No Allocation for Defense Costs Incurred in Lawsuit Comprised of Covered and Uncovered “Claims”

Emily Hart | Wiley Rein

The U.S. District Court for the Northern District of California, applying California law, has held that, under a duty to defend policy, an insurer was required to pay defense costs incurred in a lawsuit where the lawsuit contained both covered and uncovered “claims.” Stem, Inc. v. Scottsdale Ins. Co., 2021 WL 3271265 (N.D. Cal. July 30, 2021). 

The insured, a technology company, sought coverage under its directors and officers policy for a shareholder lawsuit (“2017 Lawsuit”) based on a 2013 stock financing round (“2013 Stock Financing”) and a 2017 loan to the company by a member of the board of directors (“2017 Loan”).  The court concluded that the interrelated wrongful act exclusion barred coverage for the 2013 Stock Financing “Claim,” but that coverage was available for the 2017 Loan “Claim” because it did not relate back to an earlier dispute.

The insured then moved for partial summary judgment on the measure of damages. The insured argued that, pursuant to the insurer’s duty to defend, the insurer was required to cover all defense costs incurred in the 2017 Lawsuit, even though the lawsuit contained both covered and uncovered “claims.” The insurer argued that the court should apply the policy’s allocation provision to cover only defense costs related to the 2017 Loan.

The court held that the insurer was required to cover defense costs incurred for the entire 2017 Lawsuit. The court reasoned that, even if an allocation provision applies where there is a duty to defend, in the instant matter, there was not “undeniable evidence of the allocability of specific expenses because the 2017 [L]awsuit is ongoing” and the insured had “taken steps to defend against the [2017 Loan Claim]” for which the insurer’s “proposed allocation does not account.”

Federal Court: Insurer Breaches Duty to Defend By Insisting it Owes Only a “Defense-Follows-Indemnity” Share of Defense Costs

Sarah Odia and Scott Thomas | Payne & Fears

In an insurance recovery case being handled by Payne & Fears partners Scott Thomas and Sarah Odia, an Arizona federal court, applying Nevada law, recently held that NGM Insurance Company breached its duty to defend its additional-insured homebuilder by refusing to pay more than a proportionate share of the builder’s defense costs based on what NGM called a “defense-follows-indemnity” formula.

The court rejected NGM’s argument that its duty to defend required it to pay only a small fraction of the builder’s defense costs proportionate to its named insured’s relatively small role in the homeowners’ overall damages; the court correctly applied Nevada law to the effect that if an insurer has a duty to defend any part of a lawsuit, it has a duty to defend the entire lawsuit. This ruling puts to rest the ill-conceived notion that under Nevada law, insurers defending developers and homebuilders as additional insureds under policies issued to subcontractors can get away with anything less than fully defending their additional insureds.

The court also rejected NGM’s argument that the builder “failed to mitigate” its damages by not trying to shift NGM’s defense burden to other defending insurers. Instead, the court held that the builder is entitled to recover from NGM all of the builder’s reasonable defense costs and any consequential damages resulting from NGM’s breach – potentially including its litigation expenses in the recovery action.

The case is Centex Homes et al. v. NGM Insurance Co., case number 2:19-cv-01392, in the U.S. District Court for the District of Arizona (July 9, 2021 Order, ECF No. 195).

Eastern District of Pennsylvania Confirms Carrier Owes No Duty to Defend Against Claims for Faulty Workmanship

Anthony L. Miscioscia and Marianne Bradley | White and Williams

On March 17, 2021, the Eastern District of Pennsylvania issued its decision in Estate Chimney & Fireplace v. IFG Companies & Burlington Insurance Company, 2021 U.S. Dist. LEXIS 50360 (E.D. Pa. March 17, 2021), finding that an insurance carrier had no duty to defend its insured where the allegations in the underlying litigation involved claims of faulty workmanship.

Estates Chimney & Fireplace, LLC (Estates Chimney) had performed inspections and replaced chase covers for a number of chimneys in a condominium complex. Chase covers are pieces of metal, which are placed over chimneys in order to keep out environmental elements. Several condominium owners sued Estates Chimney, alleging that Estates Chimney had improperly installed, then improperly replaced, their chimney caps, which caused their chimneys to cease working properly. As a result, the underlying plaintiffs allegedly incurred costs to repair or replace the chimney caps and chimneys.

Estates Chimney sought coverage from its carrier, who denied coverage based upon its determination that the claims in the underlying lawsuits arose out of faulty workmanship, which did not result in damage to the property of a third party. Estates Chimney filed a declaratory judgment action, seeking a declaration that it was entitled to coverage under the policy. Both parties moved for summary judgment, and the Eastern District ruled in favor of the carrier.

In reaching its decision, the court declined to consider the insured’s expert’s opinion, explaining that – under Pennsylvania law – courts “must decide coverage issues based on the four corners of the complaint against the insured, not the opinion of an expert, even if that expert opined that Estates Chimney did quality work that complied with all laws and regulations. This is a coverage dispute, the outcome of which cannot be decided by extrinsic evidence that addresses the merits of the underlying claims.” Id. at *17.

Having determined that its consideration was limited solely to the four corners of the underlying complaints, the court concluded that all of the underlying plaintiffs’ claims were for faulty workmanship, which do not present the degree of fortuity required for there to be a covered “occurrence,” defined in part as an “accident.” Id. at *17 (citing Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006).

The court further rejected the insured’s argument that – because some of the underlying plaintiffs may have sought consequential damages – the allegations in the underlying complaint constituted an “occurrence.” Id. Rather, the court explained that “the holding in Kvaerner has been extended to the foreseeable results of the insured’s faulty workmanship.” Id. Thus, because it was foreseeable that faulty workmanship when capping chimneys could lead to damage to the chimney itself, rendering the fireplace unusable, “there is no insurance coverage.” Id. at *16.

Finally, the court declined to find a covered “occurrence” based upon the insured’s argument that the underlying lawsuits involve “specific allegations of negligence.” Relying upon well-established Pennsylvania law, the Eastern District explained that it is the factual allegations, not the legal terminology used in the complaint, which determines whether a duty to defend arises. Id. at *18 (citing Nationwide Mutual Insurance Company v. CPB International, Inc., 562 F.3d 591, 598-99 (3d Cir. 2009)). Thus, faulty workmanship – even when cast as a negligence claim – does not constitute a fortuitous event. Id. (citing Westfield Insurance Company v. Bellevue Holding Company, 856 F. Supp. 2d 683, 694 (E.D. Pa. 2012).

Illinois Court Determines Duty to Defend Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii

    Given the underlying allegations of damage to personal property, the court determined the insurer had a duty to defend. Certain Underwriters at Lloyd’s London v. Metropolitan Builders, Inc., 2019 Ill. App. LEXIS 979 (Ill. Ct. App. Dec. 18, 2019).

    Metropolitan was hired as the general contractor for construction, renovation and demolition at contiguous properties – the 1907 Property, 1909 Property, and 1911 Property. During construction activities, the structures on the 1907 Property and 1909 Property collapsed. The existing structures on the properties were later deemed unsafe and were demolished by the city of Chicago. 

    AIG insured the owner of the buildings and paid over $1.8 million for repairs and associated expenses arising from the collapse. AIG then invoked its rights of subrogation against Metropolitan by filing suit. Metropolitan tendered the suit to its insurer, Lloyd’s, who denied coverage and filed for a declaratory judgment. The trial court found the underlying complaint alleged property damage, but not an occurrence. Summary judgment was awarded to Lloyd’s. 

    The appellate court agreed with Lloyd’s that the damage to the real property was not covered by the CGL policy. Metropolitan was the general contractor with overall responsibility for the renovation and conversion of the existing structures into single-family housing. Metropolitan’s allegedly faulty workmanship led to their collapse and ultimate demolition. Thus, the collapse of the structures was not an “accident” or “occurrence”, but was the natural and ordinary result of faulty workmanship on the contractor’s work product. 

    Metropolitan argued that the underlying complaint alleged damage to parts of the property on which Metropolitan was not working. This, however, did not change the court’s conclusion. The properties were under the responsibility of Metropolitan, as general contractor, to convert the structures into single-family homes. Even if the damage extended to parts of the project on which Metropolitan was not currently working, it was still part of Metropolitan’s scope and responsibility, and thus was part of the project itself. 

    The alleged property damage to personal property deserved a different analysis, however. This was damage to something other than the project itself. The underlying complaint gave no description of what “personal property” of the owner was damaged. But it was not clear from the underlying complaint that AIG did not cover claims of damage to the owner’s person property. The admittedly vague references to damage to the owner’s “personal property” were enough to allege “property damage” caused by an occurrence. The allegations were enough to trigger the insurer’s duty to defend. 

No Duty to Indemnify Where No Duty to Defend

Tred R. Eyerly | Insurance Law Hawaii

    The Montana Supreme Court held that because there was no duty to defend the insureds’ intentional acts, the insurer had no duty to defend. Farmers Ins. Exch. v. Wessel, 2020 Mont. LEXIS 2617 (Mont. Dec. 22, 2020).

    The insureds’ property was accessed by Turk Road. Turk Road was also used by the neighbors to access their land. The insureds asked for permission to snowmobile across the neighbors’ property. Permission was denied because the property was in a conservation easement which prohibited motorised used. The insureds’ thereafter retaliated by not allowing the neighbors to use Turk Road. The neighbors then purchased an easement from another landowners to construct  a new driveway which did not traverse the insureds’ property. The insureds built snow berms and gates, felled trees, and created other obstacles to prevent the neighbors from using the new driveway. Physical threats were also made by the insureds.

    The neighbors sued the insureds for declaratory and injunctive relief. The complaint alleged that the insureds’ acts were intentional and purposeful.

    Farmers defended, but sued for a declaratory judgment on coverage. Farmers argued there was no “occurrence” because there was nothing accidental about the insureds’ conduct. The Montana Supreme Court affirmed the district court’s granting summary judgment agains the insureds on the duty to defend. 

    The district court also determined it was premature to decided whether Farmers had a duty to indemnify. The Supreme Court reversed. There was no coverage under the policy to give rise to a duty to defend. A conclusion that there was no duty to defend compelled the conclusion that there was no duty to indemnify.