Insurance: February 2008 Archives

The Massachusetts Supreme Court, relying on a 1988 Third Circuit decision, Keystone v. Home Insurance Company, has held that an excess insurer was not bound by the primary insurer’s decision to settle. The excess carrier had declined to provide coverage for a settlement due to exclusions in the policy even though the primary carrier had agreed to the settlement. The insured sued the excess liability insurer for declaration of coverage under a “follow form” excess liability insurance policy for settlement of the underlying class action. 

The Massachusetts Supreme Court, in Allmerica Financial Corp. v. Certain Underwriters at Lloyd’s, affirmed the trial court’s ruling that excess insurers with “follow form” policies are entitled to make their own coverage and settlement decisions, regardless of decisions made by the primary carrier.  In making its decision, the Court reasoned:  “a basic point about excess insurance policies: they are separate and distinct contracts from the primary policy.”  Thus, the court held,  even where an excess policy “follows form,”  excess insurers act independently of each other with respect to decisions about their policies, including coverage determinations and settlements.

The decision is the right one, of course, but it underscores the fact that any settlement discussion must include the excess carrier. Otherwise, the claimant may end up receiving only the primary's portion of the money due. 

Leily Schoenhaus

The United States Supreme Court has declined to hear an appeal by Katrina flood victims after the Court of Appeals for the Fifth Circuit ruled they had no coverage under their policies of insurance. The policyholders in Vanderbrook v. Unitrin Preferred Insurance Co. (In re Katrina Canal Breaches Litigation) sought recovery under their policies for damage arising from flooding caused by breaches or overtopping of levees during Hurricane Katrina.  Though the policies all expressly excluded losses caused by flood, the plaintiffs creatively argued that the flood exclusions did not apply because the levee breaches releasing the water were caused by the negligent design, construction or maintenance. The friendly district court had found the term “flood” ambiguous because it was not clear whether it referred to natural events or those caused by negligent or intentional acts. While this argument at first blush might seem a sure loser, courts have commonly found that the earth movement exclusion applied only to natural causes and not to manmade events.

The Fifth Circuit, however, found that the flood exclusions were unambiguous and, whether or not the negligent design, construction or maintenance of the levees contributed to their failure after Hurricane Katrina, the water inundation of New Orleans fit within the definition of “flood.”  In particular, the court rejected the argument that, in the context of the levee breaks, the policies’ flood exclusions do not unambiguously exclude coverage for loss caused by water inundation where the damage occurred in part because the levee was negligently designed.  The court noted that the plaintiffs’ approach “would lead to absurd results,” recognizing that “[a]ny time a flooded watercourse encounters a man-made levee, a non-natural component is injected into the flood, but that does not cause the floodwaters to cease being floodwaters.”   The court thus upheld the application of commonly-used flood exclusions in homeowners and commercial insurance policies, meaning that, under the terms of these policies, there is no coverage for water damage resulting from the failure of the levees surrounding New Orleans after Hurricane Katrina, even if those levees never should have failed if they had been properly constructed.

The result is a sad end to the hopes of Katrina victims seeking indemnification under policies they thought provided coverage in the event of such a preventable disaster.

Leily Schoenhaus

The Illinois Appellate Court has rendered an important decision concerning coverage under the advertising injury provision in a commercial liability policy. In Valley Forge Ins. Co, v. Swiderski,  the question was whether a claim alleging violation of the Telephone Consumer Protection Act (“TCPA”) on account of an insured sending unsolicited fax advertisements gives rise to coverage for written publication of material that violates a person’s right of privacy.  Swiderski Electronics had sent fax advertisements to various individuals without obtaining prior consent.  A putative class action was filed seeking damages for violation of the TCPA and conversion of fax machine toner and paper.  Swiderski tendered the suit to its insurers.  The insurers disclaimed coverage and sought a declaratory judgment that they had no duty to defend or indemnify.  The parties filed cross-motions for summary judgment on the duty to defend and the trial court found that the insurers had a duty to defend under the policies’ advertising injury provision. 

          The decision, which was affirmed by the Illinois Supreme Court, held that coverage under personal and advertising injury is available for violations of the TCPA.  Notably, the court in Swiderski declined to follow the Seventh Circuit’s decision in American States Insurance Company v. Capitol Associates of Jackson County, (the first federal appellate decision to address whether an advertising injury provision covered the sending of unsolicited fax advertisements) which held that coverage for TCPA claims was not covered under the advertising injury provision.  In particular, the court noted that the TCPA protects a fax recipient’s privacy interest in seclusion, and the language of the advertising injury provision reflect that Swiderski and the insurers intended the policies to cover the type of injury to privacy that is the subject of the TCPA claim.  The court’s holding effectively expanded advertising injury coverage from indemnifying against “invasion of privacy torts” to covering intrusion on seclusion type causes of action.

Leily Schoenhaus