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Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Advance the Civil Justice System
Fall 2013
Carbon nanotubes (CNTs) holdpromise for many beneficialapplications. However, there havebeen concerns and calls for amoratorium raised over “mountingevidence” that CNT may be the“new asbestos,”1 or at leastdeserving of “special toxicologicalattention” due to prior experienceswith asbestos.2 The shape and sizeof some agglomerated CNTs aresimilar to asbestos—the most“desirable.” And because CNTs forstructural utility are long andthin—characteristics thought toimpart increased potency to
asbestos fibers—discussions ofparallels between these twosubstances are natural. Thus, giventhe legacy of asbestos-relatedinjury and the thousands of caseslitigated each year, consideration ofpossible implications of the use ofCNTs in research and in consumerproducts is prudent.
First reported in 19913, CNTsepitomize the emerging field ofnanotechnology, defined by someas the “ability to measure, see,manipulate, and manufacturethings usually between 1 and100 nanometers.”4 CNTs are a typeof carbon-based engineerednanoparticle generally formed by
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel toAdvance the Civil Justice System
Fall 2009
Toxic Torts and EnvironmentalLaw Committee
IN THIS ISSUECarbon Nanotubes: The Next Asbestos . . . . . . . . . . . . . . . . . . . . . . . 1
Editor’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tatera v. FMC Corporation: When Is A Product No A Product? . . . 3
Mexico’s National Wastes Management Program. . . . . . . . . . . . . . . 4
Environmental Risk During Restructuring And Bankruptcy . . . . . 5
Upcoming TTEL Programs And Meetings . . . . . . . . . . . . . . . . . . . . 6
Limitations Of Toxicogenomic Studies To Assess Toxic ExposuresAnd Injury From Benzene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Burlington Northern: The Requisite Intent For Arranger LiabilityUnder Cercla . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2009-2010 TIPS Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Continued on page 18
CommitteeNewsCommitteeNews
CARBON NANOTUBES: THE NEXT ASBESTOS?Fionna Mowat, Exponent, [email protected] Tsuji, Exponent, [email protected]
1 Miller, G. 2008. Mounting evidence that carbonnanotubes may be the new asbestos. Friends of theEarth Australia. Available at http://nano.foe.org.au.2 The Royal Society and Royal Academy ofEngineering (RS/RAE). 2004. Nanoscience andnanotechnologies. Royal Society and Royal Associationof Engineers. London: The Royal Society. Available athttp://www.royalsoc.ac.uk/.3 Iijima, S. 1991. Helical microtubules of graphiticcarbon. Nature (London) 354:56–58.4 National Science and Technology Council (NSTC).2007. The National Nanotechnology Initiative. StrategicPlan. Washington DC: NSTC, Committee onTechnology, Subcommittee on Nanoscale Science,Engineering, and Technology. December. Available athttp://www.nano.gov/ NNI_Strategic_Plan_2004.pdf.
For decades, policyholders have found commercial general liability policies offered protection against liability for bodily injury, property
damage or personal/advertising injury. While CGL policies undoubtedly still provide ample protection for these “general” types of risks, technological advances have created many new, specialized risks for policyholders. The risks policyholders commonly face today may no longer be limited to potential liability caused by bodily injury, property damage or personal/advertising injury. Rather, policyholders are now facing risks related to their ownership and use of intellectual property. And, policyholders are looking to insurance carriers to provide coverage for this new, specialized risk.
Intellectual Property Claims Present Unique Challenges
As an initial matter, intellectual property assets are generally protected through copyrights, trademarks/tradedress and patents. While the defense of bodily injury, property damage and personal injury claims may involve a number of familiar concepts, the law related to enforcing intellectual property rights is quite specialized
and involves a number of unique and technical concepts. And, litigation involving intellectual property assets can
Insurance Coverage Litigation Committee
IN THIS ISSUE:Continued on page 13
INTELLECTUAL PROPERTY INSURANCE: NO LONGER REQUIRING GENERAL LIABILITY POLICIES TO PROVIDE COVERGAGE FOR UNIQUE INTELLECTUAL PROPERTY CLAIMSBy: Todd M. Rowe
Intellectual Property Insurance: No Longer Requiring General Liability Policies To Provide Coverage For Unique Intellectual Property Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Editors Column . . . . . . . . . . . . . . . . . . . . . . . . . 4Supreme Court of Florida Rules In Favor of Policyholders And Medical Providers In Three Separate Decisions Involving Issues Of Policy Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Deepwater Horizon Insurance Litigation - The Fifth Circuit Reverses The District Court’s Additional Insured Decision But Then Withdraws Its Decision And Certifies Issues To The Texas Supreme Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7When Is Your Work Really “Your Work?” Construction Defect Claims In The GC Context . 82013-2014 TIPS Calendar . . . . . . . . . . . . . . . . 17
Insurance Coverage Litigation Committee Newsletter Fall 2013
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ChairBradford Moyer
Plunkett Cooney950 Trade Centre Way, Ste 310
Kalamazoo, MI 49002-0493(269) 382-5935
Fax: (269) [email protected]
Chair-ElectHelen Michael
Kilpatrick Townsend & Stockton LLP607 14th St NW, Ste 900
Washington, DC 20005-2019(202) 508-5866
Fax: (202) [email protected]
Last Retiring ChairLyndon Bittle
Carrington Coleman901 Main St, Ste 5500Dallas, TX 75202-3767
(214) 855-3530Fax: (214) 758-3796
Council RepresentativeAlan Rutkin
Rivkin Radler LLP555 Madison Ave
New York, NY 10022-3301(516) 357-3000
Fax: (516) [email protected]
Scope LiaisonJohn BjorkmanLarson King LLP
30 7th St E, Ste 2800Saint Paul, MN 55101-4904
(651) 312-6511Fax: (651) 312-6618
Law Student Vice-ChairNatalie Walet
825 New Hampshire Ave NW, Apt 111Washington, DC 20037-2308
Membership Vice-ChairGary Gassman
Meckler Bulger et al123 N Wacker Dr, Ste 1800
Chicago, IL 60606-1770(312) 474-7994
Fax: (312) [email protected]
Newsletter Vice-ChairBrandi Burke
Thompson Coburn LLP505 N 7th St, Ste 1
Saint Louis, MO 63101-1693(314) 552-6598
Fax: (314) [email protected]
Technology Vice-ChairLaurie Dugoniths
The Johnson Insurance Law Group LLC1629 Monroe Dr NE
Atlanta, GA 30324-5003(404) 442-8834
Fax: (404) [email protected]
Vice-ChairAmber Coisman
Tressler LLP233 S Wacker Dr, Fl 22
Chicago, IL 60606-6399(312) 627-4000
Fax: (312) [email protected]
Antony WoodhouseLawrence Graham LLP
4 More London RiversideLondon SE12AU442077596987
Fax: [email protected]
Renee CallantineMeckler Bulger et al
575 Market St, Ste 220San Francisco, CA 94105-2854
(415) 593-9611Fax: (415) 644-0978
Timothy ThorntonNelsen Thompson et al
12100 Wilshire Blvd, Ste 500Los Angeles, CA 90025-7121
(310) 315-1001Fax: (424) 442-2779
Alan RutkinRivkin Radler LLP555 Madison Ave
New York, NY 10022-3301(516) 357-3000
Fax: (516) [email protected]
Andrew HoughtonSedgwick LLP
225 Liberty St, Fl 28New York, NY 10281
(212) 422-0202Fax: (212) 422-0925
Arthur GarrettKeller and Heckman LLP
1001 G St NWWashington, DC 20001-4545
(202) 434-4248Fax: (202) [email protected]
Brian MargoliesTraub Lieberman Straus
& Shrewsberry LLP7 Skyline Dr
Hawthorne, NY 10532-2185(914) 347-2600
Fax: (914) [email protected]
Catherine O’DonnellHomesite Insurance
99 Bedford St, Ste 302Boston, MA 02111-2221
(617) [email protected]
Charles PlattoLaw Offices of Charles Platto
1020 Park Ave, Ste 6BNew York, NY 10028-0913
(212) 423-0579Fax: (212) 423-0590
Chauntis JenkinsPorteous Hainkel & Johnson
704 Carondelet StNew Orleans, LA 70130-3774
(504) 581-3838Fax: (504) [email protected]
Christopher MosleySherman & Howard
633 17th St, Ste 3000Denver, CO 80202-3622
(303) 299-8466Fax: (303) 298-0940
Christopher YetkaBarnes & Thornburg LLP225 S 6th St, Ste 2800
Minneapolis, MN 55402-4662(612) 367-8748
Fax: (612) [email protected]
Craig StewartEdwards Wildman Palmer LLP
111 Huntington AveBoston, MA 02199-7613
(617) 239-0164Fax: (617) 227-4420
David GauntlettGauntlett & Associates
18400 Von Karman Ave, Ste 300Irvine, CA 92612-0505
(949) 553-1010Fax: (949) 553-2050
David AndersonHoke LLC
117 N Jefferson St, Ste 100SChicago, IL 60661-2313
(312) 575-8562Fax: (312) 575-8599
David RosenbaumFasken Martineau Dumoulin LLP
333 Bay Street Suite 2400Bay Adelaide Centre Box 20
Toronto, ON M5H 2T6(416) 868-3516
Fax: (416) [email protected]
Dawn GonzalezBaugh Dalton Carlson
& Ryan LLC135 S La Salle St, Ste 2100
Chicago, IL 60603-4223(312) 759-1400
Fax: (312) [email protected]
Diane BucciZelle McDonough Cohen
50 Main StWhite Plains, NY 10606-1901
(617) 742-6520Fax: (914) [email protected]
Ginny PetersonKightlinger & Gray LLP
211 N Pennsylvania St, Ste 300Indianapolis, IN 46204-1965
(317) 968-8182Fax: (317) 636-5917
Grace HansonHomesite Insurance Company
99 Bedford StBoston, MA 02111-2221
(617) [email protected]
Gregory GiomettiGregory Giometti & Associates
50 S Steele St, Ste 480Denver, CO 80209-2836
(303) 333-1957Fax: (303) 377-3460
James PaskellLitigation and Liability
Management LLC5159 Hemmington BlvdSolon, OH 44139-6901
(440) 498-0171Fax: (440) 498-0171
Insurance Coverage Litigation Committee Newsletter Fall 2013
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James CreenanCreenan & Baczkowski PC
3907 Old William Penn Hwy, Ste 304
Murrysville, PA 15668-1834(724) 733-8832
Fax: (724) [email protected]
Jeff KichavenJeff Kichaven Commercial Mediation
555 W 5th St, Ste 3100Los Angeles, CA 90013-1018
(310) 721-5785Fax: (877) [email protected]
Joanne ZimolzakMcKenna Long & Aldridge LLP
1900 K St NW, Ste Ll100Washington, DC 20006-1102
(202) 496-7375Fax: (202) 496-7756
John BjorkmanLarson King LLP
30 7th St E, Ste 2800Saint Paul, MN 55101-4904
(651) 312-6511Fax: (651) 312-6618
Jose RamirezHolland & Hart LLP
6380 S Fiddlers Green Cir, Ste 500Greenwood Village, CO 80111-
5048(303) 290-1605
Fax: (303) [email protected]
Judith GoodmanGoodman & Jacobs LLP
75 Broad St, Fl 30New York, NY 10004-2415
(212) 385-1191Fax: (212) 385-1770
Kelly WilcoveAssurant
260 Interstate North Cir SEAtlanta, GA 30339-2228
(770) 763-1207Fax: (770) 859-4366
Lindsey MillsScheldrup Blades
1225 Jordan Creek Pkwy, Ste 108West Des Moines, IA 50266-2347
(515) 223-9920Fax: (515) 262-1384
Lisa OonkDalan Katz & Siegel PL
2633 McCormick Dr, Ste 101Clearwater, FL 33759-1041
(727) 796-1000Fax: (727) 797-2200
Madeleine FischerJones Walker et al
201 Saint Charles Ave, Fl 51New Orleans, LA 70170-1000
(504) 582-8208Fax: (504) 589-8208
Mark Holzhauer8 White Tail Ct
Henderson, NV 89074-6134Fax: (877) 888-1396
Michael CarriganHolland & Hart LLP
555 17th St, Ste 3200Denver, CO 80202-3921
(303) 295-8384Fax: (303) 295-8261
Michelle LaffertyThe Hylant Group
6000 Freedom Square Dr, Ste 400Cleveland, OH 44131-2554
(419) [email protected]
Nicolas MescoRLI Corp
525 W Van Buren Street, 350Chicago, IL 60607(312) 360-1566
Nosizi RalephataTurner Padget et al
PO Box 22129Charleston, SC 29413-2129
(843) 576-2807Fax: (843) 577-1655
Pamela GrimesPO Box 8212
Atlanta, GA 31106-0212(770) 314-4757
Peter LoughlinAssurant
260 Interstate North Cir SEAtlanta, GA 30339-2228
(770) 763-2490Fax: (770) 859-4366
Raymond TittmannCarroll Burdick & McDonough LLP
44 Montgomery St, Ste 400San Francisco, CA 94104-4689
(415) 989-5900Fax: (415) 989-0932
Robert WesterfieldBowles & Verna LLP
2121 N California Blvd, Ste 875Walnut Creek, CA 94596-7387
(925) 935-3300Fax: (925) 935-0371
Robert KellyJackson & Campbell PC
1120 20th St NW, South TowerWashington, DC 20036-3437
(202) 457-5480Fax: (202) 457-1678
Roberta AndersonK&L Gates Center
210 6th AvePittsburgh, PA 15222-2613
(412) 355-6222Fax: (412) 355-6501
Ronald RichmanBullivant Houser Bailey PC601 California St, Ste 1800
San Francisco, CA 94108-2823(415) 352-2700
Fax: (415) [email protected]
Sandra McCandlessDentons US LLP
525 Market St, Fl 26San Francisco, CA 94105-2734
(415) 882-2412Fax: (415) 882-0300
Sheryl BeyBaker Donelson et al
4268 I55 N Meadowbrook Ofc PkPO Box 14167
Jackson, MS 39236-4167(601) 351-2490
Fax: (601) [email protected]
Tracy Campbell5 E 14th Place #503Chicago, IL 60605(312) 753-5092
Fax: (312) [email protected]
Robert Friedman2001 12th St NW
Washington, DC [email protected]
William BlackCassatt RRG Holding Co1200 Atwater Dr, Ste 180Malvern, PA 19355-8782
(610) [email protected]
William BarkerDentons
233 S Wacker Dr, Ste 8000Chicago, IL 60606-6448
(312) 876-8140Fax: (312) 876-7934
David HeintzTravelers Ins. Co1 Tower Square
Hartford, CT 06183-0002(860) 277-0111
Gordon WaltonWalton Law Group LLC
161 N Clark St, Ste 4700Chicago, IL 60601-3201
(312) 523-2106Fax: (312) 474-7898
J MillerMorris Polich & Purdy LLP1055 W 7th St, Ste 2400
Los Angeles, CA 90017-2550(213) 891-9100
George RockasWilson Elser et al
260 Franklin St, Fl 14Boston, MA 02110-3112
(617) 422-5301Fax: (617) 423-6917
Janet DavisMeckler Bulger et al
123 N Wacker Dr, Ste 1800Chicago, IL 60606-1770
(312) 474-7947Fax: (312) 474-7898
Jill BerkeleyNeal Gerber & Eisenberg2 N La Salle St, Ste 1700Chicago, IL 60602-4000
(312) 269-8024Fax: (312) 980-0836
Joan CotkinNossaman LLP
777 S Figueroa St, Fl 34Los Angeles, CA 90017-5800
(213) 612-7828Fax: (213) 612-7801
Natalie Walet825 New Hampshire Ave NW,
Apt 111Washington, DC 20037-2308
Insurance Coverage Litigation Committee Newsletter Fall 2013
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Dear Friends, Colleagues, and New Members,
Allow us to voice the question on all of our minds: where did the summer go? We hope you all took time to enjoy it though, and that those of you who attended the ABA Annual Meeting had a wonderful time. The ICLC’s own Michelle Lafferty and Joe Ramirez co-chaired a fascinating panel on risk management and insurance coverage implications associated with human-caused mass tragedies that drew a lot of interest and audience participation from the attendees. The ICLC
(along with the Business Litigation and the Excess, Surplus Lines and Reinsurance Law Committees) will be co-sponsoring another great CLE program at the TIPS Fall Leadership Meeting in Minneapolis. The program, titled “Diligence is Due: What Every Lawyer Must Know about Insurance,” will cover the ins and outs of insurance policies, and coverage determinations and litigation. Be sure to register for the program if you’ll be at the Fall Leadership Meeting. And, as always, the ICLC has a terrific line-up of CLE programs for its midyear meeting, which will be held February 20-22, 2013, at the Arizona Biltmore in Phoenix, Arizona. We look forward to seeing you soon at an ICLC event.
The current issue has 4 articles on a wide-range of insurance topics. Patrick Stolz and Paul Curley, of the Kaufman Borgeest and Ryan law firm, have contributed an article discussing three significant coverage-related decisions handed down by the Florida Supreme Court in July 2013. Brian Bassett and James Eastham, of the Traub Lieberman Straus & Shrewsberry law firm, have authored an article on the concept of “your work” in a general liability policy, particularly as it applies to work performed by subcontractors. Todd Rowe of Tressler LLP writes about intellectual property insurance and the unique challenges presented by intellectual property claims. Last, but not least, arbitrator and mediator Chuck Platto, along with Joseph Grasso and Michael Menapace of Wiggin and Dana LLP, write to update us on the latest regarding the Deepwater Horizon insurance litigation. Thank you to all of our authors for these excellent contributions!
Sincerely,Brian Margolies and Brandi L. Burke, Co-Editors
Editors Column
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Seth LamdenNeal Gerber & Eisenberg2 N La Salle St, Ste 1700Chicago, IL 60602-4000
(312) 269-8052Fax: (312) 980-0837
Megan KamdarQuarles & Brady LLP
300 N La Salle Dr, Ste 4000Chicago, IL 60654
Stephen GrovesNexsen Pruet LLC
205 King St. Ste 400Charleston, SC 29401-3159
(843) 720-1725Fax: (843) 414-8206
Vartan SaraviaDarling & Risbrough LLP
19200 Von Karman Ave, Ste 750Irvine, CA 92612-8519
(714) 384-4250Fax: (714) 384-4251
Aidan CameronMcCarthy Tetrault LLP
777 Dunsmuir Street, Ste 1300Vancouver, BC V7Y 1K2
(604) 643-5894Fax: (604) 622-5789
Insurance Coverage Litigation Committee Newsletter Fall 2013
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www.americanbar.org/tips Register today for the Tort Trial & Insurance Practice Section’s Fall Leadership Meeting. Offering valuable CLE programming, various networking events and public service opportunities, this is a meeting you won’t want to miss!
Fall Meeting CLE Programs
Wednesday, October 9, 2013 Commercial Transportation: Four Hot Topics for the Trucking Lawyer Electronic Data Recorders or the Proverbial “Black Box”: Questions Concerning Admissibility Preservation and Ownership of the Data After a Motor Vehicle Accident
Thursday, October 10, 2013 When Passing the Bar is a Lifelong Challenge More Diligence is Due: What Every Lawyer Must Know About Insurance 2014 Health Insurance Market: New Challenges Dialog with General Counsel
Friday, October 11, 2013 Advanced Theories of Recovery and Subrogation 201
Register Today!
Hotel Reservations Please call the hotel directly at 612/349-4000 or toll free at 800/229-8280 to make your room reservation. The room block will be held until exhausted or until Tuesday, September 17, 2013 at 5:00pm (CST).
Thank You to Our Sponsors For Their Generous Support!
Insurance Coverage Litigation Committee Newsletter Fall 2013
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On July 3, 2013, the Supreme Court of Florida issued a trio of decisions in favor of policyholders and medical providers that clarify Florida law governing policy interpretation. The three decisions involve diverse lines of coverage and widely different set of facts, but taken together should provide guidance to underwriters and coverage counsel on how Florida courts will analyze policy language in coverage disputes going forward.
The Decisions
The first decision involved a dispute between Geico and a medical provider, Virtual Imaging Services, Inc., over payment of personal-injury-protection (“P.I.P.”) benefits for injuries sustained by the insured as a result of a motor vehicle accident. See Geico Gen. Ins. Co. v. Virtual Imaging Servs., Inc., SC12-905, 2013 WL 3332385 (Fla. July 3, 2013). In what amounted to a victory for the medical industry, the Supreme Court of Florida ruled that Geico could not rely upon a preferred Medicare-based schedule for payment of P.I.P. benefits, despite state law giving insurers that option, where “the policy did not [specifically] reference the permissive Medicare fee schedule method of calculating reasonable medical expenses.” Id. at *9. The Court reasoned that because amendments to Florida’s P.I.P. laws allowing for use of the Medicare fee schedule as a basis for determining the amount of reimbursable benefits were “permissive and not mandatory” and “not the only mechanism [available to insurers] for calculating reimbursements,” Geico was required to “provide [express] notice in the policy of its election to use the fee schedules.” Id. at *10.
Geico argued that the policy incorporated permissive fee schedules providing that “reimbursements will be made ‘in accordance with the Florida Motor Vehicle No-Fault law, as amended.’” Id. at *8-9. The majority rejected this argument; sending a message to insurers that if they want to take advantage of permissive provisions of state law, which operate to limit the scope of coverage afforded under their policies, they must do more than state that coverage will be afforded “in accordance with” state law and, instead, provide notice of their intent to do
so through use of clear and unequivocal language.
The second decision stems from a dispute over whether “replacement cost” coverage in a homeowner’s policy includes construction overhead and contractor profit, notwithstanding the fact that those costs were not actually incurred by the insured. See Trinidad v. Florida Peninsula Ins. Co., SC11-1643, 2013 WL 3333823 (Fla. July 3, 2013). Siding with the policyholder and relying upon Florida precedent discussing the definition of “replacement cost,” the majority adopted an expansive view of that term, and held that it includes overhead and profit “where the insured is reasonably likely to need a general contractor for repairs,” and where the policy does not permit the withholding of replacement costs “until the insured actually incurred expenses for the repairs.” Id. at *8.
The take-away from the Trinidad decision is that if insurers want to exclude coverage for certain categories of damages or loss, they must evidence this intent by including specific language in their policies. Otherwise, Florida courts may adopt an unintended view of what is covered under the policy’s insuring agreement.
In the third and perhaps most impactful decision handed down, the Supreme Court of Florida clarified that Florida law does not require resort to extrinsic evidence before applying the general rule that ambiguous policy terms must be strictly construed against the insurer and in favor of coverage. See Washington Nat. Ins. Corp. v. Ruderman, SC12-323, 2013 WL 3333059 (Fla. July 3, 2013).
The question of whether Florida law permits consideration of extrinsic evidence in order to resolve ambiguities in an insurance policy was certified to the Supreme Court of Florida by the United States Court of Appeals for the Eleventh Circuit, which found that “the proper approach to take concerning admission of extrinsic evidence and resolution of ambiguity in insurance policies was an unsettled question of
SUPREME COURT OF FLORIDA RULES IN FAVOR OF POLICYHOLDERS AND MEDICAL PROVIDERS IN THREE SEPARATE DECISIONS INVOLVING ISSUES OF POLICY INTERPRETATIONBy: Paul T. Curley and Patrick Stoltz
Continued on page 14
Insurance Coverage Litigation Committee Newsletter Fall 2013
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One of the interesting insurance coverage cases resulting from the Deepwater Horizon explosion and oil spill arises out of the claim by BP that it was entitled to coverage as an additional insured
under the Transocean liability insurance policies. We have been following this litigation since its inception, and have written several articles reporting on ongoing developments in the litigation, all of which were published in the Insurance Litigation Reporter (Thomson Reuters), beginning in 2010 when the litigation first commenced. This year has seen two very interesting and important developments. In March 2013, the Fifth Circuit Court of Appeals reversed a decision of the United States District Court for the Eastern District of Louisiana, which had held that BP was not an additional insured under the Transocean liability policies, and ruled that under applicable Texas law, BP was an additional insured under those policies. However, in August, 2013, the Fifth Circuit withdrew its initial decision and certified questions relevant to the determination of additional insured coverage to the Texas Supreme Court. Our articles on these two recent decisions by the Fifth Circuit are set forth below.
FIRST - IN RE: DEEPWATER HORIZON INSURANCE LITIGATION – FIFTH CIRCUIT REVERSES IN FAVOR OF BP’S ADDITIONAL INSURED CLAIM
During the very same week in which the trial of
the multibillion dollar claims by the U.S. Government and private parties against BP and the other parties involved with the Deepwater Horizon drilling rig was just getting under way in Federal Court in New Orleans, the Fifth Circuit Court of Appeals was putting the finishing touches on its decision in the declaratory judgment case brought by Transocean’s primary and excess insurers against BP, involving BP’s claim for coverage as an additional insured under Transocean’s policies. In a decision issued on Friday, March 1, 2013, the Fifth Circuit unanimously reversed the decision of the E.D.La., which had previously granted judgment in the insurers’ favor denying coverage to BP. In a major victory for BP, the Fifth Circuit ruled that BP was entitled to coverage as an additional insured under the Transocean policies. In Re: Deepwater Horizon, Ranger Ins., Ltd., Transocean Offshore Deepwater Drilling., Inc., et al. and Certain Underwriters at Lloyd’s London, v. BP P.L.C. et al., No. 12-30230.
Transocean maintained primary and excess liability coverage in the amount of $750 million covering the period during which the explosion of the Deepwater Horizon drilling rig took place. Transocean was a contractor to BP, and BP and its affiliated entities were named as additional insureds under the policies. The dispute with the insurers arose because, under the Drilling Contract between BP and Transocean, Transocean was only obligated to indemnify BP and to name BP as an additional insured for surface pollution, and the major
DEEPWATER HORIZON INSURANCE LITIGATION – THE FIFTH CIRCUIT REVERSES THE DISTRICT COURT’S ADDITIONAL INSURED DECISION BUT THEN WITHDRAWS ITS DECISION AND CERTIFIES ISSUES TO THE TEXAS SUPREME COURT
By: Charles Platto*, Joseph G. Grasso**, and Michael Menapace***
This article is adopted with permission from articles by the authors published this year in Volume 35 of the Insurance Litigation Reporter.
Continued on page 15
*Charles Platto is Adjunct Professor of Insurance Law and Litigation at Fordham Law School, a Vice Chair of the ABA TIPS Insurance Coverage Litigation Committee and a Member of the Editorial Board of the Insurance Litigation Reporter. He was formerly Chair of the Insurance Practice Group at Wiggin and Dana LLP, and previously a partner at Cahill Gordon & Reindel, and is now an independent arbitrator and mediator on domestic and international commercial and insurance matters. Mr. Platto, Mr. Grasso, and Mr. Menapace, along with Tim Diemand, are co-editors of the TIPS ICLC Handbook on Additional Insureds, published by the American Bar Association in 2012.**Joseph G. Grasso is the current Co-Chair of the Insurance Practice Group of Wiggin and Dana LLP and Chair of the Committee on Marine Insurance and General Average of the U.S. Maritime Law Association. He is counsel to the American Institute of Marine Underwriters and wrote the Institute’s amicus brief to the United States Supreme Court in the Exxon Valdez case.***Michael Menapace is an insurance and reinsurance attorney at Wiggin and Dana LLP in Hartford, Conn. He is also an adjunct professor of insurance law at Quinnipiac University School of Law. Along with Mr. Platto, he is the co-author of the chapter on Principle Exclusions (Coverage A) of The TIPS ICLC Reference Handbook on the Commercial General Liability Policy, second edition (ABA Publishing) (to be released in early 2014).
Insurance Coverage Litigation Committee Newsletter Fall 2013
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WHEN IS YOUR WORK REALLY “YOUR WORK?” CONSTRUCTION DEFECT CLAIMS IN THE GC CONTEXTBy: Brian Bassett and James Eastham
“There is no coverage under a CGL policy for repair or replacement of an insured’s own defective construction work.” That mantra has been consistently promoted by insurers for decades. But is it true in every instance? What if the defective work was performed by a subcontractor on behalf of an insured? This article addresses the evolution of the CGL form, and how its iterations have been interpreted in the context of various construction defect claims. A survey of case law on these issues reveals a sharp contrast among jurisdictions as to whether an insurer owes coverage to its insured for a suit claiming defective construction work.
History of the ISO Form
In order to understand the varied holdings from different jurisdictions, it is helpful to look back at the changes that the standard insuring contract forms have undergone. The Commercial General Liability policy (“CGL”) is a standard policy that has been in existence in various manifestations since 1940. Over the years, as the courts have interpreted the CGL, ISO has modified the form to respond to national trends of interpretation. Generally speaking, as courts parse insurance policy language, coverage expands and exclusions are narrowed. Conversely, the revisions to the CGL are often attempts to bolster exclusions that have been whittled away by the courts.
This process has been evident in many arenas, but is particularly notable in the context of construction defect coverage disputes. Historically, coverage has been available to insureds for claims involving damage to third party property as a result of faulty construction. This article, however, will focus on the long-running battle between insurers and insureds relating to the scope of coverage afforded by the CGL form where an insured is sued for its own defective construction work. Early versions of the CGL form contained an exclusion for damage to work performed by an insured or any entity performing work on behalf of the insured. Insureds consistently found themselves without coverage for these claims, even in instances where the defective work was performed by a subcontractor on behalf of the insured.
In 1976, a Broad Form Property Endorsement became available for insureds to purchase which effectively eliminated the exclusion for completed work performed by a subcontractor on behalf of the named insured. The CGL form was revised again in 1986 and the Broad Form Property Endorsement was incorporated into new provisions to create the modern version of the so-called “business risk exclusions.” Specifically, Exclusion (j) (6) excludes coverage for “property damage” to “property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Exclusion (l), the “your work” exclusion, was also added and barred coverage for “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Importantly, Exclusion (l) contained an exception stating, “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Both policyholders and additional insureds, such as general contractors (GC), found the addition of the “subcontractor exception” to be attractive in that it provided more protection for GC’s against claims for the poor workmanship of their subcontractors which did not cause third-party damage.1
The most recent development involving the subcontractor exception occurred in 2001 when the insurance industry added an optional endorsement, Endorsement CG 22 94 10 01, which deleted exclusion (l) and replaced it with an identical exclusion omitting the subcontractor exception. This endorsement provides another avenue for insureds and insurers to once again remove coverage for the faulty workmanship of subcontractors.
The CGL and its history are important keys to understanding and analyzing the application of the subcontractor exception to exclusion (l). A common source of insurance litigation relates to disputes between GC’s and insurers when property damage results from faulty workmanship performed by a subcontractor. In instances where a GC is sued for damage resulting from the work of a subcontractor, the first step in analyzing coverage is to determine the nature of the damage being claimed.
1 For a more detailed history of the ISO Form and the Subcontractor Exception see generally, U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 878-80 (Fla. 2007); 21 Eric Mills Holmes, Holmes’ Appleman on Insurance 2d (2002); 2 Jeffrey W. Stempel, Stempel on Insurance Contracts (3d ed. Supp. 2007).
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If the claimant seeks recovery for damage to its own property which was not a part of the GC’s scope of work, a duty to defend is likely triggered. Conversely, where a claimant asserts a claim for damage to the structure which the GC was hired to construct, an insurer may be able to challenge the coverage owed to the GC depending on how the jurisdiction has interpreted the policy’s insuring agreement and the business risk exclusions.
Approaches to the Subcontractor Exception
There are three prominent approaches, or schools of thought, as to whether coverage is owed to an insured for claims for defective work performed by the insured’s subcontractor. Some jurisdictions have found that when faulty workmanship is the cause of property damage to the GC’s overall project of which the subcontractor’s work is a component, there has been no “occurrence” and/or “property damage” under the terms of the insurance policy and therefore the insuring agreement is not satisfied. In those jurisdictions, courts do not even reach the interplay between exclusion (l) and the subcontractor exception. Other jurisdictions have ruled that faulty workmanship can qualify as an “occurrence,” and these courts proceed to analyze the subcontractor exception in applicable cases. In some of the jurisdictions which have held that faulty workmanship may constitute an “occurrence,” courts have held that coverage only exists where the damage is done to otherwise undamaged property which was not being worked on by the insured or the subcontractor.
No “Occurrence” or “Property Damage”
A question that must be answered before a court can even consider if the subcontractor exception restores coverage for a claim for defective work is whether the insuring agreement is even satisfied. The CGL form’s insuring agreement requires that “property damage” be caused by an “occurrence.” Over the years courts have developed extensive case law regarding what constitutes an “occurrence” under various construction defect scenarios.2
Several states have held that damage to property included in the GC’s scope of work resulting from faulty workmanship does not satisfy the insuring agreement, and so the subcontractor exception and exclusion (l) are not reached by their analysis. These jurisdictions have
taken the stance that the subcontractor exception is not relevant in cases of faulty construction because faulty construction is not an “occurrence” as defined in the CGL policy.
Generally, liability insurance does not provide coverage for claims arising out of the failure of the insured’s product or work to meet the quality or specifications for which the insured may be liable as a matter of contract. Jurisdictions that do not recognize faulty workmanship as an occurrence often turn to the definition of “accident” as applied in insurance policy disputes. A common definition of an “accident” is “an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned, sudden, or unexpected event of an inflictive or unfortunate character.” Stoneridge Dev. Co. v. Essex Ins. Co., 382 Ill. App. 3d 731, 749 (Ill. App. Ct. 2d Dist. 2008). The Illinois court further noted in Stoneridge that if the damage is the “‘natural and ordinary’” consequence of the act, it is not an “accident.” Id. at 751. Put more simply, some courts have held that property damage to the insured’s own work resulting from defective construction is the natural and ordinary consequence of poor workmanship and therefore cannot be considered an “accident” as required the policy’s insuring agreement.
This principle has been applied by some courts to situations where the claim against the insured pertains to work performed by its subcontractor. The overarching principle of their analysis is that “defective workmanship, standing alone, is not an occurrence under a CGL policy.” Admin. Realty, LLC v. Travelers Prop. Cas. Co., 2006 U.S. LEXIS 40867, *23 (EDNY 2006). Cases from New Jersey have also held that damage to the work product of the insured caused by faulty work performed by a subcontractor is not an “occurrence.” Pa. Nat’l Cas. Ins. Co. v. Parkshore Dev. Corp., 2008 WL 4276917 (D.N.J. Sept. 10, 2008). In Parkshore, the court relies on the well-trod reasoning that extending coverage to a GC for the defective work of a subcontractor creates a surety relationship that was not intended by the insurance policy. Id. at 12. In Admin. Realty and Parkshore, the courts held that the GC was not afforded coverage for a subcontractor’s work when the damage was limited to portions of a project that were included in the GC’s scope of work.
2 Some states have gone so far as to enact legislation stating whether faulty workmanship is an “occurrence.” For example, Colorado has a statute which states that “a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.” C.R.S. 13-20-808 (3). Conversely, South Carolina’s statute states that “property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself” shall be deemed to be an occurrence. S.C. Code Ann. § 38-61-70.
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The Subcontractor Exception Applies
In jurisdictions that find a claim against a GC for a subcontractor’s defective work satisfies the insuring agreement, courts proceed to analyze the “your work” exclusion and the subcontractor exception therein. These courts have applied the plain language of the policy to find that the insuring agreement can afford coverage for work completed by a subcontractor on behalf of an insured. Courts have rationalized that when taking the entire insurance contract into consideration, it would make the subcontractor exception superfluous if no “occurrence” is found in these scenarios. Lennar Corp. v. Great Am. Ins., 200 S.W.2d 1032 (Fla. 2006). Furthermore, courts have found that the literature produced by the ISO explicitly stated that the “your work exclusion” is “intended to ‘exclud[e] only damages caused by the named insured to his own work. Thus . . . [t]he insured would have coverage for damage to his work arising out of a subcontractor’s work [and] [t]he insured would have coverage for damage to a subcontractor’s work arising out of the subcontractor’s work.’” Md. Casualty Co. v. Reeder, 221 Cal. App. 3d 961, 971-72 (Cal. App. Ct. 1990).3 Courts also point to the optional endorsements removing the subcontractor exception that may be included in CGL policies as proof that the exception should play a role in the coverage owed to an insured. U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 885 (Fla 2007); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W. 3d 1 (Tex. 2007).
Courts which have found that the subcontractor exception extends coverage to GCs for defective work by a subcontractor have specifically rejected the notion that providing coverage for faulty workmanship is akin to making an insurance policy a performance bond.4
Indeed, some courts have noted that it is appropriate to provide coverage for subcontractor work because GCs do not have the same kind of control over subcontractors as they do over their own work.5
“Other Property” Only
Finally, some jurisdictions have taken the approach that a claim against a GC for damage resulting from defective construction performed by a subcontractor qualifies as an “occurrence” only where the faulty work
leads to damage of otherwise undamaged components of the overall project. In other words, if the damage extends beyond the work product of the subcontractor to previously undamaged property that is part of the GC’s overall project, then the CGL policy may provide coverage, but damage to the allegedly faulty subcontractor’s work itself will not constitute covered property damage. In states where this distinction is applied, it is important to understand the parameters of the GC’s project and what work is considered to be part of the insured’s property and what work is considered third-party property. In Crossman Cmtys. Of N.C. v. Harleysville Mut. Ins. Co., the Supreme Court of South Carolina held that “negligent or defective construction resulting in damage to otherwise non-defective componants [sic] may constitute ‘property damage’ but the defective construction would not.” 395 S.C. 40 (SC 2011). Likewise, the U.S. Court of Appeals, applying North Carolina law, held that the CGL does not contemplate faulty workmanship as “property damage” but that “property allegedly damaged [which was] undamaged or uninjured at some previous point in time” is covered. Breezewood of Wilmington Condos. Homeowners’ Ass’n v. Amerisure Mut. Ins. Co., 335 Fed. Appx. 268, 272 (4th Cir. N.C. 2009) . In these jurisdictions, the appropriate inquiry is whether the claim against the GC is for damage to the subcontractor’s own defective work or whether the claim entails damage to another part of the project caused by the subcontractor’s defective work. Courts must toe a fine line in determining where the work product of the subcontractor ends and the “previously undamaged” property of the GC or another subcontractor begins.
“Your Work” Exclusion
Another developing wrinkle relating to the subcontractor exception and the business risk exclusions is how to interpret the definition of “your work” when a GC which qualifies as an additional insured (“AI”) is making a claim under the subcontractor’s policy. The CGL policy defines “you” and “your” as the named insured and the business risk exceptions generally preclude coverage for damage to “your work.” The issue, therefore, is whether “your work” means the work of the Named Insured only or if it alternatively applies to the
3 This case interprets the Broad Form Endorsement which modifies an older version of the ISO CGL form. The endorsement eliminated the language from the “your work” exclusion (then exclusion (o)) that bars coverage for work “on behalf of the named insured.” The endorsement gave the policy the same effect as the modern subcontractor exception to exclusion (l).4 Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 673 (Tex. App. Houston 14th Dist. 2006); Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, P125 (Wis. 2004). 5 Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 2004 WI 2, P68-71 (Wis. 2004) (“Many contractors were unhappy [with the lack of coverage], since more and more projects were being completed with the help of subcontractors. In response to this changing reality, insurers began to offer coverage for damage caused by subcontractors…the industry chose to add the new exception to the business risk exclusion in 1986. We may not ignore that language when interpreting case law decided before and after the addition. To do so would render the new language superfluous.”).
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AI seeking coverage under the policy. Resolution of the issue can be dispositive in a GC’s claim for coverage. If the GC is sued for its own defective work, and the “you” in the subcontractor’s policy only refers to the subcontractor, then the GC may be entitled to coverage as the policy only excludes coverage for damage to the subcontractor’s work. Alternatively, if the GC is sued for the subcontractor’s defective work, and “you” only refers to the subcontractor, then the “your work” exclusion should apply to bar coverage.
Very few cases have contemplated this issue and the rulings related to it do not take a clear stance on the interpretation of “your work” as respects AI’s. A case from California held that a GC was covered by a policy issued to a subcontractor in which the GC qualified as an AI. The damage claimed resulted from faulty workmanship performed by the named insured/subcontractor. In addressing the interpretation of “your work” under exclusion (l), the court stated that:
Although the subcontractor exception to the completed operations hazard exclusion would appear to prevent [the named insured] from itself seeking indemnity under the policies, it should not prevent [the AI] from showing
that the work excluded under 2(l) was performed by [the AI’s] subcontractor, even though that subcontractor was the named insured.6
In another case that assessed this issue, the Southern District of Mississippi noted that the exclusion for “your work” did not bar coverage for claims related to the named insured’s work, where liability was imposed on an AI. State Auto Ins. Cos. v. Harrison County Commer. Lot, LLC, 2012 WL 2789741 (S.D. Miss. July 9, 2012). That court found that the AI’s claim warranted coverage because an endorsement specifically providing coverage to the AI would be rendered “meaningless” if coverage was not extended. Id.
These varied analyses appear to be the next step in the evolution of these provisions. It is possible that disagreements over the definition of the interpretation of “your work” in relation to AI’s and subcontractors may lead to yet another revision to the ISO form. While disputes over coverage, especially in construction defect cases, are anything but new, this emerging question is one of first impression in most jurisdictions. Only time will tell which direction will become the majority approach to this issue.
6 Garamendi v. Golden Eagle Ins. Co., 2006 WL 337599 (Cal. App. 1st Dist. Feb. 15, 2006).
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be expensive. For example, the American Intellectual Property Law Association has found litigation costs for trademark and copyright litigation can exceed $1 million. The World Intellectual Property Association estimates the average costs for patent litigation in the United States to be approximately $4 million. Obviously, this expense can make the defense and/or protection of intellectual property rights virtually impossible unless a business has significant resources. Insurance carriers have started to offer options to allow businesses, regardless of their size or resources, the opportunity to protect intellectual property assets.
By Definition, CGL Policies Are Designed To Provide “General” Coverage
For many years, insurance coverage for intellectual property assets has been litigated in the context of the advertising injury clause in CGL policies. In general, the advertising injury clause provides coverage for an injury caused by an “offense” committed in an insured’s advertising. The typical CGL policy defines “offense” as including “infringement of trademark, copyright, title or slogan.” At first glance, this policy language seems somewhat straightforward. First, to determine if there is an “offense,” there must be an allegation that an insured stole a trademark or copyright. And, this “offense” must be committed in the context of the insured’s advertising. This “causal nexus” between the “offense” and the insured’s advertising has been the source of a significant amount of litigation and, after years of inconsistent decisions concerning coverage under the advertising injury clause, courts are increasingly finding that the advertising injury clause does not provide coverage for intellectual property assets.
More recently, CGL policies have included exclusions expressly barring insurance coverage for intellectual property. Specifically, newer CGL policies have added intellectual property exclusions barring coverage under the following circumstances:
Intellectual Property. We won’t cover injury or damage that results from any actual or alleged infringement or violation of any of the following rights or laws:
• Copyright.• Patents.• Trade dress.
• Trade name.• Trade secret.• Trademark.• Other intellectual property rights or
laws.
While a CGL policy containing an intellectual property exclusion is intended to still potentially provide coverage for infringement of intellectual property used in the insured’s advertising, it is clear that a business with significant intellectual property assets should not rely merely on CGL coverage to protect its use of intellectual property. The recent decision in ProLink Holdings Corp. v. Federal Ins. Co., 103 U.S.P.Q.2d (BNA) (7th Cir. 2012) provides another example of the potentially dire consequences of attempting to protect valuable intellectual property assets with CGL coverage alone. In ProLink Holdings, the Seventh Circuit held an insurer correctly denied coverage for allegations by an insured’s competitor for patent infringement, slander of title and unfair competition. Any business with intellectual property assets should consider decisions such as ProLink Holdings when determining whether intellectual property insurance coverage is necessary to adequately protect their assets and to decrease potential liability.
Intellectual Property Insurance Provides Specialized Coverage Addressing The Unique Challenges Of Intellectual Property Claims.
Based on the uncertain treatment of intellectual property rights through the advertising injury clause and intellectual property exclusions, coupled with growing realization of the intrinsic value in intellectual property rights, business owners are beginning to seek coverage specifically designed for intellectual property. Likewise, recognizing a market for specialty insurance for intellectual property assets, insurers have begun developing insurance policies to protect intellectual property. In general, the underwriting process is the key in allowing an insurer to properly assess the risk as well as providing the coverage sought by the insured. The insurer will need to determine the strengths of the potential insured’s rights to the intellectual property as well as make an assessment of the strength of the rights of the insured’s potential competitors. The underwriting process must take into account a number of factors that are exclusive to intellectual property rights. The insurer also must have a level of sophistication to provide relevant information to underwriters and to have a reasonable assessment of the value of its intellectual property rights.
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Unlike CGL policies, which provide coverage for defense and indemnity against liability, insurers have developed the following three types of insurance options for intellectual property: (i) defense and indemnity; (ii) defense only; and (iii) offensive policies.
(i) Defense cost & damages reimbursement coverage.
Intellectual property policies bearing perhaps the closest resemblance to commercial general liability coverage are commonly known as “defense cost and damages reimbursement” insurance and provide coverage for damages related to “intellectual property liability.” These policies are designed to reimburse defense costs incurred by a policyholder in infringement litigation. Coverage is typically provided on a “claims-made” basis, which requires that a lawsuit be filed during the period in which the policy is effective. Typically, coverage is conditioned upon the policyholder obtaining an opinion of non-infringement from the United States Patent and Trademark Office. Such policies will, however, typically exclude coverage for willful acts of infringement. These policies provide a means for a smaller policyholder to defend against competitors with greater resources.
(ii) Multi Peril Coverage
Intellectual property policies bearing perhaps the closest resemblance to traditional property policies’ coverage are commonly known as “multi-peril” policies which are designed to reimburse losses sustained from liability for claims of infringement of intellectual property owned by another. Rather than perils such as fire or wind seen in traditional property policies, multi-peril policies cover “perils” commonly seen with intellectual property rights including business interruption, loss of commercial advantage, loss of trade secret advantage, as well as the cost of redesign, remediation and reparations that may result from protracted litigation.
(iii) Offense-based coverage
Policies known as “abatement policies” are unique to the extent they provide coverage for reimbursement of costs associated with enforcing the policyholder’s intellectual property rights. These policies are offensive in nature to the extent they provide coverage to policyholders to prosecute their intellectual property
rights against potential infringers. These policies also provide reimbursement for the use of expert witnesses as well as other costs incurred in proving infringement. Coverage is also provided on a “claims-made” basis for abatement policies. To obtain coverage, policyholders will typically need to obtain a legal opinion stating that they hold the rights to the IP. Abatement policies bar coverage for any willful acts by the policyholder that may have given rise to the infringing conduct.
The abatement policy has another unique feature referred to as “economic benefit” which requires that a policyholder share any recovery with the insurance carrier. The policyholder and the carrier each take a pro rata share of any recovery based on amounts the parties contributed in prosecuting the infringement action. Proponents of abatement policies point out these policies allow a smaller company to enforce its rights against a larger one with more resources. Critics of these policies question whether insurance carriers will only pursue litigation when there appears to be a good chance for a successful outcome. One important consideration related to these policies is the fact that typically any monetary award made against the infringer does not go back into the policyholder’s pocket. Instead, amounts recovered through judgment or settlement are used to replenish the funds available to the policyholder in the event that any future claims are made under the policy.
Conclusion
Of course, the vast majority of policyholders will always need the coverage provided by CGL policies. Most policyholders, even those that have business tied to intellectual property, will face risk covered by CGL policies. Intellectual property insurance should be considered by any policyholder that has a business involving the use of intellectual property. More than merely providing protection against infringement claims, intellectual property insurance provides a way for a policyholder to compete against larger competitors that may have the resources for protracted litigation. With policyholders’ technology constantly advancing, insurers will increasingly be called upon to offer products that provide coverage for these valuable assets.
Todd Rowe is an associate in the Chicago offices of Tressler LLP where he focuses his practice on the representation of insurers in complex coverage matters.
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Florida law.” Id. at *3 (internal citations omitted). The uncertainty faced by the Eleventh Circuit was based upon earlier Florida case law that appeared to qualify “the longstanding rule of construing an ambiguity against that drafter” by stating that the rule should apply only “after resort to the ordinary rules of construction.” Id. (internal citations omitted).
The majority began by reaffirming the well-established principle under Florida law that in order for policy language to be considered ambiguous, it must first be “susceptible to more than one reasonable interpretation, one providing coverage and the other limiting coverage.” Id. (internal citations omitted). The majority stated further that in examining the relevant policy language, an attempt must be made to read the policy “as a whole, and [to] endeavor to give meaning to every provision.” Id. at *4.
The majority then clarified that under Florida precedent, if a bona fide ambiguity is found to exist, the ambiguity “must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.” Id. at *7. In other words, as stated by the majority, where “one reasonable interpretation of the policy provisions would provide coverage, that is the construction that must be adopted” without resort to consideration of extrinsic evidence and notwithstanding the validity of the insurer’s position. Id.
In this case, the majority agreed with the Eleventh Circuit that the relevant policy language was ambiguous and clarified that no Florida precedent “constitutes an implicit declaration that resort must be made to consideration of extrinsic evidence before an insurance policy is found to be ambiguous and construed against the insurer.” Id.
In a spirited dissent, Chief Justice Ricky Polston stated that as an initial matter, the policy language at issue was unambiguous and should be enforced as written. Id. at *7-9. Chief Justice Polston wrote further that even if the policy language was ambiguous, under Florida law, extrinsic evidence could be considered in an attempt to resolve such ambiguity before applying the “last-resort rule” that ambiguous language must be construed against the insurer and in favor of coverage. Id. at *9-13. Chief Justice Polston accused the majority of misconstruing the question certified by the Eleventh Circuit, which was framed as whether “courts first attempt to resolve the ambiguity by examining available extrinsic evidence.” Id. at *9., citing, Ruderman ex rel. Schwartz v. Wash. Nat’l Ins. Corp., 671 F.3d 1208, 1212 (11th Cir. 2012). Instead, Chief Justice Polston wrote (quoting from the majority opinion,) “the majority concludes that [Florida] precedent does not require ‘that extrinsic evidence must be considered in determining if an ambiguity exists.’” Id. (emphasis in original). The dissent described the question resolved by the majority as “beside the point” and “widely miss[ing] the mark by answering a question that the Eleventh Circuit has not asked.” Id. Instead, according to the dissent, Florida “precedent provides that an ambiguous contract is construed against the insurer only as a last resort, meaning only after all available construction aids, including extrinsic evidence, fail to resolve the ambiguity.” Id.
Conclusion
These three decisions indicate that Florida courts will hold insurers to a high threshold when evaluating provisions that limit coverage or that are purportedly ambiguous and serve as a reminder that it is important to carefully examine policy language at the drafting stage to ensure that it accurately reflects the intentions of the parties at the time of contracting.
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pollution claims resulted from subsurface pollution from the well blowout. However, there was a question as to whether the insurance policies were similarly limited.
In its decision issued on November 15, 2011, the District Court, applying Texas Law, held that the additional insured coverage was only as broad as the indemnity requirements in the underlying contract and, therefore, denied coverage to BP and issued judgment on the pleadings in favor of the insurers. 2011 WL 5547259 at 75.
The Fifth Circuit ruled to the contrary:
“Applying Texas law, especially as clarified since the district court’s decision, we find that the umbrella insurance policy [and the primary insurance policy as well] – not the indemnity provisions of Transocean’s and BP’s contract – controls the extent to which BP is covered for its operations under the Drilling Contract. Because we find the policy imposes no relevant limitations upon the extent to which BP is covered, we REVERSE the judgment of the district court and REMAND the case for entry of an appropriate judgment in accordance with this opinion.” 710 F.3d 338, 2013 WL 776354, at *1.
The Fifth Circuit reached this conclusion for the following reasons.
Initially, the Court of Appeals noted that the $50 million primary policy issued by Ranger Insurance Ltd., and the $700 million excess policies had materially identical provisions, so it treated all insurers as one for purposes of its decision. Id. The Drilling Contract between Transocean and BP required that Transocean maintain insurance covering its operations, and that BP be named as an additional insured under Transocean’s policies. Id. at *2. The parties agreed that the Drilling Contract was an “insured contract” under the policies. The issue in contention was the scope of BP’s insurance coverage. Id. at *2.
Under Article 24 of the Drilling Contract, Transocean was responsible for, and indemnified BP with respect to, pollution or contamination originating on or above the surface of the water, whereas BP was responsible for, and indemnified Transocean with respect to, pollution or contamination not assumed by Transocean, i.e. originating from sub surface conditions (such as the well blow out). Id. at *2. The District Court had found that the Drilling Contract only required Transocean to carry insurance and name BP as an additional insured for
above surface pollution, and that the policies that were obtained by Transocean only provided coverage to the extent of Transocean’s contractual liabilities. The Court of Appeals disagreed.
The Court of Appeals conducted a de novo review of the District Court’s decision granting judgment on the pleadings to the insurers and of the contract and the policies. Id. at *3 It applied standard principles under Texas law, holding that if there are ambiguities in or more than one reasonable interpretation of a policy, coverage will be interpreted in favor of the insured. Id. at *3. As applied to this case, the Court was guided by the following principle:
“Under Texas law, to discern whether a commercial umbrella insurance policy [or the primary policy], that was purchased to secure the insured’s indemnity obligation in a service contract with a third party also provides direct liability coverage for the third party, we look to the terms of the umbrella policy itself, instead of looking to the indemnity agreement in the underlying contract. We apply this analysis so long as the indemnity agreement and the insurance coverage provision are separate and independent.” Id. at *4 (internal citations omitted).
Applying this analysis, the Court of Appeals looked first to the policy language, and applied Texas law as set forth in Evanston Ins. Co. v. ATOFINA Petrochems, Inc., 256 S.W.3d 660 (Tex. 2008) and Aubris Resources LP v. St. Paul Fire & Marine Ins. Co., 566 F. 3d 483 (5th Cir. 2009), which the District Court had distinguished, and Pasadena Refining System, Inc. v. MCraven, Nos. 14-10-00837-CV, 14-10-00860-CV, 2012 WL 1693697 (Tex. App. May 15, 2012), which came down after the District Court’s opinion, in concluding that even if the indemnity obligations of Transocean were limited under the Drilling Contract, only the policy itself may establish limits upon the extent to which an additional insured is covered. Id. at *6. The Court found that, as in ATOFINA, Aubris and Pasadena Refining, the fact that the policy referred to the underlying contract in the definition of additional insured was not sufficient, without more, to impose any limitations of liability in the underlying contract, on the policy obligations. Id. at *7. The Court of Appeals concluded that “there is no relevant limitation to BP’s coverage under the policy as an additional insured, that is so long as the insurance provision and the indemnities clauses in the Drilling Contract are separate and independent.” Id. (internal citations omitted). The Court of Appeals then went on to hold that it is “unmistakable” that the provision in the Drilling Contract extending direct insured status to
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BP was separate and independent from BP’s agreement to forego contractual indemnity in various circumstances. Id. at *8 (internal citations omitted).
The Court of Appeals’ final conclusion was as follows:
“Because we find that the umbrella policies [and the underlying policy] between the Insurers and Transocean do not impose any relevant limitation upon the extent to which BP is an additional insured, and because the additional insured provision in the Drilling Contract is separate from and additional to the indemnity provisions therein, we find BP is entitled to coverage under each of Transocean’s policies as an additional insured as a matter of law.” Id. at *9.
Thus, the bottom line of the Court’s decision was quite simple. Even if the obligations of an additional insured are limited in an underlying contract, if the insurance policy is broader than those obligations, unless the policy provides specific limitations on coverage to the additional insured – by specific reference to the limitations in the underlying contract, or otherwise, at least under Texas law, the policy will provide the full extent of coverage to the additional insured.
At the time it was decided, this case represented an important development in additional insureds law, one that undoubtedly caused carriers to more carefully tailor their policies to limit coverage to additional insureds if there are limits in the underlying contracts. The decision also represented a major win for BP, to the tune of $750 million. (Of course, compared to the billions BP has already spent as a result of the Gulf Oil spill, and the billions still at issue in underlying claims, $750 million may not seem like so much, but as they say, every little bit helps.)
SECOND - IN RE: DEEPWATER HORIZON INSURANCE LITIGATION – FIFTH CIRCUIT WITHDRAWS MARCH 2013 DECISION IN FAVOR OF BP’S ADDITIONAL INSURED CLAIM AND CERTIFIES THE ISSUE TO TX SUPREME COURT
The Fifth Circuit has now withdrawn that decision
in an order dated August 29, 2013, in response to Transocean’s underwriters’ motion for reconsideration, and certified the issue to the Texas Supreme Court. The Texas Supreme Court has accepted certification. It will now decide, under Texas law, two certified questions:
(1) whether BP is entitled to coverage based solely on the language of the insurance policies, because the additional insured and indemnity provisions in the drilling contract were “separate and independent”; and
(2) whether contra proferentum applies to interpretation of the insurance provisions in the drilling contract.
With respect to the first issue certified, the Fifth Circuit noted that while the parties agreed that the ATOFINA case was instructive, they had differing views of the application of the holding in the that case. The Court also noted that “there are potentially important distinctions between the facts of the instant case and ATOFINA.” The Fifth Circuit noted “the wide ramifications, both throughout the oil and gas industry and for insurance law, of this case.”
With respect to the second issue certified, the Court noted that Texas law has consistently applied the doctrine of contra proferentum to interpret ambiguous policy provisions in favor of the insured, but it suggested that in this case, there may be a basis for a sophisticated insured exception to the doctrine, because Texas law had derived from the assumption that the insurer and insured had unequal bargaining power in the transaction. Here, the Court noted that “where all the parties involved are highly capable contractors,” the exception may be appropriate.
We will continue to monitor the case and report further when there is additional activity in this dispute.
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Insurance Coverage Litigation Committee Newsletter Fall 2013
17 17
2013-2014 TIPS CALENDAROctober 20138-13 TIPS Fall Leadership Meeting Minneapolis Marriott Hotel Contact: Felisha A. Stewart – 312/988-5672 Minneapolis, MN Speaker Contact: Donald Quarles – 312/988-5708
13 Symposium: Animal Shelter and Rescue Law Hyatt Regency Contact: Ninah F. Moore – 312/988-5498 Jacksonville Jacksonville, FL
17-18 Aviation Litigation Fall Meeting Ritz-Carlton, Washington, DC Contact: Donald Quarles – 312/988-5708 Washington, DC
November 20136-8 Fidelity & Surety Committee Fall Meeting The Fairmont Contact: Donald Quarles – 312/988-5708 Copley Plaza Boston, MAJanuary 201416-18 40th Annual Midwinter Symposium on Insurance The Driskoll Employee Benefits Austin, TX Contact: Ninah F. Moore – 312/988-5498
21-25 Fidelity & Surety Committee Waldorf~Astoria Hotel Midwinter Meeting New York, NY Contact: Felisha A. Stewart – 312/988-5672 Speaker Contact: Donald Quarles – 312/988-5708
©2013 American Bar Association, Tort Trial & Insurance Practice Section, 321 North Clark Street, Chicago, Illinois 60654; (312) 988-5607. All rights reserved.
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