule liquidated damages until the milestone is satisfied. A delay that continues for too long may mature into a default, leading to termination rights and other remedies.

To ensure that guaranteed milestones in both agreements reinforce each other and do not create any gaps, an owner should consider the following:

  1. The EPC guaranteed substantial completion date and PPA guaranteed COD should either match or require delivery prior to the guaranteed COD. For example, if the PPA has a June 1st guaranteed COD, then the EPC guaranteed substantial completion date must occur either on June 1st, or some earlier date. An EPC milestone that occurs later than the guaranteed COD may lead to lost revenue and schedule liquidated damages.
  2. The EPC should narrowly define change order conditions. Change orders may allow a contractor to extend delivery beyond the guaranteed COD. Since an owner must typically grant change orders for owner-caused delays, the owner should ensure its own prompt performance and that of its other contractors, major suppliers, agents, and personnel.
  3. The EPC should include a clearly drafted and internally consistent technical specification, scope of work document, and project schedule. These documents are crucial for minimizing contractor confusion and disputes as well as lessening change order risk and delays.

b. Schedule Liquidated Damages

If the contractor misses the EPC guaranteed substantial completion milestone, then schedule liquidated damages will likely accrue under both contracts. The owner should align the liquidated damages amounts under both agreements so that PPA damages will flow through to the contractor.

Otherwise, the owner must absorb liquidated damage payments payable to the off-taker, while not recovering the amount from the contractor who accepted the schedule risk. And since the contractor likely priced in contingency to account for schedule liquidated damages, without a flow through provision, the owner risks double payment.

c. Project Performance – Substantial Completion Conditions, Capacity Testing, and Performance Guarantee

Under both agreements, the performing party must satisfy conditions before the other party will certify the milestone. Thus, performance criteria comprising EPC substantial completion should align with the relevant COD conditions under the PPA. Chief among these EPC conditions is the satisfaction of commissioning, testing, and turnover obligations.

The owner relies on the contractor’s capacity and energy output tests to certify PPA compliance. Thus, technical personnel for both the contractor and the owner should scrutinize procedures and results to ensure accuracy, consistency, and transparency. And if the PPA requires it, a third party should provide an independent assessment to confirm the project is operational.

For PPAs that authorize commercial operation at some capacity threshold less than 100 percent, the parties may negotiate a post-COD cure period. During this time, an owner may keep working to achieve up to 100 percent contracted capacity.

If the owner – through its contractor – fails to achieve 100 percent contracted capacity, then the PPA may impose a capacity shortfall payment for each megawatt below a specified threshold. This one-time payment represents an owner buy-down for lost production capacity over the PPA term. The PPA should also set a lower boundary of acceptable project capacity, below which would be a default.

To support that PPA requirement, the EPC should require recovery plans following the initial capacity test, assigning cost responsibilities and establishing damages or other remedies. If the off-taker is willing to accept a range of performance under the PPA, the EPC could make the post-COD recovery plan optional.

By allowing the contractor either to elect a capacity shortfall payment or to make good on its delivery obligation at 100 percent, the contractor may be able to minimize cost overruns. If the contractor can meet a range of acceptable performance outcomes, then the contractor could save the other parties money by building less contingency into the fixed price.

The owner, off-taker, contractor, and facility lenders must all coordinate to align financial incentives, capacity shortfall payments, and minimum acceptable performance outcomes. To do this, the parties must synchronize the parallel terms of the PPA and the EPC to avoid any gaps.

In the end, the EPC should flow through the PPA performance guarantees, capacity shortfall payments, and default provisions wherever possible. Just as the owner should avoid being “caught in the middle” when it comes to schedule delays, so also should the owner ensure that the contractor accepts the risk of underperformance if it cannot deliver a project at 100 percent.

Close Enough Only Counts in Horseshoes and Hand Grenades

Garret Murai | California Construction Law Blog

In State Farm General Insurance Company v. Oetiker, Inc., Case No. B302348 (December 18, 2020), a manufacturer sued in subrogation action under the Right to Repair Act almost got away. Almost.

The Oetiker Case

James and Jennifer Philson’s home was substantially completed, and a notice of completion was recorded, in 2004. In 2016, the Philsons tendered a claim to their homeowner’s insurance carrier, State Farm General Insurance Company, after their home experienced significant water damage due to a defective stainless steel ear clamp.

In 2018, after paying the Philson’s claim, State Farm filed a subrogation action against the manufacturer of the ear clamp, Oetiker, Inc. State Farm’s complaint, which included causes of action for negligence, strict products liability and breach of implied warranty, alleged that the home was “damaged by a water leak from the failure of a defective stainless steel ear claim on a water PEX fitting” and that the ear clamp was “defective when it left the control of [Oetiker].”

Because Philson’s home was newly constructed when purchased, Oetiker claimed that State Farm’s subrogation claim was subject to the Right to Repair Act which included a 10-year statute of repose for latent defects and filed a motion for summary judgment on that basis. The trial court granted Oetiker’s summary judgment finding that “Oetiker has established that Plaintiff’s claims for property damage . . . fall within Civil Code section 896(a)(14), (15) [of the Right to Repair Act].”

State Farm appealed.

The Appeal

On appeal, the 2nd District Court of Appeal explained that the Right to Repair Act, while it applies generally to “builders,” also applies as set forth in the Act, “to the extent set forth in Chapter 4 . . . [an] individual product manufacturer . . . [who] shall, except as specifically set forth in this title, be liable for, and the claimant’s claims or causes of action shall be limited to violation of . . . the standards [set forth in the Act].”

Thus, explained the Court of Appeal, the threshold question was whether the defective ear clamp fell within the standards set forth under the Right to Repair Act. The Court held that it did explaining that the standards require that the “lines and components of the plumbing system . . . shall not leak” and that the “[p]lumbing lines . . . shall not corrode so as to impede the useful life of the systems.” And, here, explained the Court, the ear claim at issue was installed on a PEX fitting, a type of plumbing line fitting, and thus was part of the “lines and components of the plumbing system.”

In response to State Farm’s claim that the Right to Repair Act did not apply because Section 896(g)(3)E) of the Act excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to the structure,” the Court of Appeal held that the exception does not apply when a defective product causes a violation of the standards set forth in the Act.

Nevertheless, explained the Court of Appeal, while the Act precludes State Farm’s negligence cause of action, the Act did not preclude State Farm’s strict products liability and breach of implied warranty claims. Citing, McMillin Albany LLC v. Superior Court (2018) 4 Cal.5th 241, in which the California Supreme Court held that the Right to Repair Act replaces common causes of action including causes of action for negligence, strict products liability, breach of contract, and breach of warranty, the Court held that the Act applies different standards to builders versus non-builders, and as to product manufacturers Section 936 of the Act only provides that the Act only applies to a product manufacturer’s negligent act or omission or breach of contract. Thus explained the Court of Appeal:

[A] product manufacturer is liable under the Act only where its negligence or breach of contract caused a violation of the standards [set forth under the Act]. . . . State Farm is therefore precluded from bringing its negligence cause of action . . . [but] [w]e reach a different conclusion with respect to State Farm’s strict liability and breach of implied warranty causes of action. Nothing in the Act restricts a homeowner or its insurer from bringing causes of action which fall outside of the Act.


I’ve never had the chance to the see the Right to Repair Act applied to a products manufacturer, so this case was interesting. The Right to Repair Act is a relatively dense statute with a complicated history and I’m always surprised when reading the cases that come out of it.

New York Court Finds No Coverage Owed for Asbestos Losses Because Insured Failed to Prove Material Terms

Marianne Bradley and Gregory Capps | White and Williams

In the long-tail insurance context, it is not unusual to have issues arise addressing “lost” or “missing” policies. In an opinion issued on January 22, 2021, a New York court ruled that an insurer did not owe coverage to its insured for underlying asbestos claims because the insured had failed to establish the material terms of a “lost” policy under which it sought coverage for the underlying claims. The lawsuit, Cosmopolitan Shipping Company, Inc. v. Continental Insurance Company,[1] arose out of a coverage dispute between Plaintiff Cosmopolitan Shipping Co., Inc. (Cosmopolitan) and its insurance carrier, Continental Insurance Company (CIC), in connection with bodily injury claims arising out of asbestos exposure. The case provides a good analysis of what an insured must do to establish coverage under a “lost” or “missing” policy.

During and after World War II, Cosmopolitan chartered and operated a number of shipping vessels on behalf of United Nations Relief and Rehabilitation Administration (UNRRA). In the 1980s, seamen who had worked on board Cosmopolitan’s vessels between 1946 and 1948 filed lawsuits against Cosmopolitan seeking damages for injuries arising out of alleged exposure to asbestos on Cosmopolitan’s vessels. Cosmopolitan sought coverage from CIC for the claims, alleging that CIC had insured Cosmopolitan’s vessels during the relevant time period under a protection and indemnity policy issued to the UNRAA (the P&I Policy).

Except for three endorsements, the P&I Policy could not be located, and CIC denied coverage on that basis. Cosmopolitan filed a declaratory judgment action, and the court held an evidentiary hearing at which both parties relied upon expert and lay witness testimony to support their respective positions.

After the hearing, Cosmopolitan filed affidavits to establish that it had conducted a sufficiently diligent search for the relevant insurance policies. New York law provides that, where an insured demonstrates it has made a “diligent but unsuccessful search and inquiry for the missing policy,” the insured may rely on secondary evidence to prove the existence and terms of the policy.

Cosmopolitan submitted evidence that it had: (1) asked its former broker to search for policies from the relevant time period; (2) conducted a thorough search of its own internal records; (3) issued subpoenas to other insurance entities permitted to provide P&I coverage for UNRRA vessels during the relevant time frame; and (4) searched various archives for insurance policies issued to Cosmopolitan and the UNRRA. The court determined that such efforts constituted a “sufficiently diligent” search, and Cosmopolitan was accordingly permitted to introduce on secondary evidence.

New York law is unclear as to whether a party using secondary evidence to establish coverage under a “lost policy” must prove the existence and terms of the lost policy by a preponderance of the evidence or by clear and convincing evidence. However, determination of the proper standard was unnecessary in this case because – although Cosmopolitan had proven by clear and convincing evidence that CIC provided insurance to the UNRRA – Cosmopolitan had nevertheless “failed to prove even by a preponderance of the evidence” the terms of the P&I Policy.

The clear and convincing evidence establishing that CIC provided coverage to the UNRRA during the relevant time period included: (1) the three endorsements identified by Cosmopolitan – one of which included language stating that it should be attached to the P&I Policy “of Continental Insurance Company and issued to the UNRRA”; (2) the dates on the three endorsements, which showed coverage from at least May of 1946 to August of 1947; and (3) Cosmopolitan’s witness’ testimony, which established that only four insurance carriers, including CIC, were writing P&I insurance during the relevant time frame.

Although Cosmopolitan established the existence of the P&I Policy, the court still found that CIC did not owe coverage. To create a binding contract, there must be evidence of a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. In this case, Cosmopolitan failed to establish one of the most critical terms of the contract: the limits of the policy. Without knowing the policy limits, the court was unable to determine how much insurance was available to Cosmopolitan for each eligible asbestos plaintiff under the Policy. Accordingly, because the use of secondary evidence did not establish the material terms of the P&I Policy, CIC was not obligated to provide coverage for the underlying asbestos claims.

The Cosmopolitan case provides insurers with guidance when addressing “lost” or “missing” policy issues, which should be considered for spotting issues to assist in defending these types of coverage claims. The decision reflects that the insured has a significant burden and insurers should be aware of that burden and hold the insured to their proofs.

[1] 2020 U.S. Dist. LEXIS 241310 (S.D.N.Y., Dec. 22, 2020)