The Connecticut Supreme Court is presently considering whether claims for breach of contract against a contractor for failing to properly construct a building may constitute an “occurrence” under a commercial general liability policy.  At issue in Capstone Development Corp. v. American Motorists Ins. Co., No. SC 18886 are various questions certified from a federal district court in Alabama concerning the availability of insurance coverage for defects in the construction of buildings an the University of Connecticut.

As the rest of us return from the last long weekend of summer, the U.S. Supreme Court send us scurrying back to our computers this morning with news that it has accepted Travelers' cert petition in Standard Fire Ins. Co. v. Knowles, 11-1450.  At issue is a ruling by an Arkansas District Court declaring that Travelers could not remove a homeowner's class action against to federal court because the underlying claimants had stipulated that they were seeking damages under $5 million, the jurisdictional limit for removal under CAFA.  

For all of its diminutive stature, Rhode Island has proven over the years that it can punch outside of its weight class when it comes to generating large environmental liability disputes and the insurance coverage controversies that invariably attend them.

Several weeks ago, DRI published an article in which I discussed recent case law trends in the wake of Qualcomm analyzing requirements in excess policies requiring that underlying insurers actually pay their limits in order for the excess insurers’ obligations to be triggered.  One of the cases cited in that article was affirmed last week by the Appellate Division of the New York Supreme Court.

In J.P. Morgan Chase & Co. v. Indian Harbor Ins. Co., 2012 N.Y. slip op. 04702 (App. Div. June 12, 2012), the insured sought coverage for several large settlements pursuant to a tower of “claims made” professional liability policies.   After settling with several lower layer carriers, J.P. Morgan sued to compel coverage from its remaining insurers, who moved for summary judgment on the grounds that the insured had failed to satisfy their policy requirements that the underlying insurers have actually paid their limits.

In affirming the trial court’s ruling in favor of the insurers, the First Department gave effect to language in the excess policies that variously required that the underlying insurers “shall have paid the full amount of their respective liability” (Twin City) or that  "shall apply only after all applicable Underlying Insurance with respect to an Insurance Product has been exhausted by actual payment under such Underlying Insurance . . ." (Lumbermens) or “after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance as covered loss thereunder” (St. Paul)

The court ruled that the settlements that the underlying insurers had entered into not only did not involve any admission of coverage but were for less than the actual policy limits.  The court followed the approach pioneered by the California Court of Appeal in Qualcomm and, more recently, the U.S. Court of Appeals for the Fifth Circuit in Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367 (5th Cir. 2011) in which courts had ruled that such clauses are a valid condition precedent to excess coverage and are not satisfied merely because the insured accepts responsibility for the gap between the full limit and the amount actually paid by the insurer. 

Further, the court refused to find ambiguity based upon a claimed conflict between this exhaustion requirement and the separate requirement in the excess policy requiring maintenance of underlying limits.  The court distinguished the Second Circuit’s opinion in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1923), which has historically been the foundation of policyholder efforts to compel coverage in such cases, declaring that Zeig was clearly distinguishable as involving different policy provisions and, indeed, as recognizing that actual payment of limits might be required where the policies so clearly state.  

The issue of whether CGL policies cover junk fax liabilities under the federal Telephone Consumer Protection Act (TCPA) has largely faded from view.  During the 2004-2010 period, insurers won several key victories in federal courts only to lose much of this ground through adverse state supreme court rulings on the key issue of whether a consumer's receipt of a fax constituted a covered "personal injury" as involving the publication of material that invaded a person's right of privacy.  At the same time, however, the widespread use of TCPA exclusions after 2007 and the growing awareness of most business concerning TCPA exposures substantially reduced the number of coverage disputes.

Although the junk fax wars are no longer on page 1 of the coverage news, a number of recent decisions make clear that the wars continue and, indeed, are being fought on several different fronts.  In particular, insurers have recently argued with success that the $500 statutory damages allowed under the Act are a type of penalty or punitive damages for which coverage is unavailable as a matter of public policy.

In Illinois, where the state supreme court ruled in Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006) that TCPA claims trigger "personal injury" coverage, the intermediate appellate court ruled last month that there is no duty to indemnify such claims because the $500 statutory penalty for sending unauthorized telefaxes is a form of punitive damages and thus uninsurable under Illinois law.  

In Standard Mut. Ins. Co. v. Lay, No. 4-11-0527 (Ill. App. April 20, 2012), the insurer agreed to defend TCPA claims under a reservation of rights.  The insured insisted on Peppers counsel, however, who negotiated a settlement with class action claim representative for the full amount demanded ($1,739,000) in consideration of an agreement to only pursue recovery from Standard Mutual's policy proceeds.  In affirming a lower court's ruling in favor of Standard Mutual, the Appellate Court noted that actual cost in loss of paper, toner and ink caused by receiving a fax is far less than $500, the purpose of this award must be one of deterrence and not compensation.  It ruled, therefore, that these damages were in the nature of a penalty that, as with punitive damages, is uninsurable as a matter of public policy in Illinois.

More recently, a divided panel of the Missouri Court of Appeals (Eastern District) took a slightly different approach in reaching the same result.  In Olsen v. Siddiqi, No. ED 97455 (Mo. App. May 9, 2012), a class of TCPA claims pursued a garnishment demand for $4.9 million against a telemarketer's liability insurer (American Family) that the plaintiffs had obtained by way of a consent judgment that could only be satisfied through the policy proceeds without risk to the insured.  Although a trial court found coverage, American Family appealed on the grounds that the claims were not for "property damage."

In reversing and finding no coverage, the Missouri appellate court ruled 2-1 that the claims were not "damages" on account of "property damage."  The court distinguished the Eighth Circuit's Missouri ruling in Universal Underwriters Ins. Co. v. Lou Fusz Automotive Network, 401 F.3d 876 (8th Cir. 2005), noting that the policy at issue in that case had expressly defined damages as including punitive damages (where insurable by law).  The Missouri Supreme Court has ruled that fines and penalties are not insurable "damages" unless the policy expressly provides to the contrary.  In this case, the majority declared that the option of recovering statutory damages under the TCPA had a penal purpose and that $500 damages are therefore not insurable.  (The court also rejected the insured's claim for "personal injury" coverage, noting that he had expressly given up this coverage by endorsement).  A minority opinion argued that the loss of toner and fax paper is clearly "property damage."  Justice Mooney also claimed that a $500 award is, in fact, remedial and that it only the provision for trebled damages in the event of intentional TCPA violations that has a penal purpose.

TCPA claims also remain a source of tension between state and federal courts.

In Illinois, state and federal courts have reached conflicting conclusions as to whether the "personal injury" requirement that a "person's right of privacy be invaded precludes CGL coverage for business interests that receive junk faxes.  In Maxum Ind. Co. v. Eclipse Mfg. Co., No. 06 C 4946 (N.D. Ill. June 13, 2011) Judge Lefkow ruled that businesses have no right of privacy and therefore cannot claim coverage, Swiderski notwithstanding.  By contrast, the First Division of the Appellate Court ruled a few months later in Pekin Ins. Co. v. Xdata Solutions, Inc., 958 N.E.2d 397 (Ill. App. Ct. 2011) that a corporation can be a "person" whether the issue is presented under Illinois or Indiana law.

In Massachusetts, where the Supreme Judicial Court followed the Swiderski court's lead in finding CGL coverage for TCPA claims presented under ISO forms in Terra Nova Ins. Co. v. Evan Fray-Witzer, 869 N.E.2d 565 (Mass. 2007), the First Circuit took a different view under different language in the St. Paul general liability policies which required that the insured "make known" material that invades privacy interests.  In Cynosure, Inc. v. St. Paul Fire & Marine Ins. Co., 645 F.3d 1 (1st Cir. 2011), the First the reference to "makes known" clearly requires that the privacy interest be invaded by the content of the communicated materials, not the means of communication consistent with the holdings of the U.S. Courts of Appeal for the Third and Fourth Circuits construing similar wordings.  Writing for the court, former U.S. Supreme Court Justice David Souter declared that "what logic and definition require, syntax confirms."

Finally, disputes persist with respect to the scope of TCPA exclusions that have been a mandatory endorsement to CGL forms since 2007.  This exclusion was upheld by a federal district in a recent Houston case.

A federal judge in Houston ruled in Rick's Cabaret International, Inc. v. Indemnity Ins. Co., No. H-11-3716 (S.D. Tex. January 24, 2012)(insurer was relieved of any duty to defend TCPA claims against its insured by reason of an exclusion in its policy for claims arising out of or relating to "actual or alleged violation of United States Federal Communications Commission rules, regulations, interpretations, policies, statutes, laws or codes").  Even so, insureds and garnishment claimants are succeeding to avoid these exclusions by claiming recovery on common law grounds.

Additionally, the ubiquity of TCPA exclusions in CGL policies is forcing claimants to broaden the scope of their coverage search, exploring claims under E&O or D&O policy that may lack such exclusions.  For instance, in Landmark American  Ins. Co. v. NIP Group, Inc., No. 1-10-1155 (Ill. App. December 5, 2011), the Illinois Appellate Court ruled that that an insurance agency's use of junk faxes to market its services potentially involve the rendering of or failure to render "professional services" so as to trigger its E&O policy.  The First Division noted that as the Landmark policy provided coverage for "advertising liability," the insurer could not argue that advertising could never involve a professional service.

Apart from these coverage issues, the key factor driving insurer exposures to TCPA claims is the risk of class certification.  It remains to be seen how much the U.S. Supreme Court's 2011 Walmart opinion and other opinions addressing Rule 26 certification will create larger roadblocks to class certification of these claims.  In the interim, the Georgia Supreme Court is now considering an appeal that present the novel issue of how such damages should be calculated.

In A Fast Sign v. American Home Services Co., a Georgia trial court determined that the insured had intentionally violated the TCPA by issuing 306,000 junk faxes.  Accordingly, the court awarded damages to the certified class totaling $459 million.  The Georgia Court of Appeals ruled on May 29, 2011 that TCPA liability hinged on a consumer's receipt of a fax and that it was therefore error to award damages based on the number of faxes issued.   The plaintiff's appeal was argued before the Georgia Supreme Court on May 21, 2012.

Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer relatively new.  The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel's client relationship with the insured.

For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel.  As a result, some states have ruled that excess counsel has no right of action at all.  Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured.  Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice.  In several of these cases, courts have ruled that  the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)("when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client");  Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship");  Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ("[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).

A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit.  Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz.  2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide."  Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith."  In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications.  The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide.  This duty exists even if the insurer is a non-client."

Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation.  However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however.  In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.  

In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident.  The primary insurer (Royal) engaged local counsel to defend the case.  A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense.  The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm.  This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos' partners or trial attorneys were licensed to practice law in Mississippi.  Although Royal insisted on continuing to use the Quintairos law firm despite its insured's concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel's belated designation of a physician as an expert witness.  Thereafter, the law firm issued an updated evaluation of the case.  Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American's excess policy might be implicated.  Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.

In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm.  In 2009, the trial court granted the defendants' motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm. 

In 2011, the Court of Appeal affirmed the trial court's dismissal of Great American's negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage.  The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm.  The court declined to allow a direct claim based upon the excess insurer's reliance on alleged misrepresentations with respect to case valuation.  Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation. 

It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured's place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation -- Shady Lawn's competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases. 

Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm.  Although the court "denied" Great American's motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking.  Whereas the Court's earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American.  Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a "stranger" to the attorney/client relationship.  The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel's claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.  

Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American  would support a claim for malpractice and that the trial court had therefore erred in granting counsel's motion to dismiss.  Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,

Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, "Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship."

It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship.  What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers.  It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.

Massachusetts is one of a handful of states that allow third party claimants to sue liability insurers for failing to promptly settle their claims.  It is unique in allowing tort claimants to recover punitive damages in such cases.   In the wake of the Supreme Judicial Court's ruling this week in Rhodes v. AIG Domestic Claims it is evident that the price of failing to settle claims in which liability is reasonably clear can be high indeed.

The fate of climate change litigation now rests in the hands of the United States Supreme Court. Electric utilities, having suffered a surprising defeat at the hands of the Second Circuit last year in American Electric Power Co. Inc. et al. vs. State of Connecticut, 582 F.3d 309 (2d Cir. 2009), rehearing denied (2d Cir. March 5, 2010) filed a petition for certiorari (.pdf) with the nation’s highest court on August 2, 2010 seeking reversal of the Second Circuit’s opinion reinstating the plaintiffs' federal common law nuisance claims against the utilities for allegedly contributing to global warming. In their cert petition, American Electric, Duke Power, Xcel Energy and Southern Company argue that such a cause of action should not be implied under the common law and that these are political issues that are best left to the Congress to decide.

The utilities' arguments found support from a surprising quarter last week when the Obama Administration weighed in on the side of the Petitioners. In an amicus brief (.pdf) filed on behalf of the Tennessee Valley Authority on August 24, U.S. Solicitor General Neal Katyal argued that the issue should not be resolved through the court system and asks that the matter be remanded to the Second Circuit so that the court can consider the Administration’s recent proposals that greenhouse gases be regulated under the federal Clean Air Act.

The Supreme Court will decide during the coming term whether to accept the case. Notwithstanding the Solicitor General's support and the generally pro-business attitude of the court, the Court's willingness to wade back into the climate change debate is far from certain, particularly given the sharp divide that was evident in the Court's seminal Massachusetts v. EPA opinion. One factor that might potentially influence the court’s attitude is that Justice Sotomayor sat on the Second Circuit panel that heard the American Electric case (but was appointed to the Supreme Court before it was decided).

Climate change litigation has enjoyed a roller coaster ride in the year since American Electric was decided by the Second Circuit last September. A few weeks later, the Fifth Circuit ruled in Comer v. Murphy Oil that federal district court had erred in dismissing claims by Gulf property owners who claimed that the defendants' emissions had increased the ferocity of Hurricane Katrina. Although the full Fifth Circuit subsequently agreed to hear en banc rehearing of Comer, so many of the justices recused themselves due to conflicts of interest that the court was left without a quorum. As the order granting rehearing had the effect of vacating the panel opinion, the dismissal of the appeal reinstated the District Court’s original opinion.
 
The Ninth Circuit is also now considering these issues in Native Village of Kivalina v. Exxon Mobil Oil Corp., a case in which a federal district court in San Francisco dismissed a climate change suit brought by Eskimo villagers who claim that emissions from oil, energy and utility companies have caused Arctic sea ice to recede, threatening their village. In contrast to the opinions of the Second and Fifth Circuits, the California District Court adopted the view that it should not entertain jurisdiction as the public nuisance claims present a non-justiciable political question that should be decided by Congress, not the courts.

Meanwhile, the issue of insurance coverage for climate change claims is moving to the fore. On August 2, 2010, the Virginia Supreme Court announced  that it would agree to hear the insured’s appeal of a state trial court’s ruling AES was not entitled to coverage for the Kivalina plaintiff’s claims on the basis that they failed to seek recovery on account of an "occurrence" as the allegations of climate change were the foreseeable result of the insured's routine discharge of millions of tons of carbon dioxide over the years. Waiting in the wings is the all important issue of whether such claims also involve the discharge of a "pollutant".

When is a policyholder not an insured? That was the issue considered by the Seventh Circuit last week in Iowa Physicians’ Clinical Medical Foundation v. Physicians’ Ins. Co. of Wisconsin, No. 08-1297 (7th Cir. October 31, 2008), an Illinois case in which the court declared that an insurer’s obligation to act in good faith in responding to offers to settle within policy limits only extends to insured entities.

The Estate of Dennis Goetz sued Dr. Randall Mullen and Iowa Health Physicians (IHP) for failing to properly vaccinate Goetz against malaria before he took a trip to Africa and, upon his return, for failing to properly diagnose or treat the malarial condition that ultimately killed Goetz. At the time, Goetz was insured under a medical malpractice policy issued by Physicians’ Insurance Company of Wisconsin with limits of $1 million. The policy was issued in the name of Iowa Health Physicians, Mullen’s employer, which also paid the premiums on behalf of Dr. Mullen as part of a financial package to entice him into working at the clinic. Although IHP was listed as the policyholder, the policy itself made clear that it was not an insured and, indeed, IHP declined to pay the additional premium that would have entitled it to coverage under its policy. Rather, IHP was covered through a combination of self-insurance and a separate commercial insurance policy.

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