Fungi and Pollution Exclusions Foreclose Duty to Defend Wrongful Death Suit

By: Daniel B. Heidtke

Facing claims that it “allowed a dangerous substance—mold” to grow in a resident’s apartment, an insured sought coverage under its “businessowners insurance” coverage.  In denying a duty to defend the underlying wrongful death suit, the insurer relied on two exclusions: (1) the “Fungi or Bacteria Exclusion” and (2) the Pollution Exclusion.  After analyzing the plain meaning of both exclusions, the U.S. District Court for the Northern District of Georgia agreed with the insurer, held that it owed no duty to defend the insured, and granted the insurer’s motion for judgment on the pleadings.

The court began by applying basic principles under Georgia law.  It noted, “[i]f the terms of the insurance contract are plain and unambiguous, the Court must ‘simply [] apply [them] as written, regardless of whether doing so benefits the carrier or the insured.’”  Reed v. Auto Owners Ins. Co., 284 Ga. 286, 287 (2008).  “This rule holds even for policy exclusions, which ‘must be given effect’ when unambiguous, ‘even if ‘beneficial to the insurer and detrimental to the insured.’”  Cont’l Cas. Co. v. Winder Lab’ys, LLC, 73 F.4th 934, 941 (11th Cir. 2023) (quoting Fid. Nat’l Title Ins. Co. of N.Y. v. OHIC Ins. Co., 275 Ga. App. 55, 57 (2005)).

The policy provided coverage for sums “that the insured becomes legally obligated to pay as damages because of ‘bodily injury’” to which the insurance applies.  “Bodily injury” includes “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.”  In “any suit” seeking damages covered by the policy, the insurer has a “duty to defend the insured.”  The court then turned to the relevant exclusions.

Continue reading “Fungi and Pollution Exclusions Foreclose Duty to Defend Wrongful Death Suit”

Texas Contractor’s Coverage Claims Foreclosed by Defective Workmanship Exclusion

By: Daniel B. Heidtke

In a recent case decided in the Southern District of Texas, the court entered summary judgment, holding that the insurer’s “construction [and] workmanship” exclusion excluded coverage as a matter of law.  The claim, brought by a contractor against a subcontractor’s insurer, arose out of allegedly defective work related to pipe fabrication.

The contractor agreed to fabricate, construct, and install pipes for a construction project in Corpus Christi, Texas.  The contractor then hired a subcontractor to fabricate piping for the project.  “As a pipe fabricator, [the subcontractor] was responsible for creating or customizing pipes for the Project so that they fit its exact requirements.”  “In connection with its work,” the subcontractor obtained a property insurance policy, which covered the workshop where it welded the components to fit the project’s needs. 

The contractor eventually discovered that some of the subcontractor’s work was defective, and asserted that the subcontractor missed “delivery times and production standards for the [p]roject.”  The contractor eventually pursued a claim under the subcontractor’s policy.

The insurer denied the claim, asserting: (1) the pipes were not “covered property”; (2) the damages to the pipes did not occur at a “covered location”; and (3) the damages to the pipes did not constitute “physical loss.”  The insurer also relied on “Exclusion ‘f,’” which barred coverage “for loss resulting from the design, specification, construction, workmanship, installation, or maintenance of property[.]”  In response, the contractor filed suit, alleging breach of contract (as subrogee to the subcontractor’s rights), and extracontractual claims for violations of Sections 541 and 542 of the Texas Insurance Code.

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Hawai‘i High Court Holds Insurer has no Duty to Defend Fossil Fuel Company Against Climate Change Suit, Upholding Pollution Exclusion

By: Gina Foran and Bill Baron

The Hawai‘i Supreme Court ruled on October 7 that AIG has no duty to defend Aloha Petroleum against climate change lawsuits, because the pollution exclusions in AIG’s policies barred coverage for the suits.

Certain cities and counties in  Hawaiʻi sued major oil companies, including Aloha, for their role in emitting greenhouse gases (“GHGs”) that contribute to global warming.  Plaintiffs alleged that Aloha was on notice that its products caused catastrophic climate change because the industry had been advised in the 1960s through various channels, including the American Petroleum Institute (“API”), an oil industry group, of the effect that burning fossil fuels would have on the climate.  API commissioned studies that predicted the earth’s temperatures would significantly increase around 2000 and cause catastrophic effects by the mid-21st century.  Aloha was aware, or should have been aware, of these studies.  Plaintiffs alleged that Aloha “had actual knowledge that their products were defective and dangerous,” and “acted with conscious disregard for the probable dangerous consequences of their conduct’s and products’ foreseeable impact upon the rights of others.”  The District Court in the coverage action thus concluded that the counties alleged reckless conduct.

The District Court certified two questions to the  Hawaiʻi Supreme Court: (1) whether an “accident” includes an insured’s reckless conduct; and (2) whether GHGs are “pollutants” within the meaning of pollution exclusions. The Court held that an “accident” did include reckless conduct, but ultimately concluded that AIG had no duty to defend the insured because the pollution exclusions in the policies unambiguously barred coverage for “pollutants” which include GHGs.

Continue reading “Hawai‘i High Court Holds Insurer has no Duty to Defend Fossil Fuel Company Against Climate Change Suit, Upholding Pollution Exclusion”

California Supreme Court Questions Existence of “So-Called” Illusory Coverage Doctrine Under California Law As It Rejects Insured’s Coverage Arguments For COVID-19-Related Losses

By Max Stern, Terrance Evans, Todd Norris and Jessica La Londe

On August 8, 2024, in a case entitled John’s Grill v. The Harford Financial Services Group, No. S278481, the Supreme Court of California questioned the existence of the “so-called” illusory coverage doctrine under California law, as it concluded that a policyholder had, in any event, failed to satisfy its foundational elements.

John’s Grill suffered substantial losses during the COVID-19 pandemic. Its insurer denied coverage on various grounds including that the loss or damage claimed by John’s Grill did not fall within the insurance policy’s “Limited Fungi, Bacteria or Virus Coverage” endorsement.  That endorsement generally excludes coverage for any virus-related loss or damage that the policy would otherwise provide, but it extends coverage for virus-related loss or damage if the virus was the result of certain specified causes of loss, including windstorms, water damage, vandalism, and explosion.

John’s Grill acknowledged that it could not meet the latter specified cause of loss limitation.  Instead, it contended the limitation was unenforceable because it rendered the policy’s promise of virus-related coverage illusory. The Court of Appeal below agreed, and allowed John’s Grill’s claims for virus-related losses or damage to proceed.

Relying on “long-settled principles of contract interpretation,” the Supreme Court of California reversed, concluding that the “plain meaning of the policy govern[ed].” The Court stated that it “has never recognized an illusory coverage doctrine as such,” and rejected “the so-called illusory coverage doctrine [as articulated by John’s Grill],” stating that it “does not appear in our precedents.”

The Court went on to explain that even assuming some version of the doctrine did exist under California law, there were two hurdles John’s Grill would still need to clear before it could establish coverage, and it had not cleared either one in this case. First, in such a case, an insured would have to “make a foundational showing that it had a reasonable expectation that the policy would cover the insured’s claimed loss or damage.” The Court declared that “[s]uch a reasonable expectation of coverage is necessary under any assumed version of the doctrine.” Here, the Court concluded that based on the policy language limiting coverage to certain causes, John’s Grill could not have an objectively reasonable expectation the policy would provide coverage for all virus-related loss or damage, regardless of the cause. Second, the Court explained that even accepting John’s Grill’s articulation of the doctrine, it still could not demonstrate that coverage was illusory. The Court noted that restaurants handle both raw and cooked food, which could be contaminated by a virus and that “John’s Grill has not shown that the prospect of such contamination by water damage or other specified cause of loss is so unrealistic as to render the promised coverage illusory.” According to the Court, it is for the insured to consider the likelihood of benefiting from the policy’s limited virus coverage when obtaining coverage.

Insurers Prevail in California Supreme Court on COVID-19 Business Interruption Coverage

By Todd Norris, Max Stern, Brian Kelly, Terrance Evans and Jessica La Londe.

Earlier today, the Supreme Court of California issued a long-awaited opinion answering an insurance coverage question that had been certified to it by the Ninth Circuit Court of Appeals in Another Planet Entertainment, LLC v. Vigilant Ins. Co. (Cal. May 23, 2024, No. S277893) 2024 WL 2339132:  “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?” (Another Planet Entertainment, LLC v. Vigilant Insurance Co. (2022) 56 F.4th 730, 734.)

“[T]he question [arose] in the context of a civil lawsuit filed by Another Planet Entertainment, LLC (Another Planet) against its property insurer, Vigilant Insurance Company (Vigilant). Another Planet operates venues for live entertainment. It suffered pandemic-related business losses when its venues closed, and Vigilant denied Another Planet’s subsequent claim for insurance coverage. Another Planet filed suit in federal district court, alleging that the actual or potential presence of the COVID-19 virus at its venues or nearby properties caused direct physical loss or damage to property and triggered coverage under its insurance policy. The district court granted Vigilant’s motion to dismiss for failure to state a claim, and Another Planet appealed. According to the Ninth Circuit, the issue on appeal “[was] whether [Another Planet’s] allegations, if taken as true, were sufficient to show ‘direct physical loss or damage to property’ as defined by California law.’ (Another Planet, supra, 56 F.4th at p. 731.) Because the Ninth Circuit concluded that resolution of this question of California law could determine the outcome of the case pending before it, the Ninth Circuit certified the question to [the Supreme Court of California.]”  (Another Planet, 2024 WL 2339132, at *1.) Continue reading “Insurers Prevail in California Supreme Court on COVID-19 Business Interruption Coverage”

Two Novel Ways to Lose Attorney-Client Privilege According to Recent Special Master Decisions

There are well-known ways to waive the protection of the attorney-client privilege: for example, the intentional disclosure of an initially confidential communication to someone outside of the privileged relationship waives the privilege; accusing your lawyer of malpractice also waives the privilege. But there are also some less well-known ways to waive the attorney-client privilege that can trip up the unwary…

Read the full article by Kevin P. Allen on the Duane Morris website.

Coverage Denied in NJ Environmental Suit Based on Policy’s Pending Litigation Exclusion

By: Sheila Raftery Wiggins

The New Jersey Appellate Division ruled that an insurer is not obligated to indemnify an insured for natural resources damages that it may pay in the underlying lawsuit brought by the New Jersey Department of Environmental Protection (“NJDEP”) because of the Policy’s Prior or Pending Litigation Exclusion.  This exclusion applies because the NJDEP’s suit is based on the same environmental contamination alleged in a 1987 Administrative Consent Order between the NJDEP and the insured.  Handy & Harman, et. al v. Beazley USA Services Inc. (Syndicates 623 and 2623 at Lloyd’s London), A-2068-20 (N.J. App. Div. March 2, 2023) (unpublished).

Lesson:  An administrative consent order – required by an environmental statute in order for the property to be sold in the 1980’s – is sufficient to constitute a “claim,” as defined by the Policy’s Prior or Pending Litigation Exclusion.

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California Court of Appeal Disposes of COVID-19 Coverage Dispute After Discovery Reveals Cause of Business Income Losses

By Max H. Stern and Holden Benon

Late last week, the California Court of Appeal issued another COVID-19 business interruption decision reminding us that creative arguments do not win the day for policyholders in California.  The true facts are decisive.

In Best Rest Motel, Inc. v. Sequoia Ins. Co., No. D079927, 2023 WL 2198660 (Cal. Ct. App. Feb. 24, 2023), the court upheld a trial court’s ruling on summary judgment, reasoning the policyholder could not show that its loss of business income was caused by “direct physical loss of or damage to property,” within the meaning of its commercial multi-peril insurance policy.

The policyholder, San Diego-based Best Rest Motel, Inc. argued that the presence of virus-infected droplets caused physical loss or damage rendering its property incapable of safely providing lodging to guests.  Readers familiar with these issues may recognize this as an attempt to plead facts that fall within the “hypothetical scenario” posited in dicta by the court in Inns-by-the-Sea.

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Mistakes Do Not Prove Malice: Federal Court in Dallas Enters Summary Judgment on Policyholder’s Bad Faith Claim

By: Daniel B. Heidtke

Alleging an insurer was “dilatory, deficient, and pre-textual” in its handling of a claim is not enough to state a claim for bad faith, explained the Northern District of Texas, as it entered summary judgment against a policyholder’s breach of the duty of good faith and fair dealing claim earlier this month.  After recognizing that the record lacked “expert testimony, proof of standard industry practices, [] legal authority” or evidence that demonstrated duplicity, the court held that the policyholder failed to meet his burden.  After all, the court explained, “mistakes do not prove malice” nor “does delay ensure duplicity”.

In Craig Collins v. State Farm Lloyds, Civil Action No. 3:21-cv-0982 (N.D. Tex. Feb. 3, 2023), Collins filed a claim on his homeowner’s insurance policy after a tornado damaged his home.  Collins’s insurer sent an adjuster to his home, who “took photographs, inspected the property, and filed a report.”  The adjuster recommended a total replacement cost, which Collins’s insurer paid.  The insurer continued to adjust and investigate his claim, performing a second inspection of Collins’s roof and, after paying an additional sum, sent a third adjuster to inspect Collins’s home.  The third adjuster recommended that the insurer pay an additional sum, which the insurer did, and hired an engineering firm to further inspect the property.  After concluding its inspection, the engineering firm concluded that no further damages were due to the tornado, but were due to “foundation movement and age-related deterioration.”  Evidently unhappy with the outcome and perhaps equally unhappy with the process, Collins filed suit alleging breach of contract, violation of the Texas Prompt Payment of Claims Act, violations of the Texas Deceptive Trade Practices Act, and breach of the common-law duty of good faith and fair dealing.

Continue reading “Mistakes Do Not Prove Malice: Federal Court in Dallas Enters Summary Judgment on Policyholder’s Bad Faith Claim”

ACCs and EPC: Ninth Circuit Certifies Question of Whether Policy Provision Can Circumvent Efficient Proximate Cause Doctrine

By: Daniel B. Heidtke

Earlier this month, the United States Court of Appeals for the Ninth Circuit certified the following questions to the Montana Supreme Court: “Whether an anti-concurrent cause (‘ACC’) clause in an insurance policy applies to defeat insurance coverage despite Montana’s recognition of the efficient proximate cause (‘EPC’) doctrine” and, if so, whether the relevant language in the policy at issue was an ACC clause that effectively circumvented the EPC doctrine.

In Ward v. Safeco Insurance Co. of America, Case No. 21-35757, the Court first analyzed Montana’s EPC doctrine, which provides: “where covered and noncovered perils contribute to a loss, the peril that set in motion the chain of events leading to the loss or the predominating cause is deemed the efficient proximate cause or legal cause of loss.”

Continue reading “ACCs and EPC: Ninth Circuit Certifies Question of Whether Policy Provision Can Circumvent Efficient Proximate Cause Doctrine”

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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