INSURANCE LAW NOTES

Exception to Exclusion Enabled by Extrinsic Evidence

2011-05-05T13:26:00.011-05:00

Generally speaking, an insurer is not permitted to rely upon extrinsic evidence when making its duty to defend determination. Instead, the insurer is required to rely solely upon the allegations of the complaint against its insured and must defend whenever a claim potentially falls withing the policy's coverage. However, in its recent decision of Haines v. State Auto Property & Casualty Ins. Co., No. 10-1946 (3d Cir. 2011), the Third Circuit made clear that there are times when extrinsic evidence is relevant to the duty to defend determination.

In Haines, the key issue was whether, under a homeowner's policy, the insured was covered for a bodily injury caused by its golf cart. The policy included a "Motor Vehicle Liability" exclusion that specifically excluded coverage of golf carts as "recreational motor vehicles." However, that exclusion also included an exception that applied if the golf cart was "used solely to service the residence premises."

Needless to say, the insurer argued that coverage was barred by the "Motor Vehicle Liability" exclusion and that no exception to the exclusion applied. In making its argument that no exception applied, the insurer relied upon evidence not included in the allegations of the complaint, but instead obtained during its own independent investigation of the claim. The U.S. District Court for the W.D. PA also relied upon this extrinsic evidence in support of its conclusion that the exclusion applied to preclude coverage under the policy.

The Third Circuit agreed with both the conclusion of the District Court and its consideration of extrinsic evidence obtained in the insurer's investigation of the accident. Importantly, however, citing Air Prods. & Chems., Inc. v. Hartford Accident & Indem. Co., 25 F.3d 177, 180 (3d Cir. 1994) (prohibiting the insurer from introducing evidence to show that an exclusion applied), the Third Circuit was careful to point out that consideration of such evidence was only permissible because the evidence was used to show that no exception to the exclusion applied, and not to support the application of the exclusion.

Thus, the Haines decision does not give insurers the right to stray from the four corners of the complaint in making a coverage decision. Rather, when the insurer meets its burden of demonstrating that a claim falls within an exclusion and the policyholder fights back arguing an exception to the exclusion, an insurer may rely on extrinsic evidence.

Still, if the complaint includes allegations that demonstrate that the exception applies, don't be surprised if extrinsic evidence is not considered. Logic and the long line of cases requiring strict reliance on the allegations in the complaint seem to dictate that the complaint still rules the day when it specifically addresses a fact or issue.

To Merge or Not To Merge?

2009-01-22T11:39:00.009-05:00

At least for now, two of PA's big health insurers, Pittsburgh's Highmark Inc. and Philadephia's Independence Blue Cross, have decided to call off their planned merger due to their dissatisfaction with proposed restrictions from state regulators. Apparently due to anti-trust concerns, they would have been required to give up their "Blue Cross" and "Blue Shield" trademarks as a condition of the merger, something neither was willing to do.

10 Worst Insurance Companies in America?

2008-10-17T10:59:00.010-05:00

Earlier this year, the American Association for Justice issued its report naming the "10 Worst Insurance Companies in America." The authors of the report describe the process undertaken to compile this list as follows:

To identify the worst insurance companies for consumers, researchers at the American Association for Justice (AAJ) undertook a comprehensive investigation of thousands of court documents, SEC and FBI records, state insurance department investigations and complaints, news accounts from across the country, and the testimony and depositions of former insurance agents and adjusters. Our final list includes companies across a range of different insurance fields, including homeowners and auto insurers, health insurers, life insurers, and disability insurers.

The report is an interesting read and provides some insight into what some policyholders encounter when making claims with their insurers. Of course, different policyholders may have different experiences and your mileage may vary. Rest assured, however, that insurers are not always looking out for the best interest of their insureds.

At a minimum, the report is worth reviewing if you are in the market for a new policy or making a claim with your insurer. It may even cause you to rethink the placement of your current coverage and assess whether you current policies are really in good and trustworthy hands.

Great Source of Information for Policyholders

2008-09-23T07:41:00.019-05:00

If you have an insurance claim or are interested in insurance law, call me ... or ignore that shameless plug and take a look at the United Policyholders website, which is loaded with helpful information. As explained on their site, their mission is to educate the public on insurance issues and consumer rights.

Declaratory Judgment Action Stayed; Claim Potentially Covered

2008-09-08T20:24:00.005-05:00

When a liability policyholder is sued and tenders the lawsuit to its insurer demanding that the insurer provide a defense in an underlying suit, if there is any doubt about whether the claims set forth in the suit are covered under the policy, an insurer may provide a defense to the policyholder under a reservation of rights and simultaneously seek a declaratory judgment that the insurer is not required to defend. As I discussed here, when an insurer succeeds in such an action, it may also attempt to seek reimbursement of defense costs paid under its reservation of rights (though the insurer will probably be unsuccessful if the policy does not provide for such reimbursement.)

However, what happens when the insurer files the declaratory judgment insurance coverage action and, instead of engaging in the substantive coverage dispute, the policyholder asks the Court to stay or suspend the declaratory judgment action? This scenario raises some interesting issues and implications, including the prospect of using a Motion to Stay as a weapon against an insurer defending under a reservation of rights. Could such a motion be used to prolong the insurer's defense?

In Allstate Ins. Co. v. Cooper, 07-00974 (W.D. Pa., May 7, 2008), Judge Nora Barry Fischer addressed a Motion to Stay under similar circumstances and stayed the action after determining that the underlying claims were potentially covered. Her Memorandum Order is typically well written and worth a read. If you have a PACER or CM/ECF account, you can access the opinion here for free.

Checks Are Not "Tangible Property"

2008-07-01T19:20:00.002-05:00

In R&L Zook v. Pacific Indem., No. 07-03774 (May 1, 2008), the U.S. District Court for the Eastern District of PA determined that checks that were allegedly improperly cashed by an insured check cashing company did not trigger coverage under that company's liability policy and did not require an insurer to defend the check cashing company in an underlying lawsuit in which the company was being sued for its alleged improper check cashing.

In Zook, the check cashing company raised a creative argument that, because it had been sued for negligent cashing of checks drawn on a third party's account, it was being accused of "property damage" (i.e. damage to the checks) such that its liability insurance was triggered and its insurer was required to defend the check cashing company in the underlying lawsuit. Addressing this issue, the Court and the parties looked to the liability policy's definition of "Property Damage":

Property Damage means: physical injury to tangible property, including resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. Tangible property does not include any software, damage or other information that is in electronic form.

The insurer argued that the checks were not "tangible property" and, thus, any damage to them could not be covered. The check cashing company countered by arguing that the phrase "tangible property" was ambiguous and reasonably susceptible to differing interpretations and, as such, must be construed against the insurer in accordance with PA law.

Because "tangible property" was not separately defined in the liability policy, the Court, following the guidance of Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 108 (Pa. 1999), looked to common definitions of tangible and intangible property in both Black's Law Dictionary and Merriam-Webster’s Dictionary of Law, as well to other PA cases. Each of these sources effectively defined the phrase to include only property that, in and of itself, has some intrinsic value. Consequently, the Court concluded that the phrase "tangible property" was not ambiguous and that, because checks are merely representative of value (as are stock certificates, bonds, and promissory notes), but have no intrinsic value, the alleged damage to the checks at issue was not Property Damage triggering any duty to defend under the liability policy.

As is often the case, the holding here may be limited to these specific facts. Indeed, I suspect that a court could rule differently if, for example, Hello Kitty checks are at issue and my 8 year old daughter is called to testify as an expert on their intrinsic value. (Just kidding, of course.)

PA Superior Court Denies Insurer Reimbursement of Defense Costs

2008-05-22T13:17:00.005-05:00

The PA Superior Court has held that, in cases where the insurance policy at issue does not provide for reimbursement of defense costs paid by the insurer, an insurer is not entitled to such reimbursement despite the insurer's r eservation of rights letter specifically addressing the issue and a later finding of no coverage under the policy.

In American and Foreign Insurance Company, et al. v. Jerry's Sports Center, Inc., et al., No. 1098 MDA 2006, 2008 PA Super 94, the Court addressed the issue of whether an implied contract exists between the insurer and its insured entitling the insurer to recoup costs expended in defending a disputed claim prior to a final judgment on the coverage issue where the relationship between the parties was governed by a written insurance policy that did not grant the insurer the right to recover defense costs. While the insurer argued that: (1) an implied contract for reimbursement was created by its reservation of rights letter in which the insurer expressly reserved the right to seek reimbursement of all defense fees advanced in the event the insurer was determined to have no duty to defend; and (2) that the insured was unjustly enriched, the Court disagreed.

Noting that the issue presented was one of first impression in Pennsylvania courts, the Superior Court examined the law in other jurisdictions and courts, citing with approval the Third Circuit's opinion Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213 (3d Cir. 1989), rejecting an insurer's claim for reimbursement. The Court further examined principles of Pennsylvania law concerning an insurer's duty to defend its insured, concluding that "the duty to defend [i]s triggered when a potentially covered claim became apparent to the insurer, as opposed to being triggered later, as when a court determined actual coverage in a subsequent declaratory judgment action" and that "[c]oncluding any differently would eviscerate the longstanding common law rule that the duty to defend is triggered whenever a claim is not just actually covered, but also potentially covered."

The Court also examined the relevant policy language and noted that the insurer not only had a "duty" to defend under the policy, but a "right" to defend as well. Examining the record, the Court determined that the insurer "was preparing for the possibility that a court would later determine there was coverage and, given that the claims may be potentially covered, [the insurer] was exercising its right to defend under the policy." Thus, the insurer's duty to defend was triggered when it was faced with potentially covered claims and when it activated its right to defend under the insurance contract by taking actions such as hiring counsel.

Finally, the Court noted that an insurer benefits from tendering the defense in such cases because it maintains control over the defense and can mitigate any potential future indemnification burdens.

Given these factors, the Court held that a reservation of rights letter does not create an implied contract for reimbursement, that the insured was not unjustly enriched, and that, if the insurer wanted to seek reimbursement of attorneys fees under the circumstances presented, it could have included such a provision in the insurance contract along with its "duty and right to defend."

It also is worth noting that the Superior Court cited with approval the case of LA Weight Loss Ctrs., Inc. v. Lexington Ins. Co., 2006 WL 689109 (Phila. Co. 2006), going so far as to adopt the Common Pleas Court's reasoning.

Thanks to my partner Beth A. Slagle for bringing this case to my attention.

Third Circuit Discusses Reasonable Expectations Doctrine

2008-02-21T15:19:00.003-05:00

In West v. Lincoln Benefit Life Company, the U.S. Court of Appeals for the Third Circuit reviewed and summarized PA's reasonable expectations doctrine in ruling that a former policyholder did not have a reasonable expectation that a life insurance policy would be reinstated.

In West, the Third Circuit faced the question of whether a policy should have been deemed reinstated despite the fact that the insured failed to submit a premium payment during a 61-day grace period. More specfically, the insured decedent had failed to pay premiums and was notified that the policy was in a 61-day grace period during which he could pay and apply for reinstatement. However, his reinstatement would be subject to the underwriting approval and not guaranteed. Ultimately, the premium check was submitted, but the decedent died while the underwriting review was pending.

Looking both to statutory requirements set forth in 40 Pa.C.S.A. § 510 and to the reasonable expectations doctrine as it has developed and evolved in PA, the Third Circuit held that the insurer was correct in denying coverage both because it had complied with statutory requirements and because the insured did not have a reasonable expectation that coverage would be reinstated. Briefly stated, the Court determined that the reinstatement requirements were clearly stated by the insurer and nothing provided to the insured created a reasonable expecation of coverage. Further, the fact that the insured failed to read the reinstatement guidelines in their entirety could not be the basis for such a reasonable expectation.

As I have said here before, it is important that policyholders do their best to read and understand their policies and communications from their insurers. This case empahsizes the importance of this point. Please read your policies or, at least, have someone read and explain them to you.

Additionally, if you are looking for a nice history and summary of the reasonable expectations doctrine, this case is certainly a good place to start.

Surety Bonds Not Subject to Bad Faith Statute

2008-02-11T15:47:00.001-05:00

A recent case from the U.S. District Court for the Middle District of PA provides further support for those arguing that surety bonds are not insurance policies for purposes of PA's bad faith statute, 42 Pa.C.S.A. § 8371.

In reaching this conclusion, the court in Intercon Construction, Inc. v. Williamsport Municipal Water Auth., No. 4:07-CV-1360, 2008 U.S. Dist. LEXIS 6022, (M.D. Pa. 2008), first noted that "there does not appear to be any Third Circuit, Pennsylvania Supreme Court, or Pennsylvania Superior Court case law on the issue," but that there are other "Pennsylvania state court decisions on the issue which appear to have reached opposite conclusions." Looking at those decisions, the court determined that there were "numerous differences between surety bonds and insurance policies." These differences include that:

"insurance is an agreement by which one undertakes for a consideration to pay money to another on the death, destruction, loss, or injury of someone or something, while a contract of suretyship is one to answer for the debt, default, or miscarriage of another"; and
the insurer and insured share a direct contractual relationship and there exists the idea of prompt compensation for loss or damage upon proof of a claim, but a surety does not have a direct contractual relationship with a third-party and has simply agreed to answer for another party's debts to the extent that party fails to answer for them itself.

Based upon these distinctions, the District Court concluded that the PA legislature did not intend to include issuers of surety bonds within the scope of the bad faith statute and dismissed the bad faith claim at issue.

Supreme Court Clarifies Sackett and Stacking

2008-01-08T09:48:00.000-05:00

Bringing to a close, at least for now, the Sackett saga discussed in my prior notes here and here, the PA Supreme Court issued two decisions (Sackett v. Nationwide Mutual Insurance Co., No. 8 WAP 2006 (Pa. Dec. 27, 2007) (Justice Castille's opinion for the dissent) and Everhart v. PMA Insurance Group, No. 13 WAP 2007 (Pa. Dec. 27, 2007)(Justice Baldwin's dissenting opinion) addressing questions regarding the Pennsylvania Motor Vehicle Financial Responsibility Law's provisions for stacking uninsured/underinsured motorist coverage.

Pennsylvania Law Weekly has a very good article discussing and explaining the decisions.

Baumhammers Decided

2008-01-04T11:43:00.001-05:00

Following up on my post from a few months ago, the PA Supreme Court has issued its opinion(s) in the Baumhammers case addressing the number of occurrences issue. You can read the majority opinion here and the two concurring and dissenting opinions here and here.

In short, the Court adopted the cause of the loss test, but it does not appear to be that simple.

More on this later.

Liability Coverage Applies to Criminal "Claim"

2008-01-03T16:23:00.000-05:00

Though the term "claim" is regularly used in liability policies, it is also a term that is commonly not defined in such policies. Mindful of this fact, the PA Superior Court recently determined that an award of restitution in a criminal action constitutes a "claim" for purposes of liability coverage.

In Brethren Mutual Insurance Company v. McKernan, the PA Superior Court addressed the issue of whether an award of restitution in a criminal action constituted both a "claim" and "damages" for purposes of the liability coverage in a homeowner's policy.

First addressing the meaning of "claim," the Court noted that PA case law provided no guidance on the subject and looked to the "keystone authority" of Black's Law Dictionary for guidance. Quoting the sixth edition of Black's, the court concluded that "claim" means:

To demand as one’s own or as one’s right; to assert; to urge; to insist. A cause of action. Means by or through which claimant obtains possession or enjoyment of privilege or thing. Demand for money or property as of right, e.g. insurance claim.
* * *
Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. Bankruptcy Code, § 101

Relying upon this broad definition and the prevailing rule that, if unclear, an insurance provision must be interpreted broadly in favor of the insured, the Court concluded that the restitution award in a criminal action was clearly a "claim" under the relevant policy terms.

Looking next to the question of whether an award of restitution constitutes "damages" for purposes of coverage, the Court analyzed the history and purposes of restitution as well as public policy issues. Again ruling in favor of the insured, the Court concluded:

while we recognize the policy of restitution is to promote rehabilitative goals of the defendant, there is another public policy consideration at play. This Appellant has a vested contractual right to coverage, which is subject to constitutional protection. Thus, we decline to deny coverage based upon considerations of public policy.

Certainly, this decision at least cracks open the door to insurance coverage in the context of criminal prosecution, despite considerations of public policy. In fact, the Court specifically stated that the term "claim" is not confined to the context of a civil suit, and can encompass a criminal action. As such, where an insured faces criminal charges arising from allegedly "reckless" conduct, which is generally not excluded from liability coverage, and an award of restitution is sought, counsel and/or the insured may wish to examine relevant liability coverage for potential defense and indemnification of such a "claim."

Bad Motive Not Required to Prove Bad Faith

2008-01-02T16:34:00.001-05:00

PA courts have routinely advised that, to prove bad faith under 42 Pa.C.S. § 8371, an insured must prove by clear and convincing evidence that its insurer: (1) did not have a reasonable basis for denying benefits under a policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim. Terletsky v. Prudential Prop. and Cas. Ins. Co., 437 Pa.Super. 108 (1994). Additionally, these same courts have stated that the insured must demonstrate that its insurer breached its duty of good faith through some motive of self-interest or ill-will. See Condio v. Erie Insurance Exchange, 899 A.2d 1136, 1142-43 (Pa. Super. 2006).

Standing alone, each of these statements seem easily understood and applied. However, what has not been clear is how they work together. Is there a third "bad motive" element of a bad faith under PA law?

The PA Superior Court addressed this issue in Greene v. United Services Auto Assoc., 2007 Pa. Super. Ct. 344 (November 20, 2007). After acknowledging this apparent ambiguity in the application of PA's bad faith statute and that no PA court has examined this issue, the Superior Court looked to the "well-informed and persuasive" decision of the PA Western District Court in Employers Mutual Casualty Company v. Loos, 476 F.Supp.2d 478 (W.D.Pa. 2007). Following the Loos reasoning, the Superior Court held that:

"motive of self-interest or ill will” level of culpability is not a third element required for a finding of bad faith, but it is probative of the second element identified in Terletsky, i.e., “the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim.”

Thus, while evidence of self-interest or other bad motive of the insurer can help in proving that an insurer knew it did not have a reasonable basis for denying a claim or recklessly disregarded such information, an insured is not required to provide the often difficult to adduce evidence of ill will or self-interested motive.

Insurance Law Notes a "Top Blog"

2007-12-04T11:02:00.000-05:00

The good people at LEXIS-NEXIS have deemed Insurance Law Notes worthy of designation as a "Top Blog" on their Insurance Law Center site. As much as I enjoy patting myself on the back, the important thing to take from this is that you should really visit thieir excellent site, which is a great source of insurance news, commentary, and information generally for lawyers and industry types alike.

Auto Insurance Discount Available With Training Course

2007-12-04T10:46:00.000-05:00

I am reasonably sure that there is bigger news in the PA insurance world, but I just wanted to post this photo.

In any event, the Pennsylvania Department of Transportation has approved a 4-hour Mature Driver Improvement Refresher Course to allow drivers age 55 and older the opportunity to continue to qualify for discounted vehicle insurance. The refresher course will be offered to individuals who have completed the PennDOT-approved, 8-hour Mature Driver Improvement Basic Course within the last three years. Currently, individuals are required to complete this course every three years to continue to qualify for discounted vehicle insurance. You can read all about it here.

PA Supreme Court Sacking Sackett's Stacking Backing?

2007-11-20T13:38:00.000-05:00

No, Not This Stacking

Back in April of this year, in Sackett v. Nationwide Mutual Insurance Co., the PA Supreme Court ruled that insurance companies must have their policyholders reject or waive stacked UIM coverage every time a vehicle is added to an existing policy. You can read my original entry on this case here.

More recently, in what can only be described as an extremely rare occurrence, the Court agreed to reconsider this ruling, granting Nationwide's petition for re-argument. This decision is interesting both because of its insurance implications and because it provides some insight into the mindset of the Court, particularly Justice Baldwin, who authored the original Sackett opinion and dissented here, along with Chief Justice Cappy.

If It Looks Like a Tort and Acts Like a Tort...

2007-11-10T15:19:00.001-05:00

Resolving an issue that has been disputed in just about every courtroom in PA, the PA Supreme Court has determined, once and for all, that the two-year statute of limitations applies to bad faith claims brought under 42 Pa.C.S.A § 8371. You can read all about it in Ash v. Continental Insurance Co., No. 35 WAP 2005 (Oct. 11, 2007) (Eakin, J.). Briefly summarized, the Court decided that such claims, while created by statute, are most like tort claims and should be subject to the two-year statute of limitations imposed by 42 Pa.C.S.A § 5524.

The Good News and the Bad News on Bad Faith

2007-10-11T13:54:00.000-05:00

I have been less than prolific these last few months, but it was summer and, more recently, the Steelers have been playing and winning and diverting my attention from insurance law. That being said, today it is cold, summer is over, and it is time once again to focus on the Law.

Perhaps my most egregious dereliction of duty this summer is failing to mention the PA Supreme Court's opinion in Toy v. Metropolitan Life Ins. Co. (with concurring and dissenting opinions). Boiling down this very long and interesting discussion of insurance bad faith law and its history to its essential insurance holdings, Toy sets forth two holdings, one favoring insurers and one favoring policyholders.

First, the PA Supreme Court held that PA's bad faith statute, 42 Pa.C.S.A. 8371, does not apply to claims alleging that an insurer engaged in deceptive of unfair conduct in soliciting the insured to purchase an insurance policy. Keep in mind that this does not mean that there is no means of relief for a party that was deceived or mistreated by an insurer or broker selling an insurance policy, just that the bad faith statute does not apply. In fact, claims of fraud in the inducement or violations of Pennsylvania's Unfair Trade Practices and Consumer Protection Law (UTPCPL) seem perfectly applicable.

The other significant portion of the holding relates to claims brought under the UTPCPL. Without getting into a lengthy discussion of this law, one of the elements required to prevail on a UTPCPL claim is "justifiable reliance" upon some information, statement, representation, etc. that misled or deceived the policyholder. In this regard, the PA Supreme Court advised that the insured's failure to read an insurance contract does not alone preclude the insured from arguing that it justifiably relied upon misrepresentations fraudulently omitted from the written insurance contract. Thus, even if an insurance policy contradicts some prior misrepresentation regarding the contents of the policy, the fact that the insured did not read the policy does not defeat a claim that the insured "justifiably relied" upon the misrepresentation in purchasing the policy.

Still, please read your policies...or hire someone (like me) to do it for you.

Fiduciary Duties of Insurance Agents

2007-10-01T14:39:00.000-05:00

Frequently, after a claim is denied, policyholders turn to their agents and say, "I didn't know anything about insurance. That's why I gave you all of my information and told you, 'Get me what I need."' Sometimes, these allegations lead to breach of contract and/or negligence claims against an agent for failure to procure insurance or to claims against an insurer for failing to provide what has been promised in the policies. However, at least one court has recently recognized that a claim for breach of fiduciary duty might be viable against the agent, even if such a claim cannot be made against the insurer.

Though only a decision addressing preliminary objections to a complaint, the Court of Common Pleas for Lackawanna County held, in Decker v. Nationwide Ins. Co. and Robert G. Turano, 06 CV 2119 (C.P. Lackawanna, June 5, 2007), that:

it is inappropriate to consider the insurance company and the insurance agent separate entities for purposes of evaluating whether [the policyholder] has a viable claim for breach of fiduciary duty against [the agent]. ... We consider it important to determine the level of involvement [the agent] had in advising [the policyholder] of the appropriate insurance policy and product to fit their needs.

Thus, when making or considering a claim against an agent for failing to procure insurance, the policyholder should keep in mind the possibility that a fiduciary relationship may have been created and breached.

"Failure to Warn" is Not a Products Claim

2007-08-30T13:30:00.000-05:00

According to the PA Superior Court's recent decision in Bombar, Intervenor, Upright Materials Handling, Inc. v. The West American Insurance Co. and First Insurance Center, Inc., Superior Court of Pennsylvania, No. 224 MDA 2006 (Pa. Super. July 26, 2007), claims alleging negligent "failure to warn" fall outside of the products hazard of certain liability policies.

In Bombar, one of the Upright's (the insured’s) employees, Ms. Bombar, was injured when she was struck by a forklift while working at and for Upright. Though the forklift had a backup alarm that was installed by Upright, it had not been completely or properly installed and was not operational.

Ms. Bombar sued Upright, Upright submitted the claim to its insurer, West American, which denied coverage, and Bombar obtained a $2.4 million verdict against Upright. Importantly, Ms. Bombar's claim was based, at least in part, on Upright's negligent failure to warn, inspect, and install with regard to the forklift’s back-up alarm. Upright assigned its claim against West American to Bombar and Bombar went after West American.

West American's denial was based upon its position that the claim fell within the "products-completed operations hazard" and that the policy excluded bodily injury claims to the extent that they fell within the “products-completed operations hazard.”

Addressing this argument, the Superior Court, affirming the trial court and reaffirming and relying upon earlier Superior Court opinions, held that the claim was not a products-completed operation claim both because of the negligence allegations and because of the fact that the installation of the alarm was not properly or fully done and, a such, was not completed. Interestingly, the Court ultimately also afffirmed the trial court's decision concluding that there was no reasonable basis to deny coverage and granting summary judgment on a bad faith claim.

Why do this case and earlier cases such as
Harford Mutual Insurance Co. v. Moorhead, 578 A.2d 492 (Pa. Super. 1990) matter? Exclusions relating to products manufactured by the insured sometimes apply only to claims falling within the Products-Completed Operations Hazard. Further, in many older liability policies, this Products Hazard coverage is subject to an aggregate limit, while general liability coverage for "regular" negligence claims is not. Thus, if an underlying victim (or, in mass tort/latent disease cases, victims) alleges failure to warn in addition to strict liability claims, the door to coverage may not only be opened, but kicked off the hinges completely, resulting in coverage with no aggregate limits. Of course, some will argue that there is no guaranty that these decisions will be extended in such a manner, but insurers may not be willing to test the PA waters given the high stakes at issue.

The Ambiguity Ambiguity

2007-07-18T10:23:00.000-05:00

Anyone who deals with insurance coverage in PA (particularly asbestos or latent disease coverage) really should read the recently published case of Asten Johnson v. Columbia Casualty Co., Civil Action No. 03-1552 E.D. Pa., March 30, 2007), which was decided by Judge Stengel of the Eastern District of PA. The decision strikes a blow against the contra proferentem rule. Randy J. Maniloff and Jennifer Wojciechowski have an interesting view of the case, which you can read on The Legal Intelligencer's site.

Additionally, the case covers topics of agent v. broker, course of performance, reformation, asbestosis exclusions, consent to settle clauses, and even the wise old equitable doctrine of laches.

It may take some time to get through this one. The published version of the case is nearly 60 pages long, while the linked version is over 120. Enjoy!

"Get a Hybrid; Be Good People Now"

2007-06-11T15:55:00.000-05:00

What do Larry David, Gerald Broflovski, and the PA Insurance Department have in common?

They each encourage you to purchase a hybrid vehicle, of course.

According to the Insurance Department's June 11, 2007 Press Release:

Pennsylvania motorists who own a hybrid vehicle may be eligible for a discount on their auto insurance premiums, according to the Pennsylvania Insurance Department.

The Insurance Department has approved a filing from GEICO to offer a five-percent discount to policyholders who insure hybrid vehicles. GEICO is the third insurer in recent months to file this type of discount, after Farmers and Travelers.

Power to the People

2007-06-06T08:48:00.000-05:00

The Pennsylvania Senate is considering a Bill that would put bad faith claims under 42 Pa.C.S. 8371 into the hands of juries.

Currently, PA law generally requires that the issues of insurer bad faith and the damages that flow from bad faith conduct are to be resolved by a judge. However, PA Senate Bill 745 proposes to change the term "court" as used in 42 Pa.C.S. 8371 to "trier of fact," which would permit juries to determine whether an insurer acted in bad faith and the type and amount of damages owed for such misconduct.

Needless to say, the PA Trial Lawyers Association favors the amendment, but insurers oppose it, fearing runaway juries and inflated settlements.

Thanks to my partner Joe Linehan for the tip on this bill.

The Electric Light and Insurance

2007-06-01T08:31:00.000-05:00

I know this is a bit off topic, but I found this interesting and amusing:

"Insurance is one of the greatest modern inventions of humankind."

Have a wonderful weekend.

Horseshoes, Hand Grenades, and Bad Faith Claims

2007-05-30T14:44:00.000-05:00

The Philadelphia County Court of Common Pleas has awarded an insured consequential damages, even though it also denied the same insured's bad faith claim.

In Prime Medica Associates v. Valley Forge Insurance Company, a jury awarded the insured, Prime Medica, $4,000,000 on its claim again Valley Forge. Following the jury trial, the court granted Valley Forge's Motion for Remittitur and reduced the award to $2,049,000, the pertinent policy limits less a $1,000 deductible.

The court also held a bench trial to determine whether Valley Forge had acted in bad faith regarding Prime Medica's claim. As explained by the court:

This court found this to be a very difficult decision in that it believed that the carrier had not acted appropriately. At the same time, the court wrestled with the conclusion that the carrier put forth a reasonable basis for its decision to deny coverage. After much soul searching, this court denied plaintiff’s bad faith claim.

Addressing the parties' cross-appeals in anticipation of review by the PA Superior Court and, apparently, accounting for the fact that some portion of the policy limits award consisted of consequential damages, the court faced "a difficult and important issue - - that is, whether in a first-party insurance claim, the insured-plaintiff is to be denied the right to obtain consequential damages." Though Valley Forge argued that the law required that no such damages were permissible, the court asserted:

This court submits that this should not be so. Here, this court, somewhat reluctantly did not find bad faith. But, the court agreed with the jury that the carrier was negligent and plain wrong in its decision, thereby causing damages to the insured. Under these conditions consequential damages should be recoverable. A comprehensive study of this carrier’s conduct leads to a conclusion that the carrier was so close to acting in bad faith that it was teetering with one leg hanging over the bad faith abyss. This court submits that there exists no appropriate policy reason to deny this plaintiff in this case the right to sue for consequential damages.

The undersigned hopes that the Superior Court will agree and will say so.

I expect that Prime Medica hopes for the same.

Note also that this is an interesting late notice/prejudice case and is worth following through the appellate courts for this reason as well.

Public Policy Defense Fails

2007-05-28T06:42:00.000-05:00

In a recent case in the Eastern District of PA involving a claim under a claims made Directors, Officers and Corporate Liability Insurance Policy for coverage of an underlying breach of contract and UCC claim, the Eastern District Court has refused to rely upon public policy to preclude insurance coverage for contractual claims asserted against an insured.

In Verticalnet, Inc. v. U.S. Specialty Insurance Co., though both Verticalnet and U.S. Specialty agreed that the language of the policy at issue provided coverage for the securities related breach of contract claims at issue and that no policy exclusion applied, U.S. Specialty still denied coverage contending that "Pennsylvania public policy bars liability coverage for contractual breaches, thereby rendering Verticalnet's claim 'uninsurable' under Pennsylvania law." In asserting this position, U.S. Specialty cited to PA cases in which courts ruled against policyholders seeking coverage for breach of contract claims under "occurrence" based general liability policies.

The court, noting that the cases cited by U.S. Specialty were determined based upon policy language, that insurers sometimes chose to insure certain types of contractual liability claims, and that no cases in PA have denied coverage for contractual claims based upon public policy concerns, refused to extrapolate from the general liability cases "a sweeping public policy that liability insurance of any type cannot cover otherwise valid claims if they also arise from a breach of contractual duty."

Of course, U.S. Specialty could have avoided all of this rather easily by specifically excluding all, or at least some, contract claims from the scope of coverage, as did the insurers in the cases it cited. This factor appeared to have significant weight in the court's decision.

It should be noted that Verticalnet's bad faith claim and damage issues remain in this case. Both of these issues could result in interesting decisions. The court's determination that there was no precedent in PA for the basis U.S. Specialty's denial may provide some support for the bad faith claim, though we may not have all of the relevant facts. With respect to damages, because the underlying case settled for $5,563,000, funded by the unspent amount of Verticalnet's applicable $500,000 self-insured retention, with the remaining funds consisting of any insurance proceeds that could obtain from U.S. Specialty, the court will need to examine the good faith and reasonableness of the settlement before determining the amount of damages.

Special thanks to Philadelphia lawyer Randy Maniloff for bringing this case to my attention.

Friends in High Places

2007-05-23T05:19:00.000-05:00

In getting this site off the ground, I scoured the web for other sites and blogs of interest, several of which are linked on this page. In so doing, I discovered the Insurance Coverage Law Blog, a rather inspiring site run by Portland, Oregon lawyer David Rossmiller. I cannot imagine that there is a better insurance coverage site (or legal blog, for that matter) out there. Thus, David's mention of PA Insurance Law Notes is particularly significant for me and greatly appreciated.

Take a look at David's site when you get a chance. It is truly an excellent and interesting blog.

Contra Proferentem Not Always the Answer

2007-05-16T11:26:00.000-05:00

I have always liked the doctrine of contra proferentem, not only because it is a rule that often benefits policyholders, but because it sounds like a made-up or misused latin term that could have been used on Johnny Dangerously's "death walk."

Apparently, not everyone likes contra proferentem as much as I do. Though PA courts generally apply the rule of contra proferentem to insurance contracts resulting in the construction of ambiguous policy terms against insurers, a recent case in the Eastern District of PA demonstrates that there are exceptions to this rule.

Prudential Ins. Co. v. Prusky involved a variable universal life insurance contract originally purchased by Stephen Prusky and, later, transferred to his father, Paul. Without belaboring the details, a dispute arose regarding Prusky's right and ability to transfer in and out of various investment options. Both parties argued that the contract was not ambiguous. Nevertheless, they advanced different interpretations of the contract. The court, looking to extrinsic evidence to determine if the contract was ambiguous, found that the evidence suggested ambiguities were present.

Prusky argued that the rule of contra proferentem applied, as it typically does where insurance policies are ambiguous. Nevertheless, the court, finding that the Prusky's were "sophisticated investors with specific experience in mutual funds and variable life insurance" and that the parties engaged in contract negotiations regarding the transfer issues before the court, declined to apply the rule, citing Burns Mfg. Co. v. Boehm (Pa. 1976) (contra proferentem is not intended "as a talismanic solution to the construction of ambiguous language"); RESTATEMENT (SECOND) OF CONTRACTS § 206 (Interpretation Against the Draftsman, Reporter's Note cmt. a noting that "the rule has less force when the other party has taken an active role in the drafting process, or is particularly knowledgeable.")

Thus, while the contra proferentem rule can be a valuable tool in pursuing a claim against an insurer, policyholders with particular expertise in the type of insurance at issue and/or who negotiated the terms at issue should not expect that a court will always blindly apply this rule.

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Late Notice Defense Still Requires Actual Prejudice

2007-05-09T09:19:00.000-05:00

The requirement that, to avoid coverage, an insurer must demonstrate that it was actually prejudiced as a result of an insured's late notice of a claim has been reaffirmed by the PA Superior Court.

The case of American States Ins. Co. v. Estate of Braheem arises from the death of Mr. Braheem, who was killed as a passenger in a one car accident. Both he and the driver were legally intoxicated at the time of the accident. Braheem's estate collected the full policy limits from the driver and from Braheem's own UIM carrier. Then, more than two years later, the estate made a claim for more than $900,000 in UIM benefits under an American States policy issued to Braheem's step-father with whom Braheem lived.

American States denied coverage, asserting that the estate failed to notify American State of the settlements with the driver's and Braheem's carriers and that the settlement and two year delay had extinguished American States' subrogation rights against the bar that served the driver.

Looking to its August 2006 decision in Nationwide Insurance Company v. Schneider, requiring an insurer to demonstrate prejudice to succeed on a late notice claim, and reminding that a similar prejudice requirement must be met in order to defeat coverage where a policyholder has violated a "consent to settle" provision, the Court held that, where late notice extinguishes an insurer's subrogation right, the prejudice requirement is satisfied.

Nevertheless, the mere presence of a possible subrogation claim alone is not enough. Thus, the Court discussed the viability and value of a potential dram shop claim, but remanded the case for further examination of the viability and value of such a claim under the particular circumstances of the case.

The morals of the story:

As counsel for an injured party, leave no insurance policy unexamined. As the court noted, Braheem's original counsel apparently did not believe that American State's policy was applicable because Braheem was a stepchild of the policyholder, rather than a blood relative. This may have caused the delay resulting in the prejudice claim.

As counsel for the insurer, make sure you establish actual, not theoretical, prejudice, creating a record that demonstrates, as much as possible, a tangible and quantifiable detriment suffered by the insurer.

PA Supreme Court Sacks Insurers on Stacking

2007-05-04T10:50:00.000-05:00

The PA Supreme Court reversed a unanimous decision of the PA Superior Court that had held an insurer is not required to offer or obtain new UM/UIM stacking waivers from insureds when an additional vehicle is added to an automobile insurance policy.

In Sackett v. Nationwide Mutual Insurance Co., the PA Supreme Court, interpreting 75 Pa.C.S. § 1738 (the Pennsylvania Motor Vehicle Financial Responsibility Law), ruled by a 4-2 vote in an April 17, 2007 opinion written by Justice Baldwin that:

Today's holding requires what the plain language of the statute states: when an existing insured purchases uninsured or underinsured motorist coverage for more than one vehicle under a policy, the named insured must be provided with the opportunity to waive stacking of that coverage. Despite what Appellee suggests, today’s holding does not extend to circumstances where an existing named insured simply replaces a vehicle, or renews an existing policy. Such changes are not purchases of coverage within the meaning of Section 1738.

Thus, even if an insured has already rejected stacking of the uninsured/underinsured coverage in his or her automobile insurance policy, if an additional vehicle is added to the policy, the prior rejection of stacking does not apply to the additional vehicle. Instead, an insurer must give the named insured another opportunity to waive the stacked limits.

Sackett appears to place a new and perhaps significant burden on automobile insurers and insurance agents in Pennsylvania and may open the doors to additional coverage for policyholders attempting to access their policies UM/UIM benefits.

Justice Castille wrote a dissenting opinion.

Ambiguities MUST Favor Policyholders, Regardless of Extrinsic Evidence

2007-05-02T13:33:00.000-05:00

Though not exactly breaking news, it is well worth noting here that, late last year, the U.S. District Court for Western District of PA ruled, that ambiguities in insurance policies must be interpreted in favor of the policyholder and, consequently, that extrinsic evidence must not be considered in interpreting ambiguous policy provisions. Federal Insurance Co. v. Continental Casualty Co., No. 2:05-cv-305 (W.D Pa. Nov. 22, 2006). While it has been argued that this is and must be the rule of law in PA, courts have not always taken this approach. See Hutchison v. Sunbeam Coal Corp., No. 6 W.D. App. Docket, 1986 (Pa. December 16, 1986), Penn Twp. v. Aetna Cas. & Sur. Co., Nos. 1071 Harrisburg, 1997, 1072 Harrisburg, 1997, 1073 Harrisburg, 1997 (Pa. Super. September 2, 1998); 12th St. Gym v. General Star Indem. Co., Nos. 95-1845, 95-1846 (3d Cir. August 28, 1996).

More on this here. Also, see my article in the March 20, 2007 issue of Mealey's Litigation Report: Insurance, "Court Rules Ambiguities in Insurance Policies Favor Policyholders."

Old Insurance Policies Can Be Hidden Treasures

2007-05-02T08:55:00.000-05:00

by Beth A. Slagle, Esquire

Most businesses believe that old insurance policies have no value or further use. Nothing could be further from the truth.

If a company needs to file a claim or has a claim filed against it for something that occurred years ago, the old policy may still cover it.

For example, it often takes years for environmental problems to emerge. Someone may file an environmental claim in 2007 against a company for something that happened 25 years ago, such as an oil spill or a leak of hazardous materials. It is the older policy that will most likely provide coverage -- assuming the business still has all the information about the old policy.

Not only that, but older insurance policies also tend to have fewer exclusions than their more modern counterparts, and often contain no aggregate limits on liability. That makes an old policy a potentially valuable asset.

Companies should make certain that they locate and save copies of all old insurance policies, including copies of insurance policies for companies they have acquired or merged with.

(You can find Beth's original article here in the Pittsburgh Post-Gazette.)

Policy Pitfall: Allocation Provisions

2007-05-01T14:08:00.000-05:00

Typically, liability insurance policies provide two distinct types of coverage that apply when a claim is asserted against an insured party:

defense coverage under which an insurer pays legal fees and related expenses; and
indemnification for amounts that the insured is ultimately legally obligated to pay for losses covered under a policy.

With respect to the insurer's defense obligation, when a claim is made of which even a part is covered by the policy, the insurer pays 100% of the insured's defense costs. In the indemnification context, an insurer generally is only obligated to pay if the claim for which an insured is liable is covered by the policy, though insurers frequently pay to settle cases involving both covered and uncovered claims.

In recent years, insurers, particularly in the directors and officers liability and professional liability context, are inserting "Allocation" or "Relative Exposure" provisions into policies that, in situations involving both covered and uncovered claims, require that the insurer and the insured use their best efforts to determine a fair allocation of payments of defense and/or indemnification between covered and uncovered claims, leaving the insured responsible for the uncovered portion. In addition to opening the door to disputes and/or litigation between insurers and insureds regarding fair allocation, these provisions represent a significant decrease in the benefit being purchased by an insured and, as such, insureds should be on the lookout for these provisions in or as options in their policies.

To be clear, this is not a "brand new" provision and has appeared in some directors and officers liability policies for more than a few years. However, it is becoming more commonly used and at least one large insurer recently added it to its new professional liability insurance form.

How Many Occurrences?

2007-04-27T16:47:00.000-05:00

Keep an eye on the case of Donegal Mutual Insurance Co. v. Baumhammers addressing the meaning of "occurrence" in the context of a homeowner's and an umbrella policy insuring Richard Baumhammers, who tragically went on a shooting spree, killing five people and seriously injuring another on April 28, 2000. The case is being reviewed by the PA Supreme Court as nicely explained here.

A Choice of Rules for Choice of Law

2007-04-23T16:18:00.000-05:00

In February 2007, the PA Superior Court provided some much needed guidance regarding choice of law rules in contract (and, most importantly here, insurance contract) cases. In Budtel Associates v. Continental Casualty Co., the Superior Court acknowledged, "There is a split on the question of how we should decide a choice of law quandary involving a contract dispute." Resolving this split, the Court determined that law of the state of delivery of the insurance contract was not controlling and that, instead, the law of the state with the "most significant contacts or relationships with the insurance contract," as set forth in the PA Supreme Court's 1964 decision in Griffith v. United Airlines, must be applied.

Welcome to PA Insurance Law Notes

2007-04-20T13:12:00.000-05:00

Welcome! In practicing in the area of insurance coverage law in Pennsylvania, I have found that no single website, periodical, or newsletter provides a centralized location for new cases or interesting developments in Pennsylvania insurance coverage law. Thus, my goal, at least at the outset, is to attempt to provide such a resource for similarly situated lawyers, insurance professionals, and others who may be interested in this area of the law.

As this is a new venture, any comments, questions, or suggestions are welcome and greatly appreciated. Feel free to leave comments on this site or to contact me here.

Disclaimer

2007-04-19T08:18:00.001-05:00

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