Ore. Fed. Ct. Considers Meaning of "Occurrence" for Developer Liability

In a decision handed down earlier this week in litigation between a primary-layer carrier and an umbrella carrier an Oregon federal court held that when a plaintiff brings a claim against a developer for negligence, the term "occurrence" in the developer's policies means the negligent development, globally: in other words, the developer's negligent work is one occurrence, despite the fact that the property damage may take multiple forms.

The case involves a high-rise condominium in Portland's South Waterfront district.  The condo association sued the developer (not the general contractor) over water damage arising from construction deficiencies that led to water problems in the garage, and elsewhere.  The primary layer policy (from American Contractors Insurance Group or "ACIG") had a $2 million per occurrence limit and a $4 million products-completed-operations aggregate limit.  AIG, the umbrella carrier, insured over the same limits (called the "retained limit").  However, the Court noted that the AIG policy had its own definition of "occurrence" and provided coverage independently of the primary layer policy subject only to the retained limit - it was true "umbrella" coverage, not excess coverage.

Both the primary layer carrier and AIG contributed to a settlement.  But AIG contended that the primary layer carrier should have been required to pay its $4 million aggregate before its policy was triggered, and so sued to gets its contribution to the settlement back.

The Court disagreed.  The Court rejected AIG's effort to rely on case law interpretations of "occurrence" and instead examined the AIG policy's definition of "occurrence" on its own terms.  The AIG  provision included some standard language about an occurrence including multiple exposures to the same "conditions."  The Court found that the "condition" implicated by the condo association's allegations, read strictly, was the negligent development overall of the project - not particular construction practices by the general contractor.  The Court found it significant, in this regard, that the condo association had not brought the general contractor into the suit.  The Court determined that there was therefore only one "occurrence" for purposes of the AIG policy's retained limit condition.

Overall, this decision re-emphasizes for insurance professionals the importance of examining policy language on its own, without relying on court decisions that may or may not be applicable, and also carefully examining what is actually alleged in the underlying litigation rather than assuming things based on what is usually alleged in construction defect litigation.

Wash. Fed. Court Orders Trial on AIG Defense Rates

The long-running federal court litigation between Washington company Coinstar/Redbox and its insurer, AIG, took a turn last week, with good news and bad for the policyholder.  The backstory: Redbox has been sued in several different jurisdictions for collecting information about its customers that it was not permitted to collect; the allegations are, generally, that Redbox used the information for its own marketing purposes or sold it to others.  AIG agreed to defend Redbox under a reservation of rights in all of the actions, but brought this action seeking to be excused from further defending.  Redbox counterclaimed, alleging that AIG had taken too long to reimburse it for defense costs and was trying to impose unreasonable caps on the attorney rates it would pay.  (A few weeks ago we reported on a discovery ruling, allowing discovery of what rates AIG pays defense counsel in other cases, and in coverage cases).

Several months ago the court granted AIG summary judgment on defense of one of those lawsuits; last week, the trial court granted AIG summary judgment on whether AIG had to defend the two other pending lawsuits.  That's the bad news, but somewhat unsurprising given the court's prior ruling and the breadth of the statutory-violation exclusion at issue.  That said, there is some puzzling language in the order about how AIG didn't benefit from delaying payment of defense fees - a strange statement in light of the publicity recently about insurance companies profiting from "the spread."

The good news concerns the rate dispute.  AIG had contended that its insurance policies, which contain standard duty/right to defend language, gave it the absolute right to control the defense and, along with that, set whatever rates it chose.  The problem for AIG is that it had allowed its insured to choose defense counsel, and had not attempted to control the choice of defense counsel.  So the court held that AIG had effectively given up the right to control the defense.  Moreover, the court observed that the insurance contract said nothing about controlling the rates, or what rates it would pay.  The court held, however, that AIG only had to pay "reasonable" rates, and that there was a question of fact about whether the rates that Coinstar had paid its lawyers was reasonable.  So that dispute will remain for trial.  It would not be surprising for this case to settle before that happens, however, as AIG may seek to avoid having any of the information about what it pays defense counsel in other cases from becoming public.

(The exclusion that operated here is typical of the broader trend toward excluding privacy-related risks, including data breach and other "cyber" risks - and is one of the reasons that many companies are looking to add specialized "cyber insurance" to their risk-management programs.  More to come on that point in this blog.)

WA Fed. Court Broadens When Insurer May Go Beyond Complaint to Deny Defense

In Allstate v. A.R., a late-July decision from a federal court -- the Western District of Washington -- the court held that an insurer may rely on facts outside the "four corners" of the complaint to deny the duty to defend if the issue is whether the plaintiff is an "insured" under the policy and therefore subject to an "insured-versus-insured" type exclusion.  In the underlying case a minor sued her mother for negligently permitting her to be alone with her grandfather, who abused the minor.  The mother's homeowner's insurance policy with Allstate had an exclusion for claims brought by another "insured" and defined "insured" to include any relative who "resided" with the insured defendant.  The underlying complaint did not specify whether the minor lived with her mother, although in fact the minor apparently did live with her mother most of the time, but also lived sometimes with her father, and with her grandparents.  Allstate investigated where the minor resided, and came to the conclusion that the exclusion applied.



In the coverage case the minor protested that Allstate was not permitted to go outside the "four corners" of the complaint and that doing so was bad faith.  The court noted that in Woo v. Fireman's Fund the Washington Supreme Court had held that an insurer can investigate facts relating to whether a defendant is an insured and rely on those facts in its defense coverage determination.  The court then extended the Woo reasoning to coverage Allstate's investigation into the minor's living situation, reasoning that the question Allstate was trying to answer was whether the minor was an "insured," and held that the exclusion did apply, and that Allstate had not acted in bad faith.



The problem with the court's reasoning, of course, is that Woo did not concern a policy exclusion, and Washington courts have held that an exclusion may not be the basis for a denial of defense based on extrinsic evidence.  The court's characterization in this case of Allstate's investigation as involving "insured status" is facile - what Allstate was really investigating was an exclusion.  And the court's extension of Woo to this situation is not supported by Woo's reasoning, which has everything to do with helping defendants get coverage.  Because of this flaw this case may be the subject of an appeal, so stay tuned.

Oregon Federal Court Affirms Breadth of Duty to Defend

An Oregon federal judge recently reaffirmed a broad approach to the duty to defend in a carrier-on-carrier dispute.  The case is Seneca Insurance v. James River Insurance.  As with many such cases in Oregon, the dispute centered around defective construction, this time on the coast.  Plaintiff insurer, Seneca, agreed to defend its insured, a contractor.  Seneca sued one of the contractor's other insurers, James River, after James River refused to help fund the defense.   James River argued that the property damage alleged in the complaint must have started before its policy kicked in, in mid-September, 2011.  But the complaint did not specify when exactly the property damage happened.  And as we know, the duty to defend is determined only by looking at the complaint and the policy - the "eight corners" rule.

The court lambasted James River for interpreting ambiguities in the complaint to exclude coverage, stating that James River was in most cases "looking through the wrong end of the telescope."  (Love that phrase!)  The complaint alleged that the work was done in the late summer of 2011, and so James River argued that because "rain fell" and "wind blew" in the fall of 2011, property damage must have occurred then.  The court rejected that argument as assuming too much about un-alleged damage.  The court also flatly rejected James River's argument that the reference to "fall 2011" in the complaint referred to the beginning of September as contradicted by meteorological science.  Finally, the court also held that James River was not entitled to rely on the insured's third-party complaint against downstream parties (sub-contractors and others) to deny the defense, strictly applying the "eight-corners" rule.