Parent of Insured Corporation Has No Standing to Seek Declaratory Relief as to Insured’s Coverage

Does the parent and controlling shareholder of an insured corporation have standing to seek declaratory relief as to the insured’s insurance coverage? Under California law, the answer is no. In a March 30, 2016 decision, ordered published April 28, 2016, Division Two of the California Court of Appeal for the First District held that a parent corporation that is not an insured under the insurance contract is not a “person interested under a written instrument” for purposes of California’s declaratory relief statute, Code of Civil Procedure section 1060. (See D. Cummins Corp. v. Untied States Fid. and Guar. Co., __Cal.App.4th__ (Cal. Court of Appeal, First Dist. No. A142985, 4/28/2016).)

The Holding Company in the case was the controlling owner of an insured facing asbestos claims, but the Holding Company was not an additional insured or otherwise in privity with the insurer. Nonetheless, the Holding Company argued it had a “practical interest in the proper interpretation of Cummins Corp.’s insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” (Slip Opn. p. 7.) The Court of Appeal found the argument “not persuasive.” (Id.) “While Holding Co. may, as it says, have a ‘practical interest’ in the success of Cummins Corp.’s litigation with the insurers by virtue of its relationship with the corporation, it has not shown how that indirect interest—no matter how enthusiastic it may be [citation omitted]—translates into ‘a legally cognizable theory of declaratory relief.’” (Id.) It is only the insured itself that has “a direct interest in the interpretation of the policies in question” for purposes of Section 1060. (Id.)

Viking Pump: New York Court of Appeal Holds That Consolidated Edison Pro Rata Allocation Rule and Horizontal Exhaustion Rule Do Not Apply Under Facts of Case

By Philip R. Matthews

The New York Court of Appeal on Tuesday, May 3, held that the Consolidated Edison pro rata allocation rule does not apply where the policies have prior insurance and non-cumulation clauses. The Court held that the pro rata rule in Consolidated Edison depends on policy language and that the prior insurance and non-cumulation clause is inconsistent with a pro rata approach. However, the Court did say that prior insurance and non-cumulation clauses would be enforced as anti-stacking clauses. Such enforcement could limit the amount of coverage available to a policyholder. The Court of Appeal also held that under the circumstances of the case, horizontal exhaustion would not apply.

To view this decision, please visit the New York Courts website.

Colorado Supreme Court Holds That Insurer Need Not Prove Prejudice to Enforce “No-Voluntary-Payments” Clause

In a 4-3 decision in Travelers Property Casualty Co. of America v. Stresscon Corp., 2016 CO 22 (Case Number 2013SC815), issued April 25, 2016, the Colorado Supreme Court held that an insurer seeking to deny coverage to its insured for a breach of the no-voluntary-payments provision does not need to prove prejudice, as it would under the rule applicable to the notice provision of an occurrence-based insurance policy.  The Colorado Supreme Court reversed the intermediate appellate court, which had held that the high court’s decision in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005) compelled the result that prejudice was a requirement to deny coverage for a voluntary payment made without insurer consent.

To understand the Court’s decision in Stresscon and how the intermediate court came to the wrong conclusion, it is helpful to understand Friedland.  In that case, Friedland (the insured) defended a CERCLA case against him and settled after four years of litigation for $20 million.  Friedland, 105 P.3d at 641-642.  Friedland provided first notice to the insurer (Travelers) six months after the case concluded, seeking defense costs and indemnity.  Id. at 642.  Travelers filed a motion for summary judgment on several bases, including late notice and the “no voluntary payment” provision.  Id.  The trial court granted Travelers summary judgment based on late notice and did not address the other issues.  Id. at 643.  In a direct appeal to that court, the Colorado Supreme Court reversed the trial court’s decision.  The Court first adopted the notice-prejudice rule for liability policies that had been previously adopted in the uninsured motorist context in Clementi v. Nationwide Mutual Fire Ins. Co., 16 P.3d 223 (Colo. 2001).  Id. at 645.  The Court stated that the insurer must demonstrate that its “significant interests” had been prejudiced in order to deny coverage based on late notice.  Id. at 643-644.

The Friedland court then held that in the situation where notice to the insurer is provided after the insured has defended and settled the case, “the delay is unreasonable as a matter of law and the insurer is presumed to have been prejudiced by the delay.  However, the insured must have an opportunity to rebut the presumption of prejudice.”  Id. at 641.  Specifically, “the insured, despite having made a unilateral settlement without notice to the insurer, must have an opportunity to rebut this presumption of prejudice based on the specific facts of the case, before a trial court may bar the insured from receiving coverage benefits.”  Id. at 648.  “If Friedland successfully rebuts the presumption of prejudice, Travelers must show by a preponderance of the evidence that it suffered actual prejudice from the delayed notices of claim and suit in order to be excused from paying policy benefits.”  Id. at 649.  The Court concluded by stating: “What form the proceedings on remand shall take regarding in the issues of prejudice, Friedland’s unilateral settlement, and the policy coverage, we leave to the trial court’s further determination” and noted that it was not addressing the other issues raised by Travelers in its summary judgment motion because the trial court had not addressed them.  Id. at 649.

In Stresscon, the insured sought indemnification from Travelers for a July 2007 construction accident.  Stresscon, 2016 CO 22, at ¶ 3.  Travelers was apparently notified and involved in the claim, but on December 31, 2008, “despite Mortenson’s [the claimant’s] failure to bring a lawsuit or seek arbitration against Stresscon, Mortenson and Stresscon entered into a settlement agreement without consulting Travelers.”  Id. at ¶ 4.  In March 2009, Stresscon filed suit against Travelers and others.  Id.  Travelers moved for summary judgment based on Stresscon’s settlement without Travelers’ consent, under the no-voluntary-payments provision of the policy, which stated: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”  Id. at ¶ 5.  The trial court denied Travelers’ motion, finding that Friedland required the insurer to show prejudice, which involved disputed issues of fact.  Id.  Stresscon ultimately obtained a verdict against Travelers for bad faith breach of the insurance contract and an award of the statutory amount, costs, and attorneys’ fees, and the trial court denied Travelers’ request for a directed verdict.  Id. at ¶¶ 1, 4.  The Court of Appeals affirmed, relying on FriedlandId. at ¶ 6.

The Colorado Supreme Court reversed the Court of Appeals’ decision.  It held that an insurer can enforce the no-voluntary-payments provision of its policy without a showing of prejudice.  Id. at ¶ 2.  The Court specifically stated that Friedland “did not . . . also implicitly extend our newly minted notice-prejudice rule to no-voluntary-payments or consent-to-settle provisions, as the court of appeals believed.”  Id. at ¶ 9.  The Court noted that, in Friedland, it had declined to decide issues that had not been addressed in the trial court, including the no-voluntary-payments issue.  Id.  It clarified that Friedland was limited to “extending the notice-prejudice rule announced in Clementi to liability policies . . . and tailoring the prejudice determination to the situation in which notice of a claim was given only after settlement.”  Id.

In Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951 (Colo. 2015), decided by the Colorado Supreme Court last year, the court distinguished Clementi and Friedland in holding that the notice-prejudice rule does not apply to the requirement in a claims-made policy that the claim be reported during the policy period (or within a designated time period after).  In Stresscon, the Court stated that: “Much of that discussion also explains why we similarly decline to judicially impose a prejudice requirement upon the enforcement of the no-voluntary payments clause of the policy in this case.”  Id. at ¶ 11.  The Court in Stresscon noted that, like the reporting requirement in a claims-made policy, the no-voluntary-payments provision “far from amounting to a mere technicality imposed upon an insured in an adhesion contract, was a fundamental term defining the limits or extent of coverage.”  Id. at ¶ 13.  The Court further stated that the no-voluntary-payments provision “actually goes to the scope of the policy’s coverage” and “makes clear that coverage under the policy does not extend to indemnification for such payments or expenses in the first place.”  Id. at ¶ 14.  The Court distinguished enforcement of this provision from enforcement of the notice provision, which it has said would be “reap[ing] a windfall by invoking a technicality to deny coverage.”  Id. at ¶ 15 (citing Friedland and Clementi).

The Colorado Supreme Court remanded the case with directions that the jury verdict be vacated and that a verdict be entered in Travelers’ favor.  Id. at ¶ 23.

By holding that an insurer need not demonstrate prejudice to enforce a no-voluntary-payments provision, Colorado joins the majority of jurisdictions that have so found.

No Prejudice in New Jersey Needed to Bar Coverage to Sophisticated Insured for Delay in Notice Under Claims-Made Policy

By Sheila Raftery Wiggins

The Supreme Court of New Jersey – the highest court in New Jersey – held that the failure to comply with the notice provisions of the claims-made policy constitutes a breach of the policy, permitting the insurer to decline coverage to a sophisticated insured without demonstrating prejudice to the insurer caused by the delay.

We previously reported on where the Appellate Division ruled, in Templo Fuente de Vida Corp. and Fuente Properties, Inc., that for a claims-made policy, the policy holder is to provide notice of a claim: (1) during the same policy period in which the policyholder received the claim and (2) “as soon as practicable.” Otherwise, the claim may be denied because of late notice. The New Jersey Appellate Division determined that six months or more is not “as soon as practicable.” Continue reading No Prejudice in New Jersey Needed to Bar Coverage to Sophisticated Insured for Delay in Notice Under Claims-Made Policy

Duane Morris Attorneys at the ABA’s Insurance Coverage Litigation Committee CLE Seminar

Duane Morris is pleased to announce that several of the firm’s attorneys will be presenting at the American Bar Association (ABA) Section of Litigation’s Insurance Coverage Litigation Committee CLE Seminar, to be held on March 2–5, 2016, in Tucson, Arizona. Duane Morris is a sponsor of the program and partner Terrance J. Evans is serving as a seminar co-chair. In addition, partners Philip R. Matthews, Ray L. Wong, Lida Rodriguez-Taseff and Jessica E. La Londe and associate Audra L. Thompson will all be presenters at the seminar.

For more information about the seminar, please visit the Duane Morris website.

Nevada Supreme Court Holds That California Cumis Rule Applies In Nevada, But An Actual Conflict Is A Prerequisite For Independent Counsel

By Dominica C. Anderson and Daniel B. Heidtke

In a 6-0 decision issued on September 24, 2015, the Nevada Supreme Court held that the California rule first announced in San Diego Fed. Credit Union v. Cumis Ins. Soc’y, 162 Cal. App. 3d 358 (1984), and the analysis of the California Court of Appeal’s decision in Fed. Ins. Co. v. MBL, Inc., 160 Cal. Rptr. 3d 910, 920 (Ct. App. 2013), a case in which Duane Morris LLP represented the insurer, also applies in Nevada.  With its decision in State Farm Mutual Automobile Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74, Case No. 64484 (2015), the Nevada Supreme Court held Nevada law requires an insurer to provide independent counsel for its insured when an actual conflict of interest arises between the insurer and the insured.  Consistent with California law on the matter, the Court also held that a reservation of rights does not create a per se conflict of interest between insurer and insured. Continue reading Nevada Supreme Court Holds That California Cumis Rule Applies In Nevada, But An Actual Conflict Is A Prerequisite For Independent Counsel

Protections Against Defended Policyholder Manufacturing Bad Faith Case Via Stipulated Judgment Confirmed By California Court

The California Court of Appeal for the Fourth District, Division Two, in 21st Century Ins. Co. v. Superior Court (Tapia), ___ Cal.App.4th ___  (No. E062244, September 10, 2015), recently confirmed some of the important protections for defending insurers against stipulated judgments that were established in the Hamilton and Safeco decisions and limited the application of other decisions that have been relied on by claimants and policyholders seeking to get around the Hamilton rule against bad faith actions premised on such stipulated judgments. Continue reading Protections Against Defended Policyholder Manufacturing Bad Faith Case Via Stipulated Judgment Confirmed By California Court

California Supreme Court Issues Fluor Decision, Reverses Henkel Anti-Assignment Rule

Today the California Supreme Court issued its decision in Fluor Corporation v. Superior Court. In a unanimous decision, authored by the Chief Justice, the Court rejected the enforceability of “consent to assignment” clauses as a bar to coverage when the loss pre-dates the assignment, based on California Insurance Code section 520, and overruled its prior decision in Henkel Corp. v. Hartford Acc. & Indem. Co. (2003) 29 Cal.4th 934.

Continue reading California Supreme Court Issues Fluor Decision, Reverses Henkel Anti-Assignment Rule

Duane Morris Partner Paul Killion Appointed Chair of California State Bar’s Committee on Appellate Courts

Duane Morris partner Paul J. Killion of the firm’s San Francisco office has recently been appointed chair of the California State Bar’s Committee on Appellate Courts for the term commencing at the close of the 2015 State Bar Annual Meeting on October 11, 2015.

Killion is a Certified Appellate Specialist and practices in the area of complex civil litigation. He has argued or briefed over 100 appellate matters, including appeals, writs, petitions for review, merits briefing and amicus curiae briefing. He has handled a variety of litigation and appeals, including significant national experience in asbestos, pollution, toxic tort insurance coverage litigation and large personal injury claims. He has a broad range of appellate experience, with a particular focus on appeals from complex jury trials. Killion has appeared before all Districts of the California Courts of Appeal and before the California Supreme Court, as well as the Ninth and Tenth Circuits and the Supreme Courts of Washington and Oregon. He also represents clients as amici counsel in the California Supreme Court and Courts of Appeal.

Pennsylvania Supreme Court Holds That Insured Did Not Forfeit Coverage By Settling Without Insurer’s Consent Even Though Insurer Was Defending Under a Reservation of Rights

In an issue of first impression, the Pennsylvania Supreme Court has held that an insured does not forfeit coverage by entering into a fair, reasonable, and non-collusive settlement without the insurer’s consent when the insurer is defending the insured under a reservation of rights and the insurer has declined to settle.  Babcock & Wilcox Co. v. American Nuclear Insurers, — A.3d — (2015), 2015 WL 4430358, Case No. 2 WAP 2014 (Pa. July 21, 2015).

The insureds were sued in a class action over alleged bodily injury and property damage caused by emissions from nuclear facilities.  Id. at *1.  The insurer (which issued $320 million in coverage) defended under a reservation of rights, asserting that the policy did not cover damages not caused by nuclear energy hazard, damages in excess of the policy limits, and claims for injunctive relief and punitive damages.  Id.  After an initial verdict against the insureds of $36 million, a retrial was granted.  Id.  The insurer refused consent to any settlement offers, believing the case could be successfully defended.  Id. at *2.  The insured then proceeded to settle with the class action plaintiffs for $80 million.  Id.

In the ensuing declaratory judgment action, the insurer argued that there was no coverage for the settlement because the insured had violated the consent to settlement clause.  Id.  The insured urged the trial court to adopt United Services Auto. Ass’n v. Morris, 154 Ariz. 113 (1987), which held that, when the insurer has reserved rights, it should be liable for an insured’s settlement as long as coverage applies and the settlement is “fair and reasonable” and entered into in good faith.  The insurer argued that insurers should only be responsible for such a settlement under Cowden v. Aetna Cas. And Sur. Co., 389 Pa. 459 (1957), which held that an insurer must pay a judgment in excess of policy limits for its bad faith failure to settle below policy limits.  The trial court adopted the test advanced by the insureds and a jury determined that the insured’s settlement with claimants was fair and reasonable.  Id. at *3.  On appeal, the intermediate appellate court adopted an entirely different test (requiring the insured to have rejected the insurer’s defense and the insurer to have acted in bad faith in declining to settle) and remanded to the trial court for a new trial on these issues.  Id. at *5.

The Pennsylvania Supreme Court granted review to consider this issue of first impression, described as “whether an insured forfeits the right to insurance coverage when it settles a lawsuit without the insurer’s consent, where the insurer has defended the suit subject to a reservation of rights.”  Id. at *5.  Declining to strictly construe the consent to settlement requirement of the insurance policy and rejecting the test applied by the intermediate appellate court, the court opted for a modified Morris standard, holding that the insurer will be on the hook “where an insured accepts a settlement offer after an insurer breaches its duty by refusing the fair and reasonable settlement while maintaining its reservation of rights and, thus, subjects an insured to potential responsibility for the judgment in a case where the policy is ultimately deemed to cover the relevant claims.”  Id. at *16.  The court further held that the settlement must be “fair and reasonable from the perspective of a reasonably prudent person in the same position of [Insureds] and in light of the totality of the circumstances.”  Id.  The court therefore reinstated the trial court judgment.  Id.