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Commercial General Liability Dispatch (Volume 7, Issue 5, May 2016)
TRESSLER WIN: 7th Circuit Affirms No Insurance Coverage for Putative Insureds’ Breach of Their Contractual ObligationsIn Hartford Casualty Insurance Co. v. Karlin, Fleisher & Falkenberg LLC et. al., Case No. 15-3417, the U.S. Court of Appeals for the 7th Circuit held there was no Employee Benefits Liability Coverage for the putative insureds’ refusal to pay a former employee accrued vacation and sick time due as an employee benefit.
The putative insureds, Karlin, Fleisher and Falkenberg LLC, Karlin & Fleisher LLC, Richard Fleisher, Jonathan B. Fleisher and Charles V. Falkenberg III (collectively, the Fleisher Defendants), sought insurance coverage for claims brought against them by Ronald Fleisher, a former employee of the law firms. The Fleisher Defendants allegedly owed Ronald Fleisher over $950,000 in accrued but unused vacation and sick time pursuant to the law firms’ office policy. The Fleisher Defendants allegedly refused to pay him those benefits when Ronald Fleisher retired in 2011. Ronald Fleisher filed suit against the Fleisher Defendants asserting causes of action for breach of contract and under the Illinois Wage Payment and Collection Act.
The Fleisher Defendants tendered their defense to the insurer. The insurer denied coverage contending that there was no negligent act, error or omission in the administration of an employee benefits program and that the claims fell within the Benefits Exclusion. The District Court held that the Fleisher Defendant’s failure to pay a contractual benefit was not a negligent act or omission and granted summary judgment in favor of the carrier. The Fleisher Defendants appealed.
The 7th Circuit affirmed the District Court’s decision holding that there was no duty to defend the underlying suit because the Fleisher Defendants’ alleged breach of their contractual obligations is not a negligent act. The 7th Circuit reasoned that insurance policies do not cover breaches of contract because to do so would create a "moral hazard" ,i.e., giving insureds an incentive to breach their contracts because the costs for such breaches would be shifted to the insurer.
The Fleisher Defendants argued that there was a duty to defend because of the statutory wage claim and because they negligently failed to maintain records of Ronald Fleisher’s accrued vacation and sick time. The 7th Circuit rejected these arguments. The 7th Circuit found that there was no duty to defend the statutory claim because it was also premised on their alleged breach of their contractual obligations.
The court also rejected the Fleisher Defendants’ record-keeping argument because Ronald Fleisher did not sue them for a negligent act, but rather because they refused to pay him money that was contractually owed to him under their agreement. The 7th Circuit noted that their position would incentivize insureds to "not keep track of their obligations, so that insurers would be responsible for all the ‘forgotten’ payments." Finally, the 7th Circuit rejected the Fleisher Defendants’ estoppel argument holding that estoppel cannot create a duty to defend or coverage where there is none.
Tressler attorneys Michael J. Duffy and Ashley L. Conaghan represented Hartford in this case.
Ohio Supreme Court Rules That an Abuse or Molestation Exclusion Barring Coverage for "Any Insured" Applied to any Insured Whether Directly or Vicariously LiableBy: Jim Murray, Partner in the Chicago Office
In World Harvest Church v. Grange Mutual Casualty Co., 2016-Ohio-2913 (Ohio May 11, 2016), the Ohio Supreme Court ruled that an abuse or molestation exclusion barred coverage for a church’s settlement after a jury found it vicariously liable for its day care worker beating a young child and for negligent supervision.
Grange Mutual Casualty Company (Grange Mutual) insured World Harvest Church (WHC). The parents of a young child who was beaten with a ruler by a WHC daycare worker sued WHC. After trial, a jury awarded: 1) $764,235 in compensatory damages, $5 million in punitive damages and attorneys’ fees against WHC; and 2) $134,865 in compensatory and $100,000 in punitive damages against the daycare worker.
The jury’s answers to interrogatories indicated that the damages were proximately caused by: 1) the daycare workers’ intentional harm or battery; 2) intentional infliction of emotional distress committed by the daycare worker and/or WHC; and 3) WHC’s negligent supervision of the daycare worker. After the verdict was affirmed on appeal, the parties settled the claims for $3.1 million.
Grange Mutual denied coverage for the settlement on the basis of an "Abuse or Molestation Exclusion" that barred coverage for "1. The actual or threatened abuse or molestation by anyone or any person while in the care custody or control of any insured or 2. The negligent: a. Employment; b. Investigation; c. Supervision; d. Reporting to the proper authorities or failure to so report, or e. Retention of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by Paragraph 1. above." After the denial, WHC filed suit against Grange Mutual for breach of contract and bad faith.
On cross motions for summary judgment, the trial court ruled that Grange Mutual was obligated to reimburse WHC for all the compensatory damages, attorneys’ fees and prejudgment interest, but not the punitive damages. The U.S. Court of Appeals for the 10th Circuit affirmed the trial court with the exception of compensatory damages, as Grange Mutual was only obligated to reimburse the damages for which WHC was secondarily liable. The appellate court found that the "Abuse or Molestation Exclusion" only barred coverage for WHC’s direct liability.
On further appeal, the Ohio Supreme court reversed. The Court held that the exclusion was clear and unambiguous. It excluded coverage for both an insured’s direct and vicarious liability so long as the victim was in the care, custody or control of any insured at the time of the threatened abuse or molestation. In reaching its decision, it rejected WHC’s claim that the exclusion was ambiguous because it failed to expressly state that coverage was excluded for secondary or vicarious liability. The Court concluded that the exclusion clearly excluded coverage for actual or threatened abuse by anyone.
This case demonstrates that courts will give policy exclusions their plain and ordinary meaning and will enforce provisions that clearly exclude coverage for abuse or molestation whether the insured is sought to be held directly or vicariously liable.
New York’s Highest Court Spikes Year When Non-Cumulations Clauses are in Play
By: Katherine E. Tammaro, Partner in the New Jersey Office
In In The Matter Of Viking Pump, Inc., N.E.3d, 2016 WL 1735790 (2016), the Court of Appeals of New York addressed two questions certified from the Delaware Supreme Court: (1) whether "all sums" or "pro rata" allocation applies where the excess insurance policies at issue either follow form to a non-cumulation provision or contain a non-cumulation and prior insurance provision; and (2) whether, in light of our answer to the allocation question, horizontal or vertical exhaustion is required before certain upper level excess policies attach.
The court "reaffirm[ed] that, under New York law, the contract language of the applicable insurance policies controls each of these questions, and we answer the certified questions in accordance with the opinion herein, concluding that all sums allocation and vertical exhaustion apply based on the language in the policies before us."
The insured acquired pump manufacturing businesses that later subjected the insured to significant liability from asbestos exposure claims. At issue were primary and excess insurance policies issued to the acquired companies spanning from 1972 to 1985. The court noted that the policies at issue generally contained or followed form to insuring agreement language that required the insurer to "pay on behalf of the insured all sums;" defining "personal injury" to include that which "occurs during the policy period;" and non-cumulation, anti-stacking and/or prior insurance provisions that operated to reduce the limits of liability under the policy by any amounts paid under previous policies for occurrences or losses covered under previous policies.
Regarding the question of allocation, the court noted that the language at issue in this case differed from the specific language at issue in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002), which applied a pro rata allocation under the facts of that case. The court acknowledged that in Consolidated Edison, it is suggested that in the absence of language weighing in favor of a different conclusion, pro rata allocation was the preferable method, but concluded that the inclusion of the non-cumulation clauses and prior insurance provisions distinguished the policy language in this case, and compelled an all sums allocation.
In New York, non-cumulation clauses have been enforced as written to prevent stacking of insurance limits in non-allocation contexts, even when this result limited the insured’s recovery. The court concluded that it would be inconsistent with non-cumulation language to use pro rata allocation because policies containing such clauses "plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence by acknowledging that a covered loss or occurrence may ‘also [be] covered in whole or in part under any other excess
[p]olicy issued to the Insured prior to the inception date’ of the instant policy."
Per the court, by contrast, the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period, meaning that no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence. Because a pro rata allocation would render non-cumulation clauses to be surplusage, which is inconsistent with New York principles of contract interpretation, and because a pro rata allocation would conflict with the New York courts’ previous recognition that such clauses are enforceable, the court applied an "all sums" allocation to the policies containing such provisions.
Regarding the question of exhaustion, the court stated that vertical exhaustion is more consistent than horizontal exhaustion with language in excess policies that ties their attachment to the exhaustion of the specific underlying policies identified, and that vertical exhaustion is conceptually consistent with an all sums allocation, permitting the insured to seek coverage though the layers of coverage available for a specific year. The court rejected the application of "other insurance" clauses to the analysis, finding that the policies’ "other insurance" clauses only apply to concurrent policies, not successive policies.
While the In The Matter of Viking Pump, Inc. decision seems to stray from the rather secure path of pro rata allocation under New York law established by Consolidated Edison, the silver lining is that the Court of Appeals limited the effect of the "all sums" allocation to those cases involving policies with language such as that at issue in Viking Pump. Specifically, the policies at issue must provide that the insurers will pay "all sums" and must further contain non-cumulation, anti-stacking or prior insurance language which, in the words of the Court of Appeals, plainly contemplate that multiple successive insurance policies cover an occurrence or loss by specifically acknowledging that an occurrence or loss can take place in multiple policy periods. This limits a more global reach of the Viking Pump decision which, by its own ruling, applies to the policy language and facts at issue only.
Nevada District Court Applies "Time on the Risk" Allocation for Defense Fees and Costs
By: Linda Tai Hoshide, Partner in the Los Angeles Office
In Evanston Ins. Co. v. Western Community Ins. Co., 2016 WL 1555706 (D. Nev. 2016), the U.S. District Court for the District of Nevada allocated defense fees and costs among primary insurers according to "time on the risk," finding it to be most equitable and to "accomplish substantial justice" between the primary carriers.
The District Court recognized that Nevada had no law to determine allocation so it chose to look to California law. The District Court stated that under California law, there was "no fixed rule for allocating defense costs among primary insurers covering the same loss." Rather, the District Court recognized that California courts consider "the varying equitable considerations which may arise...and which depend on the particular policies of insurance, the nature of the claim made, and the relation of the insured to the insurers." In addition, the District Court stated that "the exact allocation is a decision that ultimately rests in the discretion of the Court."
Given the specific facts of the case, the District Court applied a "time on the risk" approach to allocating defense fees and costs because the court found it to be the "most equitable" and will "‘accomplish substantial justice’ among the parties." The court also determined that the "time on the risk" calculation began when the construction of the property was completed. Therefore, the District Court found that Evanston Insurance Company (Evanston) was only on the risk for 59 days, while Western Community Insurance Company (Western) was on the risk for 1460 days, therefore allocating 3.9% of the defense fees and costs to Evanston and 96.1% to Western.
As no Nevada courts have addressed the issue of allocation among primary carriers, as it appears that Nevada courts will likely follow California law on this issue and apply equitable principles in determining allocation among carriers. Also significant is the fact that the court determined, for purposes of calculating allocation based upon time on the risk, that one should look to when the construction was completed to begin calculations.
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