Insurance Litigation Review: 2001

April 2002

Insurance coverage disputes are a mirror to casualty and liability losses throughout the world. In this article, Jill Berkeley lists the more important insurance cases of last year.

by Jill B. Berkeley
Schiff Hardin LLP

Insurance coverage disputes are a mirror to casualty and liability losses throughout the world. Where damage and injury occur from weather-driven calamities, commercial transactions, automobile accidents, construction projects, or products liability, insurance-related controversies are not far behind. In fact, we are all well accustomed to dealing with the everyday accident, and have proven our resiliency in the event of catastrophic disaster, as evidenced by September 11. Even large-scale environmental contamination from hazardous waste or toxic torts from lead and asbestos seem commonplace to the coverage lawyer, policyholder, and insurer. So much so that perhaps we become blasé, hardened, and impervious to pain and suffering.

What is constantly shocking to me is the proliferation of society's problems within the context of insurance coverage cases. This year is no different. Certainly the insurance analysis keeps the impact of social issues several levels away. One experiences the anguish and horror of victims from an intellectual distance. The encounter is unmistakable, all the same.

The following are recent examples. Gun violence, discrimination, sexual assaults, and other forms of physical abuse cry out in cases from many different perspectives, including the victim, the perpetrator, the employer, and the professionals serving them. More detailed summaries can be found in the Spring and Fall Editions 2001 of CGL Reporter published by IRMI.

Construction Defect Litigation

Defective construction cases give rise to a multitude of coverage disputes. See:

• Maryland Cas Co v Nationwide Mut Ins Co., 81 Cal App 4th 1082, 97 Cal Rptr 2d 374 (Cal App 2000), involving equitable contribution between primary and excess insurers over a defective construction matter
• Pershing Park Villas Homeowners v United Pacific Ins. Co., 219 F3d 895 (9th Cir 2000), dealing with bad faith issues
• Oak Crest Construction v Austin Mutual Ins., 998 P2d 1254 (Or App 2000), looking at breach of contract versus tort concepts
• Signature Development Cos. v Royal Ins. Co., 230 F3d 1215 (10th Cir 2000), examining the impact of other insurance on the duty to defend
• Lindy Investments v Magnolia Creek, 209 F3d 802 (5th Cir 2000), applying the work product exclusion to a claim for defective siding
• Cincinnati Ins. Co. v Mills, 2000 W Va LEXIS 146 (W Va 2000), determining whether damage to uncompleted work is excluded

Bad Faith Litigation

The insurance relationship is also beset with some fundamental inequities. Bad faith cases arise in a variety of contexts and create a myriad of problems and issues:

• Pershing Park Villas Homeowners v United Pacific Ins. Co., 219 F3d 895 (9th Cir 2000), deals with emotional distress
• Jadco Management Corp. v Federal Ins. Co., 9 P3d 92 (Okla App 2000), deals with recovery by third-party beneficiaries
• Gray v North Carolina Ins. Fund, 529 SE2d 676 (NC 2000), and Sobley v Southern National Gas Co., 210 F3d 561 (5th Cir 2000), involved first-party claims
• Pinto v Allstate Ins. Co., 221 F3d 394 (2nd Cir 2000), and Frankel v St. Paul Fire & Marine Ins. Co., 759 A2d 869 (NJ App Div 2000), are classic failure to settle third-party liability cases
• Commercial Union Ins. Co. v Seven Provinces Ins. Co., 217 F3d 33 (1st Cir 2000), arises in the reinsurance relationship
• Old Republic Ins. Co. v FSR Brokerage, 95 Cal Rptr 2d 583 (Cal App 2000), questions if insurer can sue its insured
• Sta-Rite Industries Inc. v Zurich Re (UK) Ltd., 178 F3d 883 (7th Cir 1999), an excess insurer that refused to settle a case with a $23.5 million demand was not liable for bad faith when the jury ultimately returned a verdict of $25
• Kransco v American Empire Surplus Lines, 2 P3d 1 (Cal 2000), an excess insurer that refused an offer of $750,000 was liable in bad faith for a judgment of $13.6 million
• Hoosier Insurance Company v Audiology Foundation of America, 745 NE2d 300 (Ind App 2001), an insurer that relied on a coverage defense for an advertising injury liability claim that raised a question of first impression was not liable in bad faith for denying the claim
• Robinson v State Farm, 2000 WL 1877745 (Idaho Dec 28, 2000), an automobile insurer whose limits were $25,000 that denied a medical payments claim was not successful in relying on the "fairly debatable" standard and was found liable for $100,000 in compensatory and $9.5 million in punitive damages

Estoppel Litigation

On the estoppel front, Illinois continues to be the most active jurisdiction (could this be because Illinois does not have an effective statutory or common law bad faith remedy?). See the following cases.

• Guillen v Potomac Ins. Co., 751 NE2d 104 (Ill App 2001), the failure to meet its burden of mailing a "Change in Coverage" endorsement estopped a liability insurer from relying on an exclusion in its new policy form
• LaGrange Memorial Hospital v St Paul Insurance Co., 740 NE2d 21 (Ill App 2000), an employer's liability insurer was estopped to rely on a late notice defense for its refusal to defend an additional insured in an action for indemnity
• Kimbrell v Union Standard Ins. Co., 207 F3d 535 (8th Cir 2000), but here estoppel was not applied to an insurer's late notice defense
• Montgomery Ward & Co. v Home Insurance Co., 753 NE2d 999 (1st Dist 2001), an excess insurer did not waive its late notice defense, although it neither filed a declaratory judgment nor reserved its rights.
• Westchester Fire Ins Co. v G. Heileman Brewing Co., Inc., 747 NE2d 955 (Ill App 2001), estoppel was prevented by the filing of a timely declaratory judgment.

Reimbursement Litigation

The issue of reimbursement was also addressed in two cases with opposite results.

• Blue Ridge Insurance Co. v Jacobsen, 19 SW3d 178 (Mo App 2000), an insurer defending under a reservation of rights was entitled to recover settlement payments over the objection of its insured when it was later determined the claims were not covered.
• Texas Association of Counties County Government Risk Management Pool v Matagorda County, ___ SW2d ___ (Tex 2000), an insurer was not entitled to recover a settlement paid where the insured had not consented to the unilateral reservation of rights.

Choice of Law Litigation

The procedural aspect of the insurance coverage practice has seen an enormous amount of litigation. Choice of law must be everyone's favorite. It would seem that there is no predicting the results of a choice of law analysis. The complexities of corporate families, mergers and acquisitions in the brokerage and insurance markets, and multiple locations for insured risk create a hodge-podge of results. Choice of law issues arose in many cases this year, including the following.

• Fantis Foods, Inc. v North River Ins Co., 753 A2d 176 (NJ App Div 2000), involving first party property policies covering property in many states
• Household International Inc. v Liberty Mutual, ___ NE2d ___, 2001 WL 209813 (Ill App 1st Dist 2001), environmental contamination under CGL policies
• Westchester Fire Ins Co v G. Heileman Brewing Co., Inc., 747 NE2d 955 (Ill App 2001), price-fixing and unfair competition claims under CGL policies
• Savage Arms, Inc. v Western Auto Supply Co., 18 P3d 49 (Alaska 2001), products liability issues concerning successor liability

Insurer versus Insurer Litigation

In the context of insurer versus insurer disputes, other insurance becomes a weapon as much as a shield. Spreading the risk is a concept that defines insurance, but also consumes many insurers as they look for other potential sources for risk sharing.

• Schal Bovis, Inc. v Casualty Ins Co., 732 NE2d 1179 (Ill App 2000), and Andrew L. Youngquist, Inc. v Cincinnati Ins. Co., 625 NW2d 178 (Minn App 2001), examining application of "other insurance" in the situation involving additional insureds
• Ohio Casualty v State Farm Fire & Cas Co., 546 SE2d 421 (Va App 2001), between various lines of insurance, such as builders risk and homeowners
• Country Mut. Ins. Co. v Teachers Ins. Co., 746 NE2d 725 (Ill 2001), permissive users of autos creates disputes between driver's and owner's insurance
• Farm Bureau Mut. Ins. Co. v Alamo Rent-A-Car, Inc., 744 NE2d 300 (Ill App 2000), rental car companies asserting rights against driver's insurance
• Air Liquide America Corp. v Continental Cas. Co., 217 F3d 1272 (10th Cir 2000), self-insurance as "other insurance"

Insurers providing different layers of insurance also have disputes: equitable contribution between primary and excess insurers over a defective construction matter is examined in Maryland Cas. Co. v Nationwide Mut. Ins Co.; 218 F3d 204 (2nd Cir 2000), leasing arrangements in the trucking industry in Chester Carriers, Inc. v National Union Fire Ins. Co., 767 A2d 555 (Pa Super 2001).

Personal Injury and Advertising Injury Liability Litigation

This coverage area has been examined in an increasingly broad array of causes of action.

• COMSTAT Corp. v St Paul Fire & Marine Ins Co., 246 F3d 1101 (8th Cir 2001), alleged anti-competitive conduct
• Travelers Ins. Co. v United Food & Commercial Workers Internatl., 770 A2d 978 (DC App 2001), labor union versus management disputes
• QSP, Inc v Aetna Cas. & Surety Co., 733 A2d 906 (Conn 2001), antitrust violations over school and youth group magazine fund-raising market
• Hoosier Insurance Company v Audiology Foundation of America, 745 NE2d 300 (Ind App 2001), professional trade association disputes over credentialing
• United National Ins. Co. v SST Fitness Corp., 182 F3d 447 (6th Cir 1999), patent infringement in the exercise and fitness products industry in
• St Paul Fire & Marine Ins. Co. v Green Tree Financial Corp., 249 F3d 389 (5th Cir 2001), the financial services market for alleged consumer fraud violations
• New Castle County, Delaware v National Union Fire Ins. Co., 243 F3d 744 (3rd Cir 2001), zoning restrictions in commercial development

Directors and Officers Liability Litigation

Looking at D&O policies, I suspect that we will have increasing activity in the coverage area, as the securities and mergers and acquisitions industry becomes shakier. Those problems are already evident in American Medical International v National Union Fire Ins. Co., 224 F3d 715 (9th Cir 2001), and Mortenson v National Union Fire Ins. Co., 249 F3d 667 (7th Cir 2001). Other issues include the following.

• Gershman v American Cas. Co., 251 F3d 1159 (8th Cir 2001), the familiar savings and loan association
• 116 Commonwealth Condominium Trust v Aetna Cas. & Surety Co., 742 NE2d 76 (Mass 2001), condominium boards are not immune from suit
• Coregis Ins. Co. v American Health Foundation, Inc., 738 NE2d 509 (Ill App 2000), even nonprofits are targets

Conclusion

Social problems are not likely to disappear. Violence, crime, and inequality are the daily news. These stories find their way into coverage disputes, much like everyday household accidents. I only wish we could live without them.

---

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.