United States: The Top Five Of 2014

Everyone, it seems, does a retrospective list at this time of the year of the most important cases of the past twelve months. We would be remiss if we didn't compile one of our own.

Here is our list of the five most influential insurance cases of 2014.

  1. Ewing Constr. Co., Inc. v. Amerisure Ins. Co.,No. 12-0661 (Texas Jan. 17, 2014). The year began with a long-awaited decision by the Texas Supreme Court that interpreted and applied the "Contractual Liability" Exclusion found in most Commercial General Liability insurance policies. Ewing Construction Company built several tennis courts for a school district in Corpus Christi. Soon thereafter, the courts began flaking and crumbling, and cracking, causing the school district to sue Ewing for breach of contract and for faulty workmanship. Ewing turned the suit over to its liability insurer, which denied coverage on the basis of the Contractual Liability Exclusion in its policy. That exclusion says that the policy does not apply to harm "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." The exclusion has an exception (meaning that the exclusion does not apply) for liability "[t]hat the insured would have in the absence of the contract or agreement." The United States District Court for the Southern District of Texas agreed with the carrier that the school district's claims against Ewing arose from liabilities Ewing had assumed under its construction contract. Ewing appealed to the United States Court of Appeals for the Fifth Circuit. That Court, in turn, asked the Texas Supreme Court for guidance about the scope and application of the Contractual Liability Exclusion under Texas law. The question was whether the exception to the exclusion applied under the circumstances. That question depended, according to the Supreme Court, on whether Ewing had agreed in its contract to assume obligations beyond those imposed on a contractor as a matter of general tort law. The contract required nothing more of Ewing than that it build the tennis courts in a "good and workmanlike manner." Failing to perform in a "good and workmanlike manner" is functionally and substantively the same as performing negligently. "Accordingly," the Ewing court said, "we conclude that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not 'assume liability' for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion." A great many courts have applied the Contractual Liability Exclusion simply because there is a breach of contract claim against the insured. The Texas Supreme Court applied the exception to the exclusion in the only way that meets the reasonable expectations of the average insured. In doing so, the decision in Ewing will likely influence other courts when faced with this common and recurring question in construction-defect insurance coverage cases. That makes the decision one of the five most important in 2014.
  2. IMO Industries v. Transamerica, et al. ,Docket No. A-6240-10T1 (N.J. App. Div. Sept. 30, 2014). The reactions among insurance lawyers to this decision range from head-scratching bewilderment to disbelieving outrage. On its face, the decision appears to eliminate one of the most important obligations an insurance company has to its insureds: To defend them in litigation without regard to the indemnity limits of the policy. Most CGL policies contain the express promise that the costs of defending the insured in litigation are "outside the limits" of indemnity liability in the policy. Thus, if the limits of liability are $100,000, and it costs the carrier $200,000 — or $2 million — in attorneys fees and costs to litigate the case, the carrier has to keep on defending and paying defense costs until the case is either settled or resolved by motion or a trial. In IMO, the New Jersey Appellate Division not only eliminated the carrier's contractual obligation to defend after the indemnity limits had been reached, it ruled that the insured would have to pay back to the carrier the defense costs that had exceeded the limits of liability. This case reinforces the old adage "hard facts make bad law." It involved coverage for thousands of underlying asbestos personal injury claims, most of which were getting resolved for a few thousand dollars each. This meant that the $1 million indemnity limit of liability in the polices was going to be reached, if at all, many years into the future. In the meantime, the carrier had paid out in defense costs 15 times the amount of the indemnity limits. This created what the trial court and the carriers called the "running spigot theory" of defense payment. The Appellate Division seemed simply to have a hard time believing that it could have been the intent of coverage for a carrier to pay out many multiples of the indemnity limit in defense costs, with no end in sight. The Court had second thoughts, however, about the wider application of the trial court's decision. It observed: "We recognize that some of Judge Coburn's statements in his oral decision of May 24, 2011, if applied to other types of liability coverage, may deviate from the expectations of insureds who purchase 'outside the limits' policies and pay premiums to cover all their litigation expenses." No kidding. Accordingly, the Court said: "To allay some of the fears expressed by amicus curiae, the exhaustion decision in this case is closely tied to its facts. We reach no general conclusion that an insurer's obligations to cover defense costs and other litigation expenses through an 'outside the limits' policy is limited by the maximum amount of indemnification coverage provided in that policy." The problem with such "designer" decisions — that is, decisions that purport to be limited to the facts of this one case — is that one never knows for sure if a court in some future case might not find the facts and circumstances sufficiently similar to the facts in IMO to justify depriving yet another policyholder of the defense obligations it purchased with its premium dollars. The IMO decision is such a dramatic departure from the entire concept of CGL coverage that it warrants a mention as one of the most important decisions of 2014.
  3. St. Paul Mercury Ins. Co. v. FDIC, No. 13-14228 (11th Cir. Dec. 17, 2014). This case decided an issue that comes up in bank-failure cases very frequently. It involved the interpretation of an "Insured-vs.-Insured" exclusion in a Directors' & Officers' Liability Insurance policy. (Full disclosure: Kilpatrick Townsend & Stockton represented the insured officers of the bank.) The scenario is depressingly common. The Federal Deposit Insurance Corporation takes over as the receiver for a failed bank. It's the receiver's job to pay creditors' claims from the remaining receivership assets. In these cases, the FDIC usually becomes the bank's biggest creditor after it pays out to the bank's depositors the money it insures on customer deposits. In St. Paul Mercury, one of the steps the FDIC took was to sue two of the bank's former officers for allegedly mismanaging certain of the bank's loans. The officers put the bank's D&O carrier on notice of the FDIC's claims and the carrier denied coverage, thereafter suing in federal court in Georgia for a declaration that it had no coverage obligations. One of the defenses the carrier raised was the "Insured-vs.-Insured" exclusion, which provides that the policy will not cover any loss on account of any claim made against an insured "brought or maintained by or on behalf of any Insured." There is a U.S. Supreme Court case, O'Melveny & Meyers v. FDIC, 512 U.S. 79 (1994), that held that the FDIC "steps into the shoes of" a failed bank when it acts as a receiver. From this interpretation, a number of courts have concluded that the FDIC-as-receiver essentially becomes an "insured" for purposes of applying the Insured-vs.-Insured exclusion. The Eleventh Circuit, however, concluded that the exclusion is ambiguous and, applying the universal rule that ambiguities are to be resolved liberally against the insurance company, held that the exclusion did not apply to the FDIC's claims against the officers as a matter of law. It sent the case back to the U.S. District Court for further proceedings. There are a great many decisions that interpret this exclusion in the context of an FDIC receivership and they are all over the map. This decision by one of the circuit courts of appeal that sits directly below the U.S. Supreme Court should have considerable influence over how future courts interpret the Insured-vs.-Insurance exclusion.
  4. Owner's Ins. Co. v. Jim Carr Homebuilders,No. 1120764 (Ala. Sup. Ct. Mar. 28, 2014). With this decision, the Alabama Supreme Court left the ranks of the outlier state Supreme Courts (there are now only three outliers remaining) that have held that construction defects can never be "accidental" for purposes of liability insurance coverage. In September 2013, the Alabama Supreme Court had issued an opinion in Owner's Insurance Co. v. Jim Carr Homebuilders LLC ("JCH I"), in which the Court bucked the recent trend of other state Supreme Courts, which had been reversing themselves and concluding that the faulty workmanship of a building contractor could constitute a covered "occurrence" under the contractor's commercial general liability policies. During a brief period in the spring and summer of 2013, the high courts of North Dakota, West Virginia, Connecticut and Georgia all held, for the first time, that faulty workmanship resulting in property damage can constitute a covered occurrence under the standard CGL policy. In JCH I, the Alabama Supreme Court had agreed with the carrier that faulty workmanship can never be accidental and, therefore, any bodily injury or property damage resulting from a construction defect can never be covered. On March 28, 2014, the Alabama Supreme Court withdrew its JCH I opinion and replaced it with a new one that reached an opposite — and unanimous — conclusion ("JCH II"). First, the JCH II opinion observed, as others have done, that the definition of "occurrence" in the CGL policy — "an accident, including continuous or repeated exposure to the same general harmful conditions, which causes 'bodily injury' or 'property damage' during the policy period neither expected nor intended from the standpoint of the insured" — does not turn on the ownership or character of the property that has been damaged by the act or event. Rather, it simply asks whether the damage was unintended (i.e., whether it was an accident). Second — and here is the relatively unique aspect of the decision — the Alabama Supreme Court examined the "Your Work" exclusion in the context of whether or not the policyholder had purchased "products completed-operations hazard" insurance coverage. Briefly, the "Your Work" exclusion says that the policy does not apply to: "'Property damage' to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" "Your work" means: "(1) Work or operations performed by you or on your behalf; and (2) [m]aterials, parts or equipment furnished in connection with such work or operations." The products completed-operations hazard ("PCOH"), is defined as those risks that arise out of products that have left the insured's physical possession or work that has been completed and turned over to the owner. In JCH II, the policyholder argued, and the Alabama Supreme Court agreed, that the "Your Work" exclusion applies if, and only if, the policyholder declined to purchase PCOH coverage. Stated another way, according to JCH II, the CGL policy does not ordinarily cover risks that arise out of products that have left the insured's possession or work that has been completed. That is, instead, a risk for which the policyholder can purchase coverage with an additional premium. But if the policyholder does buy PCOH coverage, then the "Your Work" exclusion does not apply because the subject of the exclusion is not included in the noncovered products completed-operations hazard. It was not at all clear from JCH I that the insured had, in fact, purchased PCOH coverage. In fact, it appeared from the way the opinion was written that JCH had not purchased such coverage. In JCH II, however, we learn that JCH had purchased $4 million in PCOH coverage. Accordingly, the "Your Work" exclusion simply did not apply to the property damage at issue.
  5. North Counties Engineering, Inc., et al. v. State Farm General In. Co.,No. 133713 (Cal. Ct. App. Mar. 13, 2014). In this case, the California Court of Appeals nails the response to a question that many other courts have answered incorrectly. The fact pattern is a common one. An engineering or construction firm has a Commercial General Liability policy that covers claims of damage for work that it has completed. At the same time, the policy excludes damage "arising from the provision or failure to provide professional services." The question is: Where is the line between providing competent construction work and providing "professional services?" North Counties Engineering, Inc. and a related company, North Counties Development, Inc., were hired to build a dam, an access road, a spillway, and a sediment basin. Shortly after construction was complete, the State of California began investigating complaints that the dam was causing sediment to accumulate in downstream waterways and that it was causing erosion in the surrounding area. The State eventually brought suit against the dam's owner to fix the problems. The owner, in turn, sued NCE and NCD for negligent construction of the dam, breach of contract, and breach of warranty. The complaint fell squarely in the coverage provided by the "products completed-operations hazard" (or PCOH) provision of the policy, which covers claims of faulty construction if the damage occurs after the project has been completed and turned over to the owner. NCE tendered the lawsuit to its CGL insurance carrier, which denied. NCE then sued the carrier for coverage and the case went to trial. After the presentation of all the evidence to the jury, the trial court directed a verdict in favor of the carrier on the basis of the "Professional Services" Exclusion in the policy. On appeal, the California Court of Appeals looked at the list of tasks in the definition of "professional services" and did not find either "construction" or "labor," two of the tasks that appeared in the allegations in the complaint against NCE. In addition, and here is the key insight into the proper application of a Professional Services exclusion, the Court distinguished a 1989 Court of Appeals case in which a professional services exclusion was found applicable to a customer's injury while she was having her ears pierced. The NCE Court noted that injury resulting from the faulty ear piercing "occurred while [the insured] was operating a retail cosmetics store." In other words, the injury occurred during the act of piercing. In contrast, the damage in NCE "occurred after the appellant's work was completed." PCOH coverage is defined as damage that occurs after the insured's work is complete or after the insured's product is no longer in the insured's physical possession. NCE completed construction of the dam and turned it over to the owner. It was only then that damage arose from the allegedly faulty construction. Thus, PCOH coverage and the Professional Services exclusion can be said to be mutually exclusive. There should, in fact, never be any overlap between what a PCOH provision covers and what a Professional Services exclusion excludes. If the injury or damage a party seeks against a contractor occurred on the job and during construction, it is then — and only then – that a Professional Services exclusion might apply. If the damage occurs after the job is complete, PCOH coverage applies but the exclusion never should. This insight is so important, and so clearly correct, that NCE makes our list of the most important decisions of 2014.

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