Excess “Other Insurance” Provision Does Not Relieve Insurer’s Duty to Defend

Nathan Lovett | Wiley Rein

The United States District Court for the Central District of California, applying California law, has held that a D&O insurer cannot rely on an excess “other insurance” provision to preclude a duty to defend.  TriPacific Capital Advisors, LLC v. Fed. Ins. Co., 2021 WL 5316407 (C.D. Cal. Nov. 15, 2021).

The insured is a California-based financial services company that manages institutional capital for residential construction projects.  In 2020, a former employee sued the company and the company’s president.  The company tendered the action to its D&O and EPL insurers.  The EPL insurer agreed to provide a defense, but the company’s D&O insurer denied coverage, asserting, among other things, that its policy applied in excess of the EPL policy. 

In the ensuing coverage action, the D&O insurer advanced several arguments to support its contention that it had no duty to defend.  First, it argued that the alleged wrongdoing by the company president occurred not in his capacity as a director and officer of the company, but as a joint venture partner, in which case the terms of the policy precluded coverage.  The court held that because the president had established a “potential” that he was acting in his capacity as a director and officer at the time of the alleged wrongdoing, that was sufficient.

Second, the D&O insurer attempted to limit its duty to defend to only those claims that are “potentially covered” under its policy.  The court dismissed this argument, holding that, under California law, “where some claims are potentially covered and others are not, the insurer has a duty to defend the action in its entirety.”  The court did note, however, that the D&O insurer could attempt to seek reimbursement at the close of litigation for any expenses that were solely allocable to non-covered causes of action.

Finally, the D&O insurer argued that it did not have a duty to defend because its policy had an “other insurance” clause dictating that its policy was excess to any other applicable insurance policies.  Thus, it asserted that it sat above the EPL policy, and did not have any defense obligation until the limits of that policy had been exhausted.  The court disagreed, holding that “other-insurance provisions are intended to apply in contribution actions between insurers, not in coverage litigation between insurer and insured.”  The court also noted that where an insurer has a duty to defend – which the D&O insurer was determined to have had immediately after tender – the existence of the “other insurance” clause does not change that duty.  The court noted, however, that the D&O insurer could bring an equitable contribution action against the EPL carrier, and in that suit “the other-insurance provision could impact the allocation of liability.”

Third Circuit Holds that Duty to Indemnify “Follows” Duty to Defend

Jeffrey J. Vita | Saxe Doernberger & Vita

In a win for policyholders, the Third Circuit Court of Appeals recently affirmed a District Court’s 2018 ruling, which held that the duty to indemnify follows the duty to defend where a settlement precludes a determination on the facts of the case relative to liability and apportionment.

In Liberty Mutual Insurance Co. v. Penn National Mutual Casualty Insurance Co., a large concrete panel collapsed and killed a construction worker at a construction site in New Kensington, Pennsylvania. Cost Company (“Cost”), Liberty Mutual’s insured, was a masonry subcontractor on the project and had further subcontracted with Pittsburgh Flexicore Co. (“Flexicore”), Penn National’s insured, for the concrete panels. Cost’s subcontract agreement required Flexicore to name Cost as an additional insured under its general liability policy issued by Penn National.

When the construction worker’s widow filed a wrongful death lawsuit against Cost and Flexicore, Cost demanded that Penn National defend and indemnify it as an additional insured under the policy. Penn National refused, arguing that any additional insured status had terminated at the conclusion of Flexicore’s work for Cost. As a result, Liberty Mutual defended Cost in the lawsuit, which was ultimately settled.

Following the settlement, Liberty Mutual sued Penn National, asserting that Cost was an additional insured under the Penn National policy and seeking reimbursement for the sums it paid to defend and indemnify Cost. Each insurer moved for summary judgment. The District Court ruled in Liberty Mutual’s favor, and Penn National appealed.

On appeal, the Third Circuit Court of Appeals first addressed whether Penn National had a duty to defend Cost. Answering in the affirmative, the Court of Appeals reasoned that Cost qualified as an additional insured under the Penn National policy’s Completed Operations endorsement. Moreover, the allegations in the complaint (i.e., that the worker’s death was caused, in part, by Flexicore’s failure to provide warnings) demonstrated that there is a possibility that Penn National’s policy covers the claim.

Turning to the duty to indemnify, the Court of Appeals noted that in an insurance coverage action, “where the underlying tort case has been settled, the insurers may seek a resolution of only the factual disputes that would not have been resolved had the underlying tort suit been tried.” In other words, factual disputes that would have been addressed in the settled underlying litigation cannot be resolved in a coverage action. The Court of Appeals added that where a coverage action raises such disputes, “Pennsylvania law provides that the duty to defend itself triggers the duty to indemnify.”

Moving to the facts of the case, the Third Circuit Court of Appeals agreed with the District Court that “the settlement made it impossible to determine the precise basis of Cost’s and Flexicore’s liability.” Accordingly, the Court of Appeals held that, “[b]ecause such factual disputes cannot be decided in this multiparty, multiclaim case without factfinding in the [Underlying Action], Pennsylvania law requires that Penn National’s duty to indemnify follows its duty to defend Cost.”

Although Liberty Mutual involves a dispute between two insurers, it represents a win for policyholders because it lowers the bar for triggering an insurer’s duty to indemnify in cases where a settlement precludes a factual determination as to the allocation of liability among various defendants. Instead, an insured need only establish that the applicable insurance policy potentially covers the claim in such cases.

How You Plead Allegations to Trigger Liability Insurer’s Duties is Critical

David Adelstein | Florida Construction Legal Updates

How you plead allegations in your lawsuit to trigger duties of a liability insurance carrier is a critical consideration.  If the complaint is not pled appropriately, it can result in the carrier NOT owing a duty to defend its insured, which is the party(ies) you are suing. If there is no duty to defend, there will be no duty to indemnify the insured to cover your damages.  For this reason, in a number of circumstances, this is NOT what you want because you want to trigger insurance coverage and potential proceeds to be paid by a carrier to cover your damages. There are times when you are confronted with a case that just is not a good insurance coverage case.  This may result in you coming up with creative arguments to maximize insurance coverage.  Even in these times, you want to plead the complaint to best maximize coverage under the creative arguments you have developed.

An example of not pleading allegations in a complaint to trigger an insurer’s duties can be found in the Eleventh Circuit Court of Appeal’s decision in Tricon Development of Brevard, Inc. v. Nautilus Insurance Co., 2021 WL 4129373 (11th Cir. 2021).   This case involved a general contractor constructing condominiums.  The general contractor hired a subcontractor to fabricate and install metal railings.  The subcontractor had a commercial general liability (CGL) policy that named the general contractor as an additional insured with respect to liability for property damage “caused in whole or in part” by the subcontractor’s direct or vicarious acts or omissions.  (This is a good additional insured endorsement.)

A dispute arose as to defective work by the subcontractor in fabricating and installing the railings.  The general contractor, therefore, engaged another subcontractor to fabricate new railings and remove the current railing to install the new ones. The general contractor submitted a claim to its original railing subcontractor’s insurer.  The insurer denied the claim and the general contractor filed a coverage action against the insurer as an additional insured under the CGL policy.

The problem, however, is that the general contractor’s complaint did not appear to truly consider insurance coverage, although it appeared to be a case where insurance coverage was not a great option.   The Eleventh Circuit explained there was no coverage based on the allegations in the complaint:

Here, [the general contractor] alleges that the subcontractor’s railings were deficient due to having defects and damage, not being installed properly, and not satisfying the project’s specifications; it does not allege that the subcontractor’s faulty workmanship damaged otherwise non-defective components of the project…. Thus, the costs that [the general contractor] incurred in removing the subcontractor’s railings and the fabrication and installation of new railings do not constitute “property damage” under the policies….

Tricon Development of Brevard at *2.

This is obviously not what the general contractor wanted and had it pled allegations differently, the outcome may have turned out different.  Although, the general contractor may have been faced with trying to come up with a creative argument recognizing it was not a great insurance coverage action.

Nonetheless, the Eleventh Circuit, finding there was no insurance coverage, includes a worthy paragraph when it comes to property damage in a construction defect/damage dispute so that parties recognize CGL policies do not cover defective workmanship. Take note of this discussion so that you can ensure allegations are pled to best maximize coverage:

The policies at issue in this appeal are post-1986 standard form commercial general liability policies with products-completed operations hazard coverage, which are governed by Florida law. We have held that such policies do not cover the costs of replacing defective products. In Amerisure Mutual Insurance Company v. Auchter Company, we examined a post-1986 standard form commercial general liability policy with products-completed operations hazard coverage. That policy “define[d] ‘property damage’ as ‘physical injury to tangible property, including all resulting loss of use of that property … or … loss of use of tangible property that is not physically injured.’ ” 673 F.3d 1294, 1298 (11th Cir. 2012) (cleaned up). Applying Florida law, we held that “there is no coverage if there is no damage beyond the faulty workmanship, i.e., unless the faulty workmanship has damaged some otherwise nondefective component of the project.” Id. at 1306 (citing U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 889 (Fla. 2007)). We also held that “if a subcontractor is hired to install a project component and, by virtue of his faulty workmanship, installs a defective component, then the cost to repair and replace the defective component is not ‘property damage.’ ” Id. (citing Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So.2d 1241, 1248 (Fla. 2008)). We further held that “nondefective and properly installed raw materials can constitute a defective project component when the contract specifications call for the use of different materials, yet the cost to reinstall the correct materials is not ‘property damage’—even though the remedy for such a nonconformity is to remove and replace that component of the project.” Id. (citing Pozzi, 984 So.2d at 1248).

Tricon Development of Brevard at *2.

Nevada Insureds Can Rely on Extrinsic Facts to Show that An Insurer Owes a Duty to Defend

Sarah Odia and Scott Thomas | Payne & Fears

On Oct. 28, 2021, the Nevada Supreme Court in Zurich American Insurance Company v.. Ironshore Specialty Insurance Company, 137 Nev. Adv. Op. 66, held that an insured can rely on extrinsic facts to show that an insurer has a duty to defend the insured, as long as the facts were available to the insurer at the time the insured tendered the claim. The court also held that an insured has the burden of proving that an exception to an exclusion in an insurance policy applies to create a duty to defend.

In Zurich, Ironshore refused to defend to its insured against multiple property damage claims arising out of construction defects, claiming that its policies’ continuing and progressive damage exclusions barred coverage. The underlying lawsuits made no specific allegations describing when or how the property damage occurred. Ironshore claimed that the property damage had occurred due to faulty work that predated the commencement of its policies. Two different federal trial courts came to conflicting conclusions in the underlying cases. One held that Ironshore had a duty to defend because Ironshore failed to show that an exception to the exclusion did not apply. The second granted summary judgment in favor of Ironshore holding that the insured failed to meet its burden of proving that an exception to the exclusion applied.

As a result of the conflicting rulings, the following questions were certified to the Nevada Supreme Court:

(1) Whether, under Nevada law, the burden of proving the applicability of an exception to an exclusion of coverage in an insurance policy falls on the insurer or the insured?

(2) Whichever party bears such a burden, may it rely on evidence extrinsic to the complaint to carry its burden, and if so, is it limited to extrinsic evidence available at the time the insured tendered the defense of the lawsuit to the insurer?

The Nevada Supreme Court held that (1) the burden of proving an exception to an exclusion is on the insured; and (2) in fulfilling its burden to prove the exception to an exclusion applies, the insured may utilize any extrinsic facts that were available to the insurer at the time the insured tendered its defense to the insurer.

The court was careful to emphasize that, in the context of the duty to defend, the extent of the insured’s burden is only to prove that there is a potential for coverage based on the exception to the exclusion—not that the exception does in fact apply, which would only be required if the insured were seeking to prove that the insurer had a duty to indemnify. The court emphasized that “it is not this court’s intention to erode the duty to defend by heightening the insured’s burden of proof” and reiterated that “the weight of proof needed to fulfill the burden of proving a duty to defend is lighter than the duty to indemnify—only the potential for coverage must be proven.”

In Nevada, it is already well-settled law that the burden is on the insured to prove that a claim falls within the scope of coverage, and on the insurer to prove that an exclusion applies. Thus, the court’s ruling that the insured has the burden of proving that an exception to an exclusion applies, which would revive coverage, is not a surprise;  this is the majority approach.

This decision will help insureds by clarifying that in Nevada, an insured can rely on evidence extrinsic available to the insurer to establish an insurer’s duty to defend. This decision makes it impossible for insurers to continue to ignore extrinsic evidence that establishes a potential for coverage and the duty to defend. 

Out of Sight, But Not Out of Mind: Facts Outside the Pleadings and the Duty to Defend

John Corbett | Barnes & Thornburg

Does an insurance company have a duty to defend a lawsuit against your company where the actual facts of the claim are within coverage, but the complaint fails to mention potentially covered facts?

Perhaps surprisingly, the answer depends on the state law that governs the questions of insurance policy interpretation. Consider the following example in which the complaint is silent as to potentially covered allegations, but the true facts should be covered under the policy.

Let’s start with a company that we’ll refer to for now as 654 Enterprises, a general contractor on a construction project. A worker employed by a subcontractor is severely injured while climbing down a ladder and brings a personal injury lawsuit against 654 (but not against his own employer). The worker alleges 654 failed to keep the construction site clean after a series of rainstorms led to the accumulation of mud that compromised the ladder’s stability. During the course of litigation, however, it is revealed that the principal cause of the worker’s injuries was his own negligence: His feet got tangled in an extension cord he was carrying, causing him to trip and fall.

That development is important. 654 is an additional insured on the subcontractor’s Commercial General Liability (CGL) policy, but the insurance carrier says its policy only covers 654 where injuries arise out of the acts or omissions of the named insured subcontractor or those acting on its behalf. Although it is undisputed that the worker’s fall was the result of tripping over his own cord, his lawsuit makes no mention of this. The subcontractor’s insurance company denies 654 coverage, taking the position that its duty to defend has not been triggered because there is no allegation in the complaint of negligence by the subcontractor or those working on its behalf (i.e., the worker or others doing work for the subcontractor).

Whether the insurance company’s position is correct largely depends on what law governs the construction of the insurance policy. General liability insurance policies rarely have a choice of law clause.

A minority of jurisdictions, most notably Texas, adheres to what is known as the “eight-corners” rule, under which the duty to defend – that is, the insurer’s contractual obligation to defend the insured against lawsuits and claims – is determined by strictly comparing the allegations in the complaint (the first “four corners”) with the terms of the insurance policy (the remaining “four corners”). Under this rule, facts extrinsic to the allegations in the complaint – no matter how salient to the case – are effectively nonexistent for purposes of determining whether the insurance company has a duty to defend. The results can be particularly harsh where, as in the above scenario, the complaint as drafted fails to allege the undisputed facts that, had they been alleged, would have triggered the insurer’s duty to defend. In the above case – Gilbane Building Co. v. Admiral Insurance Co., 664 F.3d 589 (5th Cir. 2011) – the Fifth Circuit Court of Appeals held in favor of the insurance company’s denial of coverage on the basis of Texas’ strict version of the eight-corners rule.

The eight-corners rule has not been widely adopted because while it is conceptually clear, it renders the policyholder’s rights to coverage subject to the whims of the lawyers drafting the complaint and ignores the actual facts of the case. Accordingly, in most jurisdictions, an insurer also has a duty to defend “where extrinsic facts known to the insurer suggest that the claim may be covered.” Hartford Cas. Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 287; see also Durant v. North Country Adirondack Coop. Ins. Co., 24 A.D.3d 1165, 1166 (N.Y. App. Div. 2005) (“extrinsic evidence may be used to expand the insurer’s duty to defend”). Under the majority rule, the insurance company’s knowledge of the worker’s negligence – though not alleged in the complaint – likely would trigger its duty to defend, all else being equal.

While extrinsic evidence may trigger the duty to defend in most jurisdictions, generally the reverse – that extrinsic evidence can defeat that duty – is not the case. This is because the purpose of the duty is to protect the policyholder from potentially covered claims without regard to the factual or legal merit of those claims. Permitting insurers to deny coverage on the basis of extrinsic facts effectively undermines the general principle that an insurance company has a duty to defend against potentially covered allegations, even if false, frivolous or fraudulent. Nevertheless, some courts permit extrinsic evidence to terminate an insurance company’s duty to defend in limited circumstances, such as where the litigants have colluded to arrange for a pleading that omits facts that would defeat coverage (Loya Insurance Co. v. Avalos, 610 S.W.3d 878 (Tex. 2020)), or when the extrinsic facts in question are unrelated to the merits of the allegations in the pleading (GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex. 2006)).

In summary, courts in most jurisdictions generally utilize undisputed evidence outside the pleadings to trigger, rather than to eliminate, an insurance company’s duty to defend. In the event your business faces a lawsuit that omits the facts most favorable to coverage, consider whether experienced coverage counsel can evaluate whether there still is the potential for coverage, so that your business receives the full benefit of the insurance company’s promise to defend its insureds.