Declarations and Exclusions

Asbestos Liability "Occurs" Again and Again and Again and . . . .

State Farm is having a bad day in Mississippi, and David Rossmiller is on the case at Insurance Coverage Blog.  First, a federal magistrate ruled that State Farm's parent company may be sued over Katrina damage even though the policies were issued by its separate subsidiary.  Then, a Mississippi trial court judge directed a $223,000 verdict against State Farm on a Katrina claim, to which the jury promptly applied the maximum ten-times multiplier the Constitutional [apparently] permits and awarded an additional $2.5 Million in punitive damages.  Stay tuned to Mr. Rossmiller for further developments.

State Farm, however, is not the only major insurer in the country, and Katrina not the only catastrophe.

Slower moving but every bit as devastating, asbestos injury claims continue their slow trudge to resolution and insurers continue their efforts to contain their exposure to those claims.  One insurer that has been in the thick of this issue is Truck Insurance Exchange, one of the Farmers Insurance companies.  Truck has already paid out more than $50 Million to satisfy injury claims brought by persons exposed to asbestos products produced by Truck's insured, Kaiser Cement and Gypsum Corporation.  Truck thought that it had established that its available limits of coverage have been exhausted, but this week California's Second District Court of Appeal concluded otherwise, reversing an earlier order of the Los Angeles Superior Court that had ruled in favor of Truck.  The Court of Appeal writes:

This petition for writ of mandate presents an issue of first impression in this state: The meaning of 'occurrence' in a commercial general liability (CGL) policy as applied to bodily injuries caused by exposure to asbestos.  We conclude that, as used in the policies at issue, 'occurrence' means injurious exposure to asbestos, not the manufacture and distribution of those products.  Accordingly, we grant the writ and direct the trial court to vacate its summary adjudication order.

(Emphasis added.)

Truck provided liability insurance coverage to Kaiser for almost twenty years, from 1964 to 1983.  Each of the Truck policies issued over that period specified that it would provide coverage up to a stated amount "per occurrence."  The definition of "occurrence" changed over the course of twenty years, but Truck argued successfully in the lower court that Kaiser's manufacture and distribution of asbestos throughout that period should be considered a single "occurrence."  Truck persuaded the court that its $50 Million-plus in payments to date exceeds the total limits of all of its policies issued to Kaiser, so that it has fully performed its obligations and owes nothing further. 

• Kaiser, for its part, agreed with Truck, principally because the policies also required Kaiser to pay a deductible also calculated on a "per occurrence" basis.  As the appellate court notes, "Kaiser’s share of the total asbestos liability increases as the number of occurrences increases. . . . [and] if each claim is treated as a separate occurrence, Kaiser may have no
  coverage for a substantial number of claims."  Kaiser was thus in the unusual position of trying to reduce the number of "occurrences" in order to reduce the amount it must pay in deductible, even though the result would also be to reduce the total amount of insurance provided to Kaiser by Truck.
  

The upshot of Truck's position would not be to leave Kaiser -- or injured claimants -- altogether without access to insurance.  Truck's coverage was only the first layer of several.  Once Truck's limits are exhausted, financial responsibility for the claims passes to the insurers who issued various excess policies of liability insurance to Kaiser.  Not surprisingly, it is those excess insurers -- a group referred to collectively as the London Market Insurers -- who disagreed with the trial court's ruling and petitioned the Court of Appeal to overturn it.

The Court of Appeal's 30-page opinion is worth reading in its entirety for its application of the First Three Rules of Insurance Policy Interpretation:

1. Read the Policy,
2. Read the  Policy, and
3. Read the Policy.

After parsing through the definitions of "occurrence" in each of the Truck policies, the Court of Appeal emphasizes that while Truck may have wanted or subjectively intended that term to carry a meaning under which twenty years of production and distribution of asbestos products constitutes a single "occurrence," the language it actually used will not sustain that interpretation.  That language compels the conclusion that an "occurrence" must refer not to what was done by the insured (Kaiser) but to what happened to the claimants/victims who were injured by the insured's actions.

Having come to its conclusion, the Court of Appeal overturns the trial court's grant of summary adjudication in Truck's favor.  Truck may ultimately be able to show that its limits have been exhausted, even under the Court of Appeal's expansive construction of "occurrence," but it will not be able to do so via the shortcut that the lower court elected to follow.

• Given that this issue is an important one, and that the Court of Appeal's decision here is the first to attempt to decide it under California law, it will not be surprising if Truck petitions the California Supreme Court for further review.

~~~

The Court of Appeal's decision in London Market Insurers v. Superior Court (January 9, 2007), Case No. B189000, can be accessed at these links in PDF and Word formats.

[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Your Assignment, Should You Choose to Accept It, May Include Attorneys' Fees

Resolving a split between appellate districts, the California Supreme Court has ruled that the recipient of an assigned claim for breach of the implied covenant of good faith and fair dealing receives with the assignment the right to claim recovery so-called Brandt attorney fees. 

In February, 2005, Decs&Excs reported on the Court of Appeal's decision in the case of Essex Insurance Co. v. Four Star Dye House, summarized this way:

When an insured prevails against an insurer on a claim for 'bad faith,' the attorneys’ fees that the insured incurred in recovering the unpaid insurance benefits can be awarded as an element of the insured’s damages under the so-called Brandt Rule.  [Brandt fees have been discussed previously here and here.]   Now a panel of the Second District Court of Appeal has ruled that an insured is permitted to assign the right to recover Brandt fees.

As noted then, the Second District in Essex rejected a contrary view -- that Brandt fee claims are not assignable -- adopted by of the Sixth District Court of Appeal in Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501.  Because of the disagreement among the state's appellate courts, it is no surprise that the California Supreme Court accepted a petition to review Essex and to sort out the conflict.  After examining the question, the Court has now adopted the Essex view as the rule in California. 

Writing for a unanimous Court, Justice Kennard gets right to the point:

The issue here is this: When an insured assigns a claim for bad faith against the insurer, and the assignee brings a tort action against the insurer that includes a claim for wrongfully withheld policy benefits, may the assignee recover Brandt fees?  Our answer is “yes.”

Following a lengthy and informative discussion of the general law on recovery of attorneys' fees and on assignability of claims, and of the rationale of the original Brandt decision, Justice Kennard ultimately sides with the claimants on practical grounds:

We reject Essex’s argument that because Brandt fees are tort damages, they are recoverable only if incurred by the insured personally, rather than by the assignee. . . .  Had Sanchez [the insured] brought the bad faith action against Essex, his right to recover Brandt fees would be unquestioned.  As the assignee of Sanchez’s claim against Essex, Five Star stands in his shoes, and so may assert his right to recover any Brandt fees incurred in prosecuting the assigned claim.  We agree with the Court of Appeal here that the right that Sanchez assigned to Five Star was the 'right to recover the policy benefits in full, undiminished by the attorney fees incurred in bringing the action to recover those benefits.'  Were we to accept Essex’s argument, Sanchez would no longer be assigning the right to recover the policy benefits in full.

* * *

Disallowing recovery of Brandt fees in cases such as this would result in a windfall for the insurer, whose liability for tortious conduct would be significantly reduced because of the fortuitous circumstance of the assignment of the bad faith claim.  As we have recognized, recoverable Brandt fees may exceed the contract benefits wrongfully withheld.  [Citation omitted.]  Disallowing recovery of Brandt fees incurred by assignees would also tend to discourage assignment of bad faith claims against insurance companies, contrary to the public policy favoring transferability of causes of action. 

The California Supreme Court's decision in Essex Insurance Co. v. Five Star Dye House, Inc. (July 6, 2006), Case No. S131992, can be accessed at these links in PDF and Word formats.

[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

~~~

UPDATE [1023 PDT]: 

J. Craig Williams has additional thoughts on the case at May it Please the Court.

Pay It Back: Liability Insurer Entitled to Recover All Defense Costs When Coverage Never Existed

The California Supreme Court has revisited the issue of a liability insurer's right to seek reimbursement from its insured for costs expended defending non-covered claims.  The Court holds that when the insurer notifies the insured that it may seek reimbursement and then obtains a determination that there is not, and never has been, a potential for coverage under the policy, the insured can be required to reimburse all defense costs paid by the insurance company from the inception of the claim.

In the case before the Court, Scottsdale Insurance Company insured MV Transportation.  MV was sued by Laidlaw Transit Services, which claimed that MV -- with the help of a number of former Laidlaw officers and employees -- had engaged in an array of unfair and unlawful competitive practices.  MV sought a defense from Scottsdale, relying on a 9th Circuit decision that had found that trade secret misappropriation could be covered under the rubric of "advertising injury."  Scottsdale disagreed with that analysis, but it agreed to provide a defense.  The defense was provided subject to an explicit reservation of Scottsdale's right to seek recovery of all defense costs that could be attributed to non-covered claims.

• Scottsdale relied on the state Supreme Court's1997 decision in Buss v. Superior Court, in which the Court first recognized an insurer's right to obtain reimbursement of defense costs to the extent those costs could be shown to relate entirely to claims that were never potentially covered.  A liability insurer must defend any claim that raises a potential for an award of covered damages, the Court reasoned in Buss, but it is not required to defend claims that are conclusively shown to have contained no such potential and -- having "done the right thing" by defending those non-covered claims along with the potentially covered claims -- is entitled to recover those expenses from the insured, which would otherwise receive a windfall.

While defending MV against Laidlaw, Scottsdale filed an action seeking a declaratory judgment to determine whether any portion of the MV/Laidlaw litigation was potentially covered under its policies.  While the declaratory judgment action was pending, the MV/Laidlaw action was settled.  Scottsdale continued forward with its action, only to have the trial court rule that Scottsdale did owe a duty to defend.  Scottsdale appealed.  The Court of Appeal's decision was a case of "good news/bad news" for the insurer: the Court agreed with Scottsdale that there was never any potential for coverage for any of the Laidlaw claims, but held that its determination of non-coverage did not operate retroactively and that Scottsdale could not recoup any of the costs that it had expended prior to obtaining the Court of Appeal's ruling in its favor -- which is to say, since the underlying case has been fully litigated and resolved by this point and all of the related defense costs have already been paid, that Scottsdale wins but recovers nothing.  (I, for one, do not envy the attorney who was chosen to report that result to the client . . . )

Scottsdale, unsurprisingly, petitioned the Supreme Court for review.  The Supreme Court, much to the relief of Scottsdale and its counsel, not only granted review, it effectively expunged the "but" from the Court of Appeal's decision.  Justice Baxter, writing for a unanimous 6-member Court [Justice Brown having been recently elevated to the D.C. Circuit] sums it up as follows:

The third party action ended in settlement.  Thereafter, in the insurance action, the superior court found a potential for coverage, but the Court of Appeal ultimately disagreed.  For reasons of law, the Court of Appeal held that the allegations in the third party’s complaint never triggered any possibility of coverage under Scottsdale’s policies.  Nonetheless, the Court of Appeal concluded that Scottsdale was not entitled to reimbursement.  The Court of Appeal reasoned, in essence, that its no-potential-coverage determination 'extinguished' Scottsdale’s defense duty only from that time forward. Hence, the Court of Appeal determined, Scottsdale could not 'retroactively' recover defense costs expended before its duty was 'extinguished.'

We disagree.  By ruling, as a matter of law, that the third party action never presented any possibility of coverage by Scottsdale’s policies, the Court of Appeal established not that the duty to defend was thereupon prospectively 'extinguished,' but that it never arose.  Therefore, Scottsdale may recover amounts it expended in defending the insured under its reservation of rights.  To the extent the Court of Appeal held otherwise, its judgment must be reversed.

(Italics in original.) Or, to state it as a quasi-syllogism

• If there is a potential for coverage, the insurer must defend
• If there is no potential for coverage, the insurer need not defend
• If there was never a potential for coverage, the insurer never needed to defend,

AND THEREFORE

• All expenses incurred in defending a never-covered claim are recoverable by the insurer.

~~

The decision in Scottsdale Insurance Company v. MV Transportation (July 27, 2005), Case No. S123766, can be accessed at these links in PDF and Word formats.
[Note: Links expire approximately 120 days following issuance of the opinions; the opinions should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

"I've Got the World On a Stringfellow"

Business Insurance reports the breaking news from the Riverside Superior Court in the ongoing litigation over who pays what in the cleanup of the notorious Stringfellow Acid Pits.  The news is not good for some of the companies that insured the State of California in connection with its activities at the site:

[A] Riverside County Superior Court jury found the insurers in breach of their contracts, said Robert Horkovich, a partner at Anderson Kill & Olick P.C., who represents California.  The jury also rejected insurers' arguments that the state willfully contaminated the Superfund site and concealed information when purchasing general liability insurance policies between 1964 and 1976.  The judgment means California will be able to collect at least $12 million plus interest from the five insurers, Mr. Horkovich said.  He said he expects the insurers will appeal while the state seeks additional awards.

The ruling was against CNA Casualty Co., Yosemite Insurance Co., Employers Insurance Co. of Wausau, Horace Mann Insurance Co. and Stonebridge Life Insurance Co.

Mr. Horkovich's prediction of an appeal by the insurance companies is likely one of the safest bets in the house.  Stay tuned.

An Insurer's Got to Know Its Limitations - Earthquake Edition

Over 11 years have passed since the Northridge Earthquake roared up from under southern California in 1994, but the losses resulting from the event continue to provide fodder for litigation affecting insurers.  In two recent decisions, the California Court of Appeal has demonstrated a willingness to stretch or disregard otherwise strict time limits to permit continuing pursuit of Northridge Earthquake claims.

Ordinarily, lawsuits against insurers over the denial of a property insurance claim must be filed within one year of the manifestation of the loss, i.e., the date on which the loss would be reasonably discoverable by a reasonable person.  (See Cal. Insurance Code section 2071.)  During the time between the initial presentation of the claim to the insurer and the insurer’s denial of the claim, that one-year time limit is suspended, or “tolled.” 

The time in which to file suit over Northridge claims expired, in most cases, within a year or two after the quake itself.  In 2000, however, California's Legislature reacted to continuing complaints about insurer's handling of earthquake claims by enacting Code of Civil Procedure section 340.9.  That statute reopened the time in which to sue over some earthquake claims for one additional year, so long as suit was filed between January 1 and December 31, 2001.

In Cordova v. 21st Century Insurance (May 9, 2005), the Court of Appeal has permitted a lawsuit to proceed even though it was not filed until well after even the extended deadline permitted by §340.9.  The Court agrees with the insurer that there is no basis on which to apply the doctrine of "equitable tolling," under which the December 31, 2001, deadline might be deemed to have been further extended.  However, the court found that the insurer could be “equitably estopped.”  That is, even though the time limit has in fact expired, the insurer is barred from raising the time limitation as a defense.

[T]he burden of a late claim falls more heavily on the insured than the insurer.  The insured first has to overcome the statute of limitations by producing evidence which would equitably estop the insurer from asserting the limitations period.  This means proving the insurer was apprised of the facts; it intended its conduct be relied upon by the insured; the insured was ignorant of the true facts; and the insured reasonably relied on the insurer’s conduct to her injury.  [Footnote omitted.]  If the insured clears this hurdle she must also be able to prove the damage she is claiming was caused by the 1994 quake and not some other event.  For these reasons we reject 21st Century’s contention applying the doctrine of equitable estoppel to the remaining Northridge earthquake cases will expose insurers to unknown but significant liability.

The Court finds nothing in the history of section 340.9 to suggest that the Legislature intended to preclude application of the doctrine of equitable estoppel.  If the insured can establish that the delay in presenting the claim was caused by the insured’s reliance on false or misleading statements of the insurer -- such as an inaccurate representation that the amount of the loss was less than the applicable deductible -- the statute of limitations can not be asserted to bar the lawsuit.  The case has been ordered back to the trial court to determine whether the insured can produce the necessary evidence to prove that the insurer acted in a misleading or deceptive manner.

Another unhappy result for insurers was presented earlier this year in 21st Century Insurance v. Superior Court (March 30, 2005).  In that case, the appellate court reiterated that section 340.9 not only revived the time for filing some lawsuits claiming insurers breached their contracts by denying Northridge Earthquake claims, but also revived the insureds’ rights to bring tort claims for breach of the insurers’ implied covenant of good faith and fair dealing, i.e., "insurance bad faith" lawsuits.  The March 30 decision holds additionally that section 340.9 revives the time in which insureds can seek punitive damages in an earthquake-related “bad faith” case. 

21st Century argued that the constitutional prohibition on ex post facto laws -- laws that revive culpability for crimes after the statute of limitations has otherwise expired -- must apply to preclude the revival of punitive damage claims by section 340.9.  The Court of Appeal rejected that argument: The prohibition on ex post facto laws applies only to true crimes, not to civil penalties.  While punitive damages exist for the purposes of imposing punishment, they are “entirely civil in nature” and therefore can be reinvigorated for whatever period of time the Legislature deems appropriate.

With the Courts of Appeal willing to revive or extend these claims, and their related allegations of bad faith claims handling, the Northridge Earthquake increasingly resembles the title creature in a long-ago Saturday Night Live sketch: “The Thing That Wouldn’t Leave!”

~~~

The decision in Cordova v. 21st Century Insurance Company (May 9, 2005), Case No. B171304, can be accessed at these links in PDF and Word formats. 
The decision in 21st Century Insurance Company v. Superior Court (March 30, 2005), Case No. B179503, can be accessed at these links in PDF and Word formats.
[Note: Links expire approximately 120 days following issuance of the opinions; the opinions should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Living with Your Material Words: Misstatements in Application, Innocent or Otherwise, Permit Cancellation of Insurance Policy

The Second District of the Court of Appeal reminds us that it pays to keep your facts straight when applying for insurance coverage: Whether they were intentional or not, misrepresentations of "material" facts in an application will warrant cancellation of the policy when the insurer discovers them.

Plaintiff William Mitchell bought insurance on a building in Los Angeles owned by the Mitchell Family Trust.  The building was later destroyed in a fire traceable to arson.  The arsonist -- "a friend of Mitchell's" -- died in the fire.  Investigating the claim, the insurer discovered a number of discrepancies between the statements made in the application for insurance and the truth.  It notified Mitchell that it was rescinding the policy, and tendered a full return of the premium Mitchell had paid.  Mitchell refused to accept the tender and filed suit against the insurer.  The trial court ruled that the insurer was entitled to rescind, and Mitchell appealed.  The Court of Appeal catalogs the discrepancies in the application:

Mitchell purchased the building in February 2000 in the name of his trust. On April 11, 2000, Mitchell’s brokers submitted an application for insurance [to United National Insurance].  The application stated that (1) the property to be insured consisted of a 3,420 square foot commercial building; (2) the building was to be used by Mitchell as a “video production studio and offices”; (3) the business to be conducted in the building had $20,000 in payroll and generated $300,000 in receipts; (4) there was no existing insurance on the building; (5) the building had no uncorrected fire code violations; (6) the building had a burglar alarm; and (7) Records & Records & Filmworks, Inc. (later changed to James E. Mitchell) was the purchaser of the building.

In fact, (1) the building was less than 2,000 square feet, (2) the business conducted in the building had no officers or employees, was used only to film a music video for two days in May or June of 2000, and was leased to a tenant who operated a garment business; (3) the business in the building generated approximately $6,500 in receipts from February 2000 to the time of the fire; (4) the building was insured by the California FAIR Plan, an insurer of “last resort”; (5) the building was subject to a City of Los Angeles abatement order stating that the building could not be occupied without a clearance or repaired without a permit and contained such deficiencies as being open to unauthorized entry, littered with combustible debris, excessive dry weeds or vegetation, broken windows, damaged or missing doors, damaged exterior wall covering, damaged interior wall and ceiling covering, and deteriorated flooring (and no permit had been obtained for corrective work on these deficiencies); (6) the building had no burglar alarm; and (7) the building was owned by the Mitchell Family Trust.

In moving for judgment, the insurer submitted a declaration from its underwriter affirming that (1) she believed what was stated in the application and (2) had she known the truth she would not have issued the policy.  Mitchell asserted that he believed the truth of his representations when he made them, i.e., that he had made the erroneous representations in good faith, even though they were inaccurate.

Affirming the judgment for the insurer, the appellate court emphasizes that where a misstatement is "material" -- where the fact actually makes a difference in underwriter's decision whether or not to enter into the insurance relationship -- the applicant's intentions are irrelevant: if the insurer entered into the agreement based on a false representation the policy may be rescinded upon discovery of the truth, regardless of the insured's belief in the representation when it was made. 

The test for materiality is whether the information would have caused the underwriter to reject the application, charge a higher premium, or amend the policy terms, had the underwriter known the true facts. . . .  ‘This is a subjective test; the critical question is the effect truthful answers would have had on [the insurer], not on some “average reasonable” insurer.'

Accordingly, the appellate court concludes, the evidence that Mitchell's misstatements were relied on by the insurer supports the conclusion that the policy could be rescinded, even if it were established that the misstatements were innocent or unintentional.

The decision in Mitchell v. United National Insurance Company (March 8, 2005), Case No. B170364, can be accessed at these links in PDF and Word formats.  [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Paved With Good Intentions: Court Disallows Commissioner's Anti-"Use It And Lose It" Regulations

California Insurance Commissioner John Garamendi has said often that he considers the Department of Insurance to be above all a consumer protection agency.  While that proposition is open to debate, there can be no doubt that Commissioner Garamendi has campaigned tirelessly to protect consumers, particularly personal lines insurance buyers, from what he perceives to be insurance industry abuses . . . even when he lacks the authority to do so. 

A case in point is the Commissioner's steadfast opposition to what he calls "use it and lose it" underwriting, the alleged practice of insurers of declining to renew policies, or of renewing only with a significantly increased premium, when the insured so much as inquires concerning a possible claim or, worse, actually presents one.  So strongly does the Commissioner feel about these alleged practices that he first tried to prohibit them in April 2003 without the benefit of any actual statute or regulation, through what was termed an "Advisory Notice" to insurers.   The Notice began:

The purpose of this advisory notice is to direct your attention to those laws concerning the appropriate use of loss history information in the rating and underwriting of residential property insurance in California.  The CDI has received numerous complaints from homeowners and tenants who have been treated unfairly by insurance companies, particularly in the gathering and use of loss information in the underwriting process.

The Department then simply notified insurers that it deemed the various complaints to be justified, and demanded they cease their existing practices.  When insurers challenged the Notice and purported enforcement activities as "underground regulation," the Commissioner promulgated an "Emergency Regulation" in July 2003 to the same effect.  Again, insurers filed a legal challenge, and succeeded in obtaining a ruling in the trial court that the Commissioner had over-stepped his statutory authority.  The Commissioner and Department appealed, and the Third District Court of Appeal in Sacramento has affirmed the trial court's decision:

The Commissioner and CDI appeal, contending the regulation was within the Commissioner’s authority and consistent with various provisions of the Insurance Code.  We disagree.  The Insurance Code provides no express authority for regulating the underwriting of homeowners insurance, nor can such expansive authority be implied.  Unlike automobile insurance, homeowners insurance is subject to only a few restrictions, all clearly set forth in the Insurance Code.  Reading the Insurance Code to give the Commissioner broad authority to regulate underwriting beyond these specific provisions is inconsistent with the legislative scheme as a whole.  Accordingly, the regulation is invalid.

A valid regulation, the Court reminds us "must be within the scope of the authority conferred by the enabling statute or statutes. No matter how altruistic its motives, an administrative agency has no discretion to promulgate a regulation that is inconsistent with the governing statutes. . . .  In reviewing the validity of a regulation, our function is to inquire into its legality, not its wisdom." 

The Commissioner was unable to satisfy the Court that any of the statutes on which he relied actually authorized the imposition of the emergency regulation.

The Commissioner contends that the use of loss history that has no substantial relationship to future risk 'may impermissibly affect rates charged by insurers and lead to insurance that is unfair, unavailable, and unaffordable.'  The Commissioner believes he has the authority to determine, by regulation, when loss history has no substantial relationship to future risk.  The Commissioner points to no express statutory authority for this regulatory power.

In fact, the Court notes, the Insurance Code includes a number of specific grounds on which a decision not to renew a policy is prohibited: the presentation of a claim is not among them.  While the Legislature has expressed its policies in an array of statutes, none of them "indicate any legislative concern with the use of claims or loss history, nor can they be read as providing implied authority for the Commissioner to regulate the use of loss history in homeowners insurance underwriting."  No matter how well-intentioned, the emergency regulation was not authorized and must be declared unenforceable.

The Commissioner's initial response to the decision suggests he intends to fight on:

The court decision is now being reviewed by my Department's attorneys.  We will determine the next step on the emergency regulations after they have completed their work.  In the meantime, I will continue our ongoing efforts to protect homeowners.  Last year we achieved partial relief with a new law that protects homeowners against use it and lose it practices when natural disasters occur.  We will continue to explore new ways to legislate fairness for consumers.

It is clear that the industry must end this harmful practice.  Insurers cannot ultimately succeed if they erode the trust of their customers and penalize them for using a product as it was designed.  That's why I'm fighting this battle, and it's not over yet.

The decision in American Insurance Association v. Garamendi (Feb. 28, 2005), Case No. C045000, can be accessed at these links in PDF and Word formats.
[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Elsewhere:   Insureds' advocate J. Craig Williams endorses the Commissioner's position.   (This also serves to remind me that I have somehow omitted his weblog, May it Please the Court, from the links list, a condition that I have now remedied.   He is podcasting, too.)

Nothing Personal: Right to Recover "Brandt" Attorney Fees May Be Assignable

When an insured prevails against an insurer on a claim for “bad faith,” the attorneys’ fees that the insured incurred in recovering the unpaid insurance benefits can be awarded as an element of the insured’s damages under the so-called Brandt Rule.  [Brandt fees have been discussed previously here and  here.]   Now a panel of the Second District Court of Appeal has ruled that an insured is permitted to assign the right to recover Brandt fees.

L.A. Machinery Moving was transporting a commercial dryer for Five Star Dye House, and dropped the machine while loading it.  When L.A. Machinery did not fix the equipment quickly enough, Five Star sued for damages.   L.A. Machinery’s liability insurance company, Essex, declined to cover the claim.   Eventually L.A. Machinery settled with Five Star, and assigned to Five Star any and all rights that L.A. Machinery possessed against Essex.   After two trials, Five Star obtained a judgment against Essex, holding that the insurer had denied L.A. Machinery coverage erroneously and in bad faith.   Five Star sought and obtained an order awarding it its Brandt fees; Essex appealed, arguing that the right to Brandt fees is “personal” to the insured, and therefore could not have been assigned from L.A. Machinery to Five Star.

In the published portion of a longer opinion, the Second District disagreed.  The Court found that the policy and purposes of the Brandt rule require that attorneys’ fees be recoverable when anyone -- either the insured directly or the insured’s assignee -- is obliged to bring suit to recover insurance benefits that have been unreasonably denied.  In doing so, the Court disagreed with the earlier decision of the Sixth District Court of Appeal in Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501:

The case the Xebec court cites in support of its statement that Brandt fees may not be assignable stands for the proposition that damages arising from ‘the personal tort aspect of the bad faith cause of action’ -- such as emotional distress damages and punitive damages -- are not assignable.  [Citation.]  But Brandt fees are not founded upon a wrong of a purely personal nature . . . .  Instead, they are ‘an economic loss’ caused by an insurer’s bad faith denial of coverage under an insurance policy.  [Citation.]  The purpose of allowing an insured to recover Brandt fees -- i.e., the attorney fees incurred to vindicate the insured’s rights under the insurance policy -- is to make the insured whole by allowing the insured to recover the policy benefits in full, undiminished by the costs involved in bringing an action to enforce the contract.  [Citation.]

In the present case, L.A. Machinery assigned to Five Star its claims against Essex -- including its claims for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing.  Thus, L.A. Machinery assigned its right to recover the policy benefits in full, undiminished by the attorney fees incurred in bringing the action to recover those benefits.  The identity of the party incurring attorney fees to vindicate the insured’s rights under the insurance policy is irrelevant -- the right that is assigned is the right to recover the policy benefits in full.  This right to recover the policy benefits in full is not the kind of personal right that is not assignable.  Therefore, the trial court erred when it found that Five Star was not entitled to Brandt fees.

Note: Given the Court’s rejection of the Xebec rule in this case, there now exists a conflict within the districts of the Court of Appeal, which will have to be resolved by the California Supreme Court.

The decision in Essex Insurance Co. v. Five Star Dye House, Inc.(Jan. 27, 2005), Case No. B167295, can be accessed at these links in PDF and Word formats.
[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Raising a Stink: Court Finds No Coverage for Damage from Backup of Sewer Water

With California still drying out after weeks of continuous rain, what could be more timely than an appellate decision on insurance coverage for a loss caused by sewage in the basement?

A sewer pipe ran underneath the basement of Mike’s Tailoring, serving Mike’s premises and those of a neighbor.   A clean out pipe came out vertically in Mike’s basement.  20 to 25 feet “downstream” the sewer pipe made small but fateful change in direction: solid matter caught and clogged at that point, causing the line to back up to the clean out pipe, where “”the sewer line flooded Mike’s basement, and the water, sewage and fumes accompanying the sewage damaged Mike’s property.”

Mike’s property insurance policy covered “water damage” among its “specified causes of loss,” but contained two potentially relevant exclusions.  The first exclusion eliminated coverage for damage “caused directly or indirectly” by “water” stated to include: “Water that backs up from a sewer or drain. . . .”   The second exclusion eliminated coverage for discharge, etc., of “pollutants,” but contained an exception: the exclusion did not apply to such a discharge if it was caused by one of the “specified causes of loss.”   The insurer contended that the damage was not covered because it resulted from a “back[] up from a sewer or drain.”   Mike’s contended that there was coverage because the loss included damage from “pollutants” (sewage, sludge, etc.) and was not excluded because the pollutants accompanied a “specified cause of loss” (water).

The Court of Appeal, reversing a judgment in Mike’s favor, agreed with the insurer: because the loss was unavoidably related to “water that backs up from a sewer or drain,” reasoned the court, the fact that that water also contained “pollutants” did nothing to defeat the operation of the relevant exclusion:

As explained, the trial court found the sewer backup exclusion inapplicable because it found the damage was caused by ‘pollutants’ rather than water.  Notwithstanding this determination, the trial court also stated: (1) the loss was ‘caused by water, waste, and sewage;’ (2) the sewer pipe conveyed ‘waste-water . . . and that water contained many pollutants;’ (3) the sewer line contained water and sewage, and the contents of the sewer line was forced up the clean-out pipe into Mike’s basement and flooded the basement; and (4) the leakage of water constituted a ‘“specified cause of loss” in the form of  "water damage” . . . .’

The phrase ‘[w]ater that backs up from a sewer or drain’ is facially unambiguous.  It is unreasonable to assume that water in a sewer will be free from waste, contaminants, and other noxious substances that are commonly referred to as sewage.  A lay person reading the policy would assume that a backup of water from a sewer would contain both water and contaminants.  No reasonable person would assume that water backing up from a sewer would be pure water.  It is also unreasonable to assume the term ‘sewer,’ which is facially unqualified, has a latent, technical meaning which limits its application to the public portion of the sewer line.

The decision in Penn-America Ins. Co. v. Mike's Tailoring (Jan. 11, 2005), Case No. C046333, can be accessed at these links in PDF and Word formats.
[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

They Do Things Differently There: New York Further Expands Insured's Right to Attorneys' Fees in Declaratory Relief Litigation

The so-called "American Rule" governing a litigant's right to recoup attorneys' fees requires the prevailing party in litigation to pays his or her own lawyers; the prevailing party does not get to claim reimbursement for those expenses from the defeated opponent unless a specific agreement (such as an attorneys' fee clause in a contract) or an express statute authorizes an award of fees.  In California, the "Brandt" doctrine will occasionally permit in insured to recover some attorneys' fees as an element of damages in a later "bad faith" case -- Decs&Excs discussed the doctrine here earlier this year -- but California generally adheres to the American Rule and generally requires the insured to bear the legal expense of defending against an insurer's declaratory relief action contesting coverage, even when the insured prevails.

Not so in New York:  In a 1979 decision -- the delightfully named Mighty Midgets case -- that state's highest court, the New York State Court of Appeals, held that when an insurer denies coverage and brings a declaratory relief action and the insured prevails, the insured is entitled to recover the attorneys' fees incurred in defending against the coverage action.

The insurer in Mighty Midgets declined to provide a defense under a liability policy, and some later courts have suggested that the failure of the insurer to defend at all was the principal ground for the award of attorneys' fees in the earlier case.  Now Business Insurance reports that the Court of Appeals, in response to a question posed by the 2nd Circuit U.S. Court of Appeals, has reaffirmed and expanded the Mighty Midgets doctrine, holding that an insured who successfully defends against a declaratory relief action is entitled to recover attorneys' fees, even if the insurer has been performing its obligations to defend. 

In the case before the 2nd Circuit, the insurer had been providing a defense to the insured in the underlying action, subject to a reservation of the insurer's right to withdraw from the defense if and when it obtained a favorable ruling in its declaratory relief case.  "The reasoning behind Mighty Midgets," says the New York Court, "is that an insurer's duty to defend an insured extends to the defense of any action arising out of the occurrence, including a defense against an insurer's declaratory relief action."  Applying that logic, it makes no difference whether the insurer performs or not while pursuing declaratory relief; the insured who successfully defends against the declaratory relief action is entitled to attorneys' fees in either case:

        In the instant case, it is undisputed that Shelby, a named insured under the policy, was cast in a defensive posture by U.S. Underwriters in their dispute over whether the insurer had a duty to defend and indemnify Shelby in the underlying personal injury action.  Further, it is undisputed that Shelby successfully defended against the insurer's summary judgment motion and thereby prevailed in the matter.

        Based on Mighty Midgets, Shelby is entitled to recover attorneys' fees.  We hold that under Mighty Midgets, an insured who prevails in an action brought by an insurance company seeking a declaratory judgment that it has no duty to defend or indemnify the insured may recover attorneys' fees regardless of whether the insurer provided a defense to the insured.   Given that the expenses incurred by Shelby in defending against the declaratory judgment action arose as a direct consequence of U.S. Underwriters' unsuccessful attempt to free itself of its policy obligations, Shelby is entitled to recover those expenses from the insurer.   In other words, Shelby's recovery of attorneys' fees is incidental to the insurer's contractual duty to defend.

(Emphasis added.)

At least temporarily, the New York Court of Appeals' decision in U.S. Underwriters Insurance Co. v. City Club Hotel, LLC, et al., (Dec. 16, 2004), can be found at this link in PDF format.