Editors: Joanna L. Crosby Linda Tai Hoshide Michael W. Morrison Kathleen A. Sweitzer

Transcription

1 Commercial General Liability Dispatch August 2012 Volume 3 Issue 8 Editors: Joanna L. Crosby Linda Tai Hoshide Michael W. Morrison Kathleen A. Sweitzer In This Issue... Wisconsin Supreme Court Finds Failure to Issue a Reservation of Rights Letter Does Not Preclude Insurer From Contesting Coverage Under an Exclusion 1 Selling Goods at Reduced Prices Constitutes Implied Disparagement, and Is Covered As a Disparagement Offense According to California Court 2 Federal Court in California Finds Pleading Is Enough to Create Potential for Coverage Without Supporting Documentation of Damage or Liability 3 Sixth Circuit Holds Business Risk Exclusion Bars Coverage for Punctured Cans of Dog Food 4 First Circuit Applies Reasonable Diligence Coverage Trigger to Find a Duty to Defend 5 District Court in Florida Finds Total Pollution Exclusion Precludes Coverage for Chinese Drywall Suit 6 Ashley L. Conaghan, Associate in the Chicago Office Wisconsin Supreme Court Finds Failure to Issue a Reservation of Rights Letter Does Not Preclude Insurer From Contesting Coverage Under an Exclusion T he Wisconsin Supreme Court held that an insurer did not waive, and was not estopped from asserting, an exclusion to preclude coverage even though the insurer unsuccessfully defended the insured in an underlying trial without issuing a reservation of rights letter. Maxwell v. Hartford Union High School District, No. 2009AP2176, 2012 Wisc. LEXIS 354 (May 30, 2012). The insured, a school district, tendered its defense of a lawsuit brought by a former employee who was terminated for breach of contract, breach of an interim agreement, and violation of her due process rights. The underlying plaintiff sought injunctive relief, monetary damages and declaratory relief interpreting her employment contract. The insurer defended the insured without issuing a reservation of rights letter. The trial court granted partial summary judgment to the former employee on her breach of contract claim. The insurer then notified the insured that it would continue to defend the insured through appeal, but that it was not liable for any judgment for damages awarded to the former employee pursuant to a policy exclusion. The exclusion barred coverage for that part of any award or settlement which is, or reasonably could be deemed to be, compensation for loss of salary California Illinois New Jersey New York

2 Continued from Page 1 or fringe benefits of your employee(s). After the trial court awarded approximately $100,000 against the insured, the insured filed a third-party complaint against the insurer. There was no dispute that the policy exclusion precluded coverage; however, the insured argued that the insurer could not assert any coverage defenses, including the exclusion, because the insurer defended the insured without a reservation of rights. The Wisconsin Supreme Court, in a 4-3 decision, held that the failure to issue a reservation of rights letter could not be used to defeat a coverage clause by waiver or estoppel. The court reasoned that waiver and estoppel cannot be used to expand coverage that was not provided for in the insuring agreement, or which was excluded, because the effect would be to create a new insurance contract to cover a risk for which no premium had been paid. However, the court distinguished between coverage clauses and forfeiture clauses and held that forfeiture clauses can be subject to waiver or estoppel. The court reasoned that forfeiture clauses, such as notice conditions, furnish grounds to void coverage when coverage otherwise exists. Consequently, when estoppel or waiver is applied to forfeiture clauses, the scope of coverage is not expanded. In a lengthy dissent, the three dissenting judges accused the majority of ignoring long-standing principles under Wisconsin insurance law. The dissenting justices would have adopted a presumption that when an insurer controls the defense of the insured without reserving rights, the insured has been prejudiced and the insurer therefore should be estopped from raising any coverage defenses, regardless of whether the defense to coverage is based on the insuring agreement, an exclusion, or a forfeiture clause. Although the Wisconsin Supreme Court ruled in the insurer s favor, it is better practice to timely issue a reservation of rights letter to preserve all defenses. While coverage clauses or exclusions may not be defeated by waiver or estoppel in Wisconsin, forfeiture defenses, such as notice provisions and cooperation clauses, are still subject to waiver and/or estoppel if these defenses are not timely raised in a reservation of rights letter. Moreover, issuance of a reservation of rights letter enhances communication with the insured and provides evidence of good faith. David Simantob, Partner in the Los Angeles Office Elizabeth L. Musser, Associate in the Los Angeles Office Page 2 Selling Goods at Reduced Prices Constitutes Implied Disparagement, and Is Covered As a Disparagement Offense According to California Court A California appellate court determined that coverage was available under a CGL policy s personal injury disparagement offense, where underlying actions alleged that the insured clothing retailer Charlotte Russe devalued a clothing manufacturer s apparel by selling it at reduced prices. Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969 (June 20, 2012). Travelers Property Casualty Company of America ( Travelers ) issued two consecutive CGL policies providing coverage to clothing retailer Charlotte Russe. The policies provided coverage for various personal injury and advertising injury enumerated offenses, including [o]ral, written, or electronic publication of material that slanders or libels a person or organization or disparages a person s or organization s goods, products or services. Clothing manufacturer Versatile Entertainment, Inc. filed several actions against retailer Charlotte Russe, asserting causes of action for breach of contract, declaratory relief, and fraudulent and negligent misrepresentation. Versatile did not assert a cause of action for disparagement or trade libel, but alleged that Charlotte Russe caused Versatile s premium People s Liberation brand to be devalued by selling the apparel at rock-bottom prices. Charlotte Russe argued that selling the clothing at low prices potentially had a disparaging effect, and that coverage was owed under the Travelers policies disparagement offense. Travelers denied coverage and filed a declaratory judgment action, arguing that reduction of a product s price is not disparagement of the product. The trial court ruled in Travelers favor on summary judgment. The appellate court reversed. The court found that a cause of action for trade libel is not a prerequisite for finding that coverage is available under the policies personal injury disparagement offense. The fact that Charlotte Russe sold Versatile s apparel at low prices was sufficient to create disparagement by innuendo or implication. In response to Travelers argument that Charlotte Russe made no alleged false statement about Versatile s products, the court found that each element of a cause of action does not need to be alleged for coverage to be owed. In any event, the court concluded that a false statement is not necessarily a required element of a trade libel claim.

3 Continued from Page 2 In finding that each element of a trade libel claim need not be asserted in the operative complaint, the appellate court failed to acknowledge cases providing that although each element need not be alleged, facts supporting each element must be alleged. See CNA Cas. Co. v. Seaboard Surety Co., 222 Cal. Rptr. 276 (Cal. Ct. App. 1986). The court in Charlotte Russe cites in a footnote, but fails to discuss Total Call International, Inc. v. Peerless Insurance Company, 104 Cal. Rptr. 3d 319 (Cal. Ct. App. 2010), which holds that disparagement requires a specific disparaging statement that explicitly or implicitly references a competitor s goods. The limited case analysis may be due to the fact that the decision was originally unpublished. However, the appellate court changed the publication status to published on July 13, 2012, and denied Travelers request for reconsideration on July 31, We anticipate that Travelers will file a petition for review by the California Supreme Court. In the meantime, this thinly reasoned decision has the potential to expand the availability of coverage for implied disparagement. If disparagement can be inferred from any alleged marketing or handling of another s goods, disparagement coverage could conceivably be available any time unfair competition claims or other claims involving another s goods are asserted, which surely goes far beyond the intended scope of disparagement coverage. Linda Bondi Morrison, Partner in the Orange County Office Federal Court in California Finds Pleading Is Enough to Create Potential for Coverage Without Supporting Documentation of Damage or Liability A federal district court declined to relieve an insurer of its duty to defend based on lack of documentation of damage or liability arising out of its insured s work, when the complaint against the insured sufficiently alleged third-party damage. Kaufman & Broad Monterey Bay v. Travelers Property Casualty Co., No. 10-CV-2856, 2012 U.S. Dist. LEXIS (N.D. Cal. July 18, 2012). Travelers issued general liability policies to Norcraft Companies, a cabinet installer, under which Kaufman & Broad ( KB Home ) was an additional insured. KB Home and Norcraft entered into subcontracts to furnish, deliver and install cabinets at certain homes within housing developments in Monterey, California. Certain homeowners sued KB Home alleging construction defects. KB Home tendered the defense and indemnity of the litigation to Travelers under the Norcraft policies on April 1, The tender included copies of pleadings, a stipulation entered in the litigation, the subcontract and additional insured documentation. Travelers acknowledged receipt of the tender and requested additional documentation, including defect lists, expert reports, documentation related to the alleged defects and deficiencies, and additional pleadings. In response, KB Home provided a homeowners matrix and some additional pleadings. KB Homes also advised that it would forward a defect list once it had been received. On July 6, 2009, Travelers noted in its internal claims notes that it is likely some, although minor, damages resulted from [cabinet] installation. Damages to the walls or pulling away from the walls could be attributed to installation. Travelers issued a letter on that date accepting KB Home s tender. The letter requested additional information that would help Travelers in its evaluation of the demand for payment of defense expenses. Three months later, Travelers requested documentation of damage caused by Norcraft. KB Home responded that no defect list was available to date. On November 5, 2009, Travelers unit manager conducted a review of KB Home s tenders and found that they lacked documentation of damage or liability arising out of Norcraft s work. On December 10, 2009, Travelers ed KB Home stating, We will be withdrawing our acceptance. On March 9, 2010, Travelers sent KB Home a letter saying that it was withdrawing from KB Home s defense, citing to an absence of allegations that give rise to a potential of property damage sustained by the plaintiffs arising out of the product provided or the work performed by Norcraft. On May 27, 2010, KB Home filed suit against Travelers alleging breach of contract and seeking declaratory relief. KB Home provided Travelers with a defect list that identified resulting damage from Norcraft s work on August 4, On December 17, 2010, based on the defect list, Travelers sent a letter to KB Home agreeing to participate in KB Home s defense from August 4, 2010, forward. The parties filed multiple cross-motions for summary judgment and partial summary judgment. A key issue was whether Travelers was required to defend KB Homes from the date of tender, April 1, The court answered in the affirmative, pointing to allegations in the complaint that the defendants did not construct the property in a workmanlike manner, as manifested by numerous defects which have resulted in damage to the homes and their component parts. The defects include... cabinet and wood trim defects. It rejected Travelers argument that the complaint does not allege that other property was damaged as a result of the Page 3

4 Continued from Page 3 cabinets, in particular that the complaint alleged only cabinet and wood trim defects and that the cabinets were installed so as to interfere with the cabinets useful life. The court concluded that Travelers reading of the complaint was too narrow and considered only the last sentence of the allegation while ignoring the remainder of the paragraph. As the allegations of the complaint sufficiently created a potential for coverage, Travelers could not rely upon lack of documentation of damages or liability. This decision underscores that when evaluating the duty to defend in California, insurers are bound to interpret the allegations in pleadings broadly when considering whether a duty to defend exists. Under Montrose Chemical Corp. of California v. Superior Court, 6 Cal. 4th 287 (1993) and other well-established authority, [a]ny doubt as to whether the facts establish the existence of a defense duty must be resolved in the insured s favor. Complaints alleging construction defects are often plead in such a manner as to make it difficult to determine what resulting damage may have been caused by the insured s work or product, and when such damage is alleged to have occurred. This type of information often must be secured through requests for information directed to the insured or through independent means. However, it is important that insurers not delay a determination of a duty to defend while awaiting such information from the insured, especially if the allegations of the pleadings are otherwise sufficient to create a potential for coverage. The consequences of failing to promptly defend in California can be serious, resulting in, among other things, the insurer s forfeiture to control the defense. (See June 2012 CGL Dispatch: Travelers Property Casualty Co. v. Centex Homes, p.2.) Sixth Circuit Holds Business Risk Exclusion Bars Coverage for Punctured Cans of Dog Food Laura J. Pfeiffer, Associate in the Chicago Office The Sixth Circuit held that exclusion j(6), one of the business risk exclusions in a commercial general liability policy, precluded coverage for punctured cans of dog food since the insured s work with the cans was incorrectly performed. Express Packaging of Ohio, Inc. v. American States Insurance Co., No , 2012 U.S. App. LEXIS (6th Cir. June 29, 2012). Express Packaging of Ohio, Inc. ( Express Packaging ) was in the business of wrapping and packaging products for various food producers. It obtained a commercial general liability insurance policy from American States Insurance Company ( American States ) to cover its operations. In 2008, Mars Petcare US ( Mars ) hired Express Packaging to package its dog food on site. Mars delivered the canned dog food wrapped in a cellophane overlay to Express Packaging. Upon receipt, Express Packaging s automated cutting conveyor system would cut the cellophane overlay (without touching the cans) so Express Packaging could rewrap the cans with Mars packaging. The automated cutting conveyor system malfunctioned in the course of removing the cellophane from the cans, causing the cans to puncture, spoil and explode. As a result, Mars recalled approximately 821,424 cases of dog food while another 13,261 were destroyed. Despite never determining why the machine malfunctioned and after notifying American States, Express Packaging voluntarily reimbursed Mars in the amount of $241,527 for the loss. American States denied Express Packaging s request for indemnification and Express Packaging filed the instant action. The district court granted summary judgment in favor of American States. Express Packaging appealed, and the Sixth Circuit affirmed. Express Packaging insisted that the policy afforded coverage for the loss as it was property damage caused by an occurrence that [took] place within the coverage territory. In contrast, American States maintained that the loss was excluded under the policy s business risk exclusions. The Sixth Circuit agreed that exclusion j(6) barred coverage. That exclusion bars coverage for property damage to [t]hat particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it. In turn, the policy defined property damage as [p]hysical injury to tangible property, including all resulting loss of use of that property and your work as (1) [w]ork or operations performed by you or on your behalf; and (2) [m]aterials, parts or equipment furnished in connection with such work or operations. According to the Sixth Circuit, exclusion j(6) unequivocally barred coverage for the damage to the cans of dog food. Specifically, the court determined that the canned dog food was physically injured tangible property falling within the ambit of property damage. Express Packaging s equipment malfunctioned in the process of handling the canned dog food and removing the cellophane. As such, Express Packaging s service was incorrectly performed on the cans. The Sixth Circuit further noted that its decision aligns with cases from the Ohio Court of Appeals, which have applied business risk exclusions to preclude coverage for damage inherent to performing a particular type of work. Since Express Packaging was hired to work with the cans and Page 4

5 Continued from Page 4 damaged the cans by incorrectly performing service on them, the court rejected Express Packaging s contention that the business risk exclusion was inapplicable. Express Packaging presents a relatively straightforward application of the language of one of the business risk exclusions in a comprehensive general liability policy, which precluded coverage for property damage arising from the insured s defective work on a product. The court correctly construed the exclusion and gave proper effect to the plain language of the exclusion. First Circuit Applies Reasonable Diligence Coverage Trigger to Find a Duty to Defend Elizabeth Caraballo, Associate in the Newark Office The court held that under Rhode Island law an insurer has a duty to defend for part of the remediation costs in connection with the cleanup of a Superfund site as coverage was triggered by an occurrence that took place when property damage manifested itself, or was discovered, or in the exercise of reasonable diligence was discoverable. Travelers Casualty and Surety Co., Inc. v. Providence Washington Ins. Co., Inc, 685 F.3d 22 (1st Cir. 2012). Travelers Casualty and Surety Co., Inc. ( Travelers ) appealed the district court s summary judgment ruling in favor of Providence Washington Ins. Co. ( PWIC ) that held that PWIC did not owe New England Container Co., Inc. ( NE ) a duty to defend, and therefore was not obliged to join Travelers defense of NE in an underlying action involving cleanup costs for a Superfund site (the Site ). The EPA issued an administrative order to compel NE and Emhart Industries ( Emhart ) to remove hazardous substances disposed of at the Site as part of the former operations of NE. Emhart sued NE to recover at least some of the costs that Emhart had been paying and would be paying in connection with its cleanup of the Site. It alleged that NE operated a reconditioning steel drum facility on the Site from about 1952 until the early 1970s and that spills and leaks of the residual contents of the drums had occurred. Both insurers provided commercial general liability policies to NE - Traveler s policies spanned from 1969 to 1982, and PWIC s policies spanned from 1982 to The district court held that Emhart s complaint failed to show that the damage alleged against NE even potentially occurred between 1982 and The First Circuit disagreed with the district court s analysis, finding that looking only to the timing of NE s alleged polluting activities was too narrow of a focus. Consideration of the potential timing of the property damage itself was needed. The court held that the doctrine of the reasonable diligence coverage trigger applied and that it did not require a temporal overlap between the policy period and NE s active business operations during which the allegedly damaging activity took place. Rather, the ultimate resolution of the coverage trigger question depended on evidence that NE had some reason to test for the contamination and must actually have been able to discover it in the exercise of reasonable diligence during the policy periods. PWIC argued that the complaint lacked any allegations showing that NE had a reason to test for environmental contamination or that any such property damage was capable of detection during the policy periods. The court rejected this argument and found that a fair reading of the allegations in accord with a broad pleadings test showed potential coverage. The court conceded that the complaint did not include specific allegations showing when property damage became detectable, but noted that the potential magnitude of NE s alleged polluting activities supports a reasonable inference that property damage was discoverable in the exercise of reasonable diligence during the mid- 1980s (i.e. some time before its actual discovery in the 1990s). The court held that Emhart s complaint gave rise to the potential that facts exist demonstrating that environmental property damage caused by NE was discoverable in the exercise of reasonable diligence at the Site during the PWIC policy periods. In doing so, the First Circuit reversed the district court s decision, vacated the judgment, and remanded for further proceedings. The court also noted that the query of when latent environmental damage becomes reasonably discoverable is ultimately a fact-intensive matter, often requiring considerable investigation, which may not necessarily take place prior to the inception of a private contribution action between multiple polluters. This insured-friendly decision under Rhode Island law cautions insurers that allegations of environmental property damage will be viewed with a wide scope factoring in reasonable inferences as to when property damage should have been discoverable. Page 5

6 Joanna L. Crosby, Partner in the Newark Office Continued from Page 5 District Court in Florida Finds Total Pollution Exclusion Precludes Coverage for Chinese Drywall Suit In First Specialty Insurance Corp. v. Milton Construction Company, No , 2012 U.S. Dist. LEXIS 97972, (S.D. Fla. July 16, 2012), a Chinese drywall case, the court granted summary judgment to the insurer applying the Total Pollution Exclusion. Specifically, the insured, Milton Construction Company ( Milton ) alleged that the Chinese drywall caused property damage and personal injury. Milton was sued in a putative class action in the Eastern District of Louisiana. All of the plaintiffs with claims against Milton were residents and homeowners at a condominium complex in Florida. Milton was insured by First Specialty Insurance Corporation ( First Specialty ) under two CGL policies during the relevant time periods. The policies contained the Total Pollution Exclusion. First Specialty disclaimed coverage and filed a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify Milton in the Louisiana putative class action suit. The Milton court, applying Florida law, cited no Florida state case law specifically addressing Chinese drywall. However, it relied upon a Florida case that addressed the pollution exclusion in the context of an accidental ammonia spill and an accidental spray of insecticides near a citrus grove, Deni Associates of Florida, Inc. v. State Farm Fire & Casualty, 711 So. 2d 1135 (Fla. 1998), as well as several Southern District of Florida decisions regarding Chinese drywall, and concluded that the drywall s release of sulfur compounds both contaminated and irritated people and things.[so that] the sulfur compounds constitute pollutants and the Total Pollution Exclusion applies. In granting summary judgment to the CGL insurer First Specialty, the Milton court rejected the insured s argument that the Total Pollution Exclusion was limited to bar coverage for environmental or industrial pollution only. According to the court, while Louisiana case law takes such a position, Florida does not. Here, the court recognized that the insurer would not get the same result if Louisiana law applied. The location of an underlying suit does not, therefore, control what law applies to a coverage determination. This decision reminds insurers that choice of law in a coverage argument is an important issue that should not be overlooked. If you have any questions concerning this bulletin or the Tressler General Liability & Excess Insurance Group, please contact our editors: Joanna L. Crosby - Newark Office 973/ jcrosby@tresslerllp.com Linda Tai Hoshide - Los Angeles Office 310/ lhoshide@tresslerllp.com Michael W. Morrison - Chicago Office 312/ mmorrison@tresslerllp.com Kathleen A. Sweitzer - Chicago Office 312/ ksweitzer@tresslerllp.com Tressler Offices: 233 S Wacker Drive 22nd Floor Chicago, IL / Fax 312/ Broad Street Suite 1510 Newark, NJ / Fax 973/ West Briarcliff Road Bolingbrook, IL / Fax 630/ One Penn Plaza Suite 4701 New York, NY / Fax 646/ South Washington Avenue Park Ridge, IL / Fax 847/ Von Karman Avenue Suite 800 Irvine, CA / Fax 949/ Avenue of the Stars Suite 450 Los Angeles, CA / Fax 310/ This newsletter is for general information only and is not intended to provide and should not be relied upon for legal advice in any particular circumstance or fact situation. The reader is advised to consult with an attorney to address any particular circumstance or fact situation. The opinions expressed in this newsletter are those of the authors and not necessarily those of Tressler LLP or its clients. This announcement or some of its content may be considered advertising under the applicable rules of the Supreme Court of Illinois, the courts in New York and those in certain other states. For purposes of compliance with New York State Bar rules, our headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, Prior results described herein do not guarantee a similar outcome. The information contained in this newsletter may or may not reflect the most current legal developments. The articles are not updated subsequent to their inclusion in the newsletter when published. Click here to add yourself, or someone else, to any of our mailing lists! Page 6