RECENT DEVELOPMENTS IN INSURANCE
COVERAGE
Roberta D. Anderson, Wystan M. Ackerman, Peter J. Biging,
Gregory R. Giometti, Jason W. Hall, J. Scott Miller,
and Joanne L. Zimolzak
I. Introduction................................................................................
II. Insurance Coverage-Related Class Actions...............................
A. Property Insurance Class Actions........................................
B. Auto Insurance Class Actions ..............................................
C. Subrogation Class Actions ...................................................
III. Insurer’s Obligation to Provide Independent Counsel ............
A. Pre-Lawsuit “Adversarial Communications” ......................
B. Definition of a Qualifying “Conflict” .................................
1. “Same Facts” ..................................................................
2. “Potential” Conflicts ......................................................
C. Payment of Independent Counsel Fees ..............................
IV. Insurance Agents and Brokers Errors & Omissions
Coverage ............................................................................................
A. Duty to Advise......................................................................
B. Duty to Procure ...................................................................
V. Climate Change Tort Claims....................................................
A. Native Village of Kivalina v. Exxon-Mobil Corp. ...................
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Roberta D. Anderson is a partner in the Pittsburgh office of K&L Gates. Wystan M.
Ackerman is a partner in the Hartford office of Robinson & Cole LLP. Peter J. Biging is
a partner in the New York City office of Lewis Brisbois Bisgaard & Smith LLP. Gregory R.
Giometti is president of Gregory R. Giometti & Associates in Denver. Jason W. Hall
is an associate in the Washington, D.C., office of McKenna Long & Aldridge LLP.
J. Scott Miller is a senior associate in the Los Angeles office of Morris Polich & Purdy
LLP. Joanne L. Zimolzak is a partner in the Washington, D.C., office of McKenna
Long & Aldridge LLP.
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B. AES Corporation v. Steadfast Insurance Company ..................
1. Recap of the AES Litigation .........................................
2. Decision on Rehearing...................................................
C. Other Climate Change-Related Civil Litigation................
D. Looking Ahead .....................................................................
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i. introduction
There have been numerous developments during the past year in the
sphere of insurance coverage litigation. Although uniformity among the
states may not be the rule, recent cases illustrate the factors that most
often influence the courts’ analyses and rulings. This article considers
recent cases that address emerging coverage areas, most notably climate
change, and those that provide significant developments in existing coverage areas, including class actions. The article is not intended to be allinclusive but rather to cover major trends that are likely to affect insurance coverage in 2013 and beyond.
ii. insurance coverage-related class actions
The past year was an active one for class actions against insurance companies relating to insurance claims, with significant decisions in property
insurance, auto insurance, and subrogation. The key decisions include
significant victories for both insurers and the plaintiffs’ bar.
A. Property Insurance Class Actions
One of the most significant decisions last year in property insurance class
actions was the Alabama Supreme Court’s reversal of class certification in
a general contractor overhead and profit case.1 In these cases, plaintiffs’
attorneys typically take the position that there is or should be a so-called
“three-trade rule” under which insurers must always include general
contractor overhead and profit if three or more “trades” are involved
in the loss.2 In National Security Fire & Casualty Company v. DeWitt, the
Alabama Supreme Court surveyed the law across the country on this
issue and agreed with the strong majority view that class certification
was improper.3 The court explained that, regardless of the existence or
non-existence of a “three-trade rule,”
1. Nat’l Sec. Fire & Cas. Co. v. DeWitt, 85 So. 3d 355 (Ala. 2011).
2. Id. at 357–58.
3. Id. at 355.
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[a]lthough this case will involve issues that are common to all class members,
it is highly likely that it will also involve individualized evidence regarding
whether it was reasonably foreseeable that the services of a general contractor
would be necessary in each of the [putative class members’] claims.4
Another significant decision was the Louisiana Supreme Court’s opinion in Oubre v. Louisiana Citizens Fair Plan,5 which involved a Louisiana
statute that provides that an insurer must initiate loss adjustment within
thirty days after notice of a catastrophic loss and within fourteen days
for noncatastrophe claims.6 The penalty for failing to comply with this
requirement is “an amount not to exceed two times the damages sustained
or five thousand dollars, whichever is greater.”7 Plaintiffs claimed and
ultimately were able to prove, through records obtained from Louisiana
Citizens, that the insurer did not have an adjuster call the insured to
schedule an inspection on many thousands of claims within thirty days
after Hurricanes Katrina and Rita.8 The court’s majority concluded that
this statute on its face provided for an automatic and mandatory penalty
for failure to initiate loss adjustment within the thirty days.9 The court
also ruled, without much explanation, that the trial court did not err in
awarding a penalty of $5,000 on each claim of putative class members.10
The U.S. Supreme Court denied certiorari where review was sought on
due process grounds.11
In two other significant class action rulings, the District of Arizona
found class certification appropriate in a case involving coverage for polybutylene (PB) plumbing,12 and the Eastern District of Tennessee dismissed a putative class action alleging improper calculation of actual cash
value by withholding certain items.13
B. Auto Insurance Class Actions
The Colorado Supreme Court issued a significant decision in State Farm
Mutual Automobile Insurance Company v. Reyher,14 one of many putative
class actions that have been filed involving the use of databases by insurers
to evaluate the reasonableness of medical expenses on auto insurance
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Id. at 384.
79 So. 3d 987 (La. 2011).
Id. at 1001 (citing LA. REV. STAT. § 22:658(A)(3)).
LA. REV. STAT. § 22:1220(C) (recodified as § 22:1973).
Oubre, 79 So. 3d at 992.
Id. at 1000.
Id. at 1006.
Oubre v. La. Citizens Fair Plan, 133 S. Ct. 30 (2012).
Guadiana v. State Farm Fire & Cas. Co., 2012 WL 243737 (D. Ariz. Jan. 25, 2012).
Stiers v. State Farm Ins. Co., 2012 WL 2405982 (E.D. Tenn. June 25, 2012).
266 P.3d 383 (Colo. 2011), reh’g denied (2012).
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claims.15 The Colorado Supreme Court held that the trial court had
properly denied class certification, reversing a decision by the Colorado
Court of Appeals.16 Notably, the court agreed with the U.S. Supreme
Court’s decision in Wal-Mart Stores, Inc. v. Dukes17 in explaining how a
trial court can properly consider issues on the merits when they overlap
with class issues.18 In Reyher, the trial court was found to have acted
within its discretion because “after rigorously analyzing plaintiffs’ classwide proof, namely the nature of State Farm’s claim review process, the
trial court was satisfied that State Farm did not have a class-wide practice
of relying solely on the database.”19
The Washington Supreme Court upheld class certification in Moeller v.
Farmers Insurance Company of Washington,20 one of numerous class actions
that have been brought on the theory that, under collision coverage, auto
insurers should pay not only for the cost of repairing damage to a vehicle
but also for any diminished value that a vehicle might sustain because
it was in an accident. The central issue in dispute was whether plaintiff
could prove liability and damages for the putative class as a whole through
mathematical modeling without showing diminished value was sustained by
vehicles owned by each member of the putative class.21 In a five-four decision, the majority seemed to sidestep that issue, rejecting an argument that
plaintiff had conceded that some class members had no loss, and focused
instead on the abuse of discretion standard.22 The court noted that the
trial court had conducted a lengthy evidentiary hearing and that the result
was not “unreasonable or untenable.”23 A dissenting opinion reasoned that
“the trial plan effectively converts the damages element of [plaintiff ’s] claim
into an affirmative defense. This impermissibly shifts the burden to prove
damages from the plaintiffs to the defendant. This offends due process.”24
In Ortega v. Topa Insurance Co.,25 the California Court of Appeal affirmed a decision striking the class allegations on the pleadings in a putative class action involving the use of non-original equipment manufacturer (OEM) parts to repair damaged automobiles.26 The court held that
15. E.g., LaBerenz v. Am. Family Mut. Ins. Co., 181 P.3d 328 (Colo. Ct. App. 2007);
Bemis v. Safeco Ins. Co. of Am., 948 N.E.2d 1054 (Ill. App. Ct. 2011); Avery v. State
Farm Mut. Auto. Ins. Co., 746 N.E.2d 1242 (Ill. App. Ct. 2001).
16. Reyher, 266 P.3d at 390.
17. 131 S. Ct. 2541 (2011).
18. Reyher, 266 P.3d at 389.
19. Id. at 390.
20. 267 P.3d 998 (Wash. 2011).
21. Moeller, 267 P.3d at 1005–06.
22. Id.
23. Id. at 1006.
24. Id. at 1012 (Alexander, J., dissenting).
25. 1141 Cal. Rptr. 3d 771 (Ct. App. 2012).
26. Id. at 784.
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common issues did not predominate on the face of the allegations because
each putative class member would have to prove that the particular nonOEM parts used in his or her repair were inferior, and the question of
whether and when a putative class member received notice that nonOEM parts were used would require an individual inquiry.27 The court distinguished a case in which class certification was upheld, where the class
allegations were narrowly tailored to only sheet metal parts, commonly
known as crash parts.28
C. Subrogation Class Actions
Subrogation practices, specifically the “made whole doctrine,” have become
a new focus of class action litigation against insurers in 2011 and 2012. The
Pennsylvania Supreme Court affirmed the dismissal of one of these putative
class actions in Jones v. Nationwide Property & Casualty Insurance Co.,29 which
involved an auto insurance claim where the insurer had reimbursed the
insured for a pro rata share of the deductible. The insured claimed that
this practice violated Pennsylvania’s common law made whole doctrine.30
The Pennsylvania Supreme Court held that this claim was not viable as a
matter of law, explaining that
application of the made whole doctrine would require the insured to recover
the entire deductible from the proceeds of any action against the tortfeasor
prior to the insurance company’s recovery, thus in essence creating a nodeductible policy, in the limited circumstances of cases involving subrogation
recoveries, in violation of [a Pennsylvania statute].31
The court further explained that the result advocated by the insured
“would force the insurer essentially to cover the risk of the deductible
where the insured has not paid premiums to cover that risk.”32
In Vandenbrink v. State Farm Mutual Automobile Insurance Company,33
another putative class action premised on the made whole doctrine and
focusing on personal injury protection and Med Pay claims, a Florida federal district court struck the class allegations on the pleadings.34 The
court explained that class treatment was facially improper because “the
threshold inquiry is whether the Plaintiffs were made whole through
their settlements,” and this would require individual inquiries into “the
27.
28.
29.
30.
31.
32.
33.
34.
Id. at 782.
Id. at 783–84 (citing Lebrilla v. Farmers Group, Inc., 16 Cal. Rptr. 3d 25 (2004).
32 A.3d 1261 (Pa. 2011).
Id. at 1266.
Id. at 1271.
Id. at 1272.
2012 WL 3156596 (M.D. Fla. Aug. 3, 2012).
Id. at *1.
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damages incurred by an individual plaintiff, the amount of the settlement,
and the portion of the settlement for medical payments.”35
iii. insurer’s obligation to provide
independent counsel
When an insurer provides a defense under reservation of rights, including
the right to assert defenses to coverage based on claims raised in the
underlying action against the insured, a conflict of interest may arise
between the insurer and the insured.36 Under these circumstances, insurers must provide independent counsel of the insured’s choosing to represent the insured’s interests in the litigation.37 Several notable decisions
this year addressed the scope of an insurer’s obligation to provide and
fund independent counsel. In particular, courts have considered when a
conflict sufficient to entitle the insured to independent counsel arises,
and the scope of an insurer’s rights and obligations with respect to controlling the litigation and paying independent counsel’s fees. As the decisions below indicate, courts have consistently ruled in favor of insurers.
A. Pre-Lawsuit “Adversarial Communications”
In Quality Concrete Corp. v. Travelers Property Casualty Co. of America,38 the
Rhode Island Supreme Court refused to extend the right of an insured to
independent counsel funded by the insurer where a suit against the
insured had not yet been commenced. In Quality Concrete, a young boy
died as the result of trespassing on the insured’s property to play on its
industrial equipment.39 After receiving a letter from the attorney for the
boy’s estate threatening suit, the insured notified Travelers.40 Travelers
agreed to defend the insured while reserving the right to deny the claim
in the event that plaintiff sought punitive damages, given that fewer
than ten years before another boy had died on the insured’s site under
similar circumstances.41 Travelers also advised the insured that it might
“wish to consult with personal counsel (at your own expense) to discuss
a possible future claim of punitive damages,” and the insured did so.42
35. Id. at *3.
36. Scott E. Turner, Alex B. Mahler & Rosanne Stafiej, The Decline of the So-Called Doctrine of Continuing Bad Faith, 43 TORT TRIAL & INS. PRAC. L.J. 199 (2008).
37. See San Diego Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 208 Cal. Rptr. 494 (1984)
(holding that insurer must provide independent counsel, at its expense, when an insurer issues a reservation of rights on a coverage issue that could be affected by the handling of the
underlying case) (codified as CAL. CIV. CODE § 2860).
38. 43 A.3d 16 (R.I. 2012).
39. Id. at 18.
40. Id.
41. Id. at 18 n.2.
42. Id. at 19.
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A settlement was later reached with no lawsuit having ever been
brought against Quality Concrete.43 After Travelers denied any obligation to reimburse the insured for its independent counsel’s fees, the
insured filed suit against Travelers for breach of contract, breach of fiduciary duty, and bad faith.44 The trial court granted Travelers’ motion to
dismiss, reasoning that because no lawsuit had been filed, any potential
conflict between insurer and insured, sufficient to trigger the insurer’s
obligation to provide independent counsel, had “yet to ripen.”45
On appeal, the Rhode Island Supreme Court observed that the insured
was effectively asking the court to extend the scope of the insured’s right
to independent counsel to include “an ‘adversarial communication’ from a
potential plaintiff with respect to an incident involving potential liability
on the part of the insured.”46 The court declined to do so, citing Rhode
Island authority supporting the notion that the duty to appoint independent counsel requires that a civil action actually be commenced.47
B. Definition of a Qualifying “Conflict”
1. “Same Facts”
Decisions by the Fifth Circuit and a federal district court decision applying Texas law further reinforced the rule in Texas and the Fifth Circuit
that for an insured’s right to independent counsel to arise, the facts to be
adjudicated in the underlying action must be the same facts on which coverage depends.48 In Downhole Navigator, L.L.C. v. Nautilus Insurance Co.,49
the insured, an oil drilling services contractor, had been hired by the
third-party claimant to redirect an oil well toward a better location within
a desired reservoir.50 The claimant later alleged in its action against the
insured that the insured performed its services negligently, causing damage
to the well.51 The insured tendered the defense of the action to its CGL
insurer, Nautilus, which agreed to provide a defense under reservation of
43. Id.
44. Id.
45. Id. at 20.
46. Id. at 21–22.
47. Quality Concrete additionally argued that it notified Travelers several times that a
conflict existed and that it had hired independent counsel to represent it. Travelers had responded by denying there was a conflict, without expressly accepting or rejecting the insured’s position that it was entitled to independent counsel. Quality Concrete argued that
these actions constituted “approval by ratification.” Id. at 22. The court rejected this theory,
finding that after an insurer advises the insured that it may consult with counsel at its own
expense, failing to object when the insured retained counsel does not constitute “ratification,” sufficient to obligate the insurer to pay the independent counsel’s fees. Id. at 22–23.
48. Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 686 F.3d 325 (5th Cir. 2012);
Partain v. Mid-Continent Specialty Ins. Serv., Inc., 838 F. Supp. 2d 547 (S.D. Tex. 2012).
49. 686 F.3d 325 (5th Cir. 2012).
50. Id. at 327.
51. Id.
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rights, reserving its right to decline indemnity coverage if the underlying
suit fell under any of a number of exclusions in the policy.52 The insured
filed for declaratory relief, claiming that this “decision to act under reservation of rights has created a material conflict with respect to the selection
of counsel,” thereby forcing the insured to hire its own counsel.53 Noting
the absence of a coverage issue, the insurer maintained that the insured is
not entitled to separate counsel unless a coverage issue develops.54 Affirming summary judgment for the insurer, the Fifth Circuit cited the rule in
Texas that an insurer’s obligation to pay for independent counsel is triggered only when the coverage issue turns on the same facts at issue in
the underlying action.55 Had the CGL policy excluded negligence from
coverage, the court reasoned, the issue in the underlying action (i.e., whether
the insured acted negligently) would have been based on the same facts.56
That was not the case here.57
The U.S. District Court for the Southern District of Texas applied the
“same facts” standard to deny the insured’s claim for independent counsel
fees in Partain v. Mid-Continent Specialty Insurance Services, Inc.58 In Partain, the insureds brought an action against their general liability insurer,
Mid-Continent, seeking damages for breach of contract and a declaration
that that they were entitled to select their own counsel in an underlying
action arising from their unauthorized use of copyrighted architectural
designs.59 The court agreed that the insureds were not entitled to independent counsel.60 In finding that no disqualifying conflict existed entitling them to independent counsel,61 the court applied the Texas rule that
[i]t is not until “the facts to be adjudicated in the liability lawsuit are the same
facts upon which coverage depends” that a potential conflict becomes a disqualifying one, entitling an insured to select independent counsel [at the insurer’s expense].62
The court observed that the Texas standard for evaluating disqualifying conflicts is stricter than that of other states.63 Noting that the Texas
52. Id.
53. Id.
54. Id.
55. Id. at 330 (citing N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004)).
56. Id. at 329.
57. Id.
58. 838 F. Supp. 2d 547 (S.D. Tex. 2012).
59. Id. at 553.
60. Id. at 568–69.
61. Id.
62. Id. at 567 (citing N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex.
2004)).
63. Id. at 567 n.5 (comparing Texas law to Arkansas (e.g., Union Ins. Co. v. Knife Co.,
Inc., 902 F. Supp. 877, 880 (W.D. Ark. 1995), and New York (e.g., Golotrade Shipping
and Chartering, Inc. v. Travelers Indem. Co., 706 F. Supp. 214, 219 (S.D.N.Y. 1989)).
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Supreme Court has not offered any further clarity on what is meant by the
“same facts” requirement in Davalos or how the requirement is to be
applied,64 the district court found that it must be apparent that facts
upon which coverage depends will be ruled upon judicially in the underlying suit; i.e., the conflict must be “disqualifying” and not merely “potential.”65 Applying this standard, the court examined each of the policy defenses for which Mid-Continent reserved its rights, including the “personal
and advertising injury” coverage provision, whether the occurrence took
place within the policy period, whether the alleged infringement was willful, whether a covered party was responsible for the infringement, and
whether the insureds gave notice of their claim to Mid-Continent so late
as to prejudice the insurer’s ability to defend the underlying suit.66 Ultimately, the district court found that the facts alleged in the underlying
copyright infringement suit did not give rise to a disqualifying conflict of
interest with respect to any of these coverage defenses that would be sufficient to trigger Mid-Continent’s obligation to appoint independent counsel
to defend the insureds.67
2. “Potential” Conflicts
In Coats, Rose, Yale, Ryman & Lee, P.C. v. Navigators Specialty Insurance
Co.,68 the insured law firm was sued in the underlying litigation by former
clients, who alleged malpractice and breach of fiduciary duty and sought
declaratory relief and compensatory and special damages, including forfeiture of all previously paid attorney fees and costs.69 Coats tendered
the suit to Navigators, which agreed to provide a defense under reservation
of rights.70
Coats first argued that the underlying cause of action for fraudulent
billing practices raised a potential conflict.71 If Navigators reserved its
right to disclaim coverage under the fraud exclusion, Coats contended
that counsel appointed by the insurer would have incentive to steer the
judgment toward a finding of fraud rather than mere negligence.72 Navigators countered that it has never reserved, nor would it reserve, any right
to deny coverage for any claim in the underlying case based on the policy’s
64.
65.
66.
67.
68.
69.
70.
71.
72.
Id.
Id. at 567.
Id. at 568–72.
Id.
830 F. Supp. 2d 216 (N.D. Tex. 2011).
Id. at 218.
Id. at 218–19.
Id. at 219.
Id.
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dishonesty exclusion.73 The court found that any such “potential conflict”
was insufficient to trigger the insured’s right to select independent
counsel.74
Coats next argued that because the Navigators policy covered compensatory damages but not return of fees, which is available only for breach of
fiduciary duty claims and not for malpractice, the insurer’s counsel would
have an interest in steering any damage award toward the return of fees so
that the award would not be covered by the policy.75 The court found that
because the policy covers compensatory damages for both legal malpractice and breach of fiduciary duty, the insurer has a strong incentive to
contest liability on both claims.76 Adding that compensatory damages
and return of fees are not substitutes for one another, the court observed
that the insurer-appointed attorney has no incentive to favor one type of
award over another and every incentive to contest liability altogether.77
Moreover, the insurer has no incentive to concede facts that could lead
to an award for return of fees; such a concession would acknowledge
wrongdoing and potentially increase the compensatory award.78
Finally, Coats argued that the nature of the underlying declaratory
judgment claim created a conflict of interest because Navigators reserved
its rights with regard to “costs arising from declaratory relief.”79 Coats asserted that this created an incentive for the insurer-appointed attorney to
litigate the case in such a way that it will be decided on the declaratory
judgment claim rather than the malpractice or breach of fiduciary duty
claims.80 The court disagreed, noting that Navigators reserved its rights
on the basis that no independent liability can arise from declaratory relief.81
The declarations that the malpractice plaintiffs were seeking would establish many of the factual and legal issues underlying their malpractice and
breach of fiduciary duty claims.82 As such, a ruling in plaintiffs’ favor
would increase the likelihood of Coats’s liability for those claims and
Navigators’ obligation to pay under the policy.83 Thus, both insurer and
insured had the same incentive to vigorously contest the declaratory relief
claim.84 The court ultimately found that no conflict of interest superseded
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
Id.
Id.
Id.
Id. at 221.
Id.
Id.
Id.
Id. at 221–22.
Id. at 222.
Id.
Id.
Id.
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the insurer’s right to select defense counsel and granted Navigators’ motion
for partial summary judgment.85
C. Payment of Independent Counsel Fees
Two notable California decisions this past year came down on the side of
insurers on issues regarding the payment of independent counsel fees,
namely, whether and to what extent an insurer may be obligated to pay
higher fees than those paid to panel counsel.86 First, the Eastern District
of California held that an insurer’s mere reservation with respect to certain issues does not necessarily give rise to the obligation to fund independent counsel fees at a rate higher than its panel counsel rates.87 In Endurance American Specialty Co. v. Lance-Kashian & Co.,88 the insured selected
an international firm that charged significantly higher rates than the
insurer’s generally accepted rates for panel counsel, which the insurer
declined to pay.89 When the insured filed suit seeking to recoup the difference in fees from the insurer, the court denied recovery, stating that
merely issuing a reservation of rights does not entitle the insured to select
independent, Cumis counsel of his choice90 and require the insurer to pay
independent counsel’s fees at a rate higher than the insurer claims is
reasonable.91
Additionally, in Sierra Pacific Industries v. American States Insurance
Co.,92 the court found that the insured was not entitled to a judicial determination that the insurer had a conflict of interest and that the insured
was entitled to independent counsel where the defense was provided without reservation of rights.93 In Sierra, ASIC’s insured, Sierra, was named in
multiple lawsuits stemming from a 2007 wildfire.94 Sierra retained its own
counsel, Downey Brand, and tendered the lawsuits to ASIC for defense
and indemnity.95 ASIC accepted the defense without a reservation of rights
and notified Sierra that it would provide its own panel counsel. Sierra did
not agree with ASIC’s proposed counsel and insisted that Downey Brand
85. Id.
86. Endurance Am. Specialty Co. v. Lance-Kashian & Co., 2011 WL 5417103 (E.D. Cal.
Nov. 8, 2011); Sierra Pac. Indus. v. Am. States Ins. Co., 2012 WL 3150289 (E.D. Cal.
Aug. 1, 2012).
87. Endurance Am. Specialty Co., 2011 WL 5417103, at *22.
88. Id. at *1.
89. Id. at *22.
90. See id. at *20 n.10. The term “Cumis counsel” derives from San Diego Navy Federal
Credit Union v. Cumis Insurance Society, 162 Cal. App. 3d 358 (1984), which recognized the
insurer’s duty to appoint independent counsel for its insured under certain circumstances.
That duty was later codified in § 2860 of the California Code of Civil Procedure.
91. Id. at *27–29.
92. 2012 WL 3150289 (E.D. Cal. Aug. 1, 2012).
93. Id. at *9.
94. Id. at *1.
95. Id. at *2.
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continue as defense counsel.96 ASIC notified Sierra that although it was not
entitled to independent counsel, ASIC would allow Downey Brand to continue as defense counsel but at its $150 per hour panel counsel rate.97 Sierra
later forwarded Downey Brand’s invoices to ASIC for payment, and the
firm’s rates were substantially higher than ASIC’s panel counsel rate.
After ASIC adjusted Downey Brand’s bills to the panel counsel rate and deducted some of the charges, Sierra filed its complaint against ASIC.98 ASIC
counterclaimed, seeking a declaration that it was entitled to control Sierra’s
defense in the underlying actions and that panel counsel did not have a conflict of interest.99 The insurer also sought damages based on Sierra’s breach
of the duty to cooperate and breach of contract for refusing to relinquish
control over the lawsuit and refusing to accept panel counsel’s rates.100
Sierra filed a motion for judgment on the pleadings and a motion to dismiss the counterclaim, both of which ASIC opposed.
The court agreed with ASIC and denied Sierra’s motions. First, it
found that ASIC’s counterclaim raised issues independent of the coverage
issues and did not create a disqualifying conflict of interest.101 Citing
California law on disqualifying conflicts, which is similar to the law of
Texas, the court stated that “[t]o establish a sufficient conflict to disqualify
the insurer from controlling the defense of its insured, the conflict must
be ‘significant, not merely theoretical, actual, not merely potential.’ ”102
The court further found that the conflicts of interest asserted by Sierra
in its motion for judgment on the pleadings were merely “potential,” so
that Sierra was not entitled to a judicial determination that it was entitled
to independent counsel.103
iv. insurance agents and brokers
errors & omissions coverage
A. Duty to Advise
In Sawyer v. Rutecki,104 a claim was made based upon the alleged negligence of the insurance agent in failing to advise the insured of the fact
that coverage had been cancelled for failure to make the requisite premium payments. The court held that, absent a special relationship, the
96. Id.
97. Id.
98. Id. at *3.
99. Id.
100. Id.
101. Id. at *9.
102. Id. at *6 (citing James 3 Corp. v. Truck Ins. Exch., 111 Cal. Rptr. 2d 181 (Ct. App.
2001); Dynamic Concepts, Inc. v. Truck Ins. Exch., 71 Cal. Rptr. 2d 882 (Ct. App. 1988)).
103. Id at *9.
104. 937 N.Y.S.2d 811 (App. Div. 2012).
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insurance agent had no duty to advise its client of cancellation of coverage. The court observed that although notification was the insurer’s statutorily imposed obligation, it was not necessary or appropriate to add it to
the agent’s responsibilities as well.105
In Byrd v. Ortiz,106 plaintiff was injured in a car accident in which both
she and the driver of the other vehicle had insufficient coverage. Following settlement with the other driver for his coverage limits, she brought a
claim against the agent who sold her the policy for failing to recommend
that she purchase adequate uninsured/underinsured motorist (UI/UIM)
coverage.107 Plaintiff alleged that the agent did not advise her about
UI/UIM coverage or ask about any assets she might need to secure
with her coverage.108 Although the trial court dismissed her negligence
claims, the appellate court reversed, holding that the insurance agent
had a duty, as a matter of law,
to explain underinsured/uninsured motorist coverage to the plaintiff, to
explain the consequences of not having a sufficient amount of such coverage,
to recommend the proper amount of coverage based on the plaintiff ’s individual circumstances and to attempt to procure that amount of coverage and
offer it to the plaintiff.109
The court relied on a prior holding in which it had upheld a jury
instruction providing that “selling insurance is a specialized field with specialized knowledge and experience, and that an agent has the duties to
advise the client about the kind and extent of desired coverage and to
choose the appropriate insurance for the client.”110 Although the precedential value of the case may be limited to claims involving the sale of
UI/UIM motorists coverage, this holding could arguably be considered
more broadly applicable, potentially subjecting agents and brokers in
Connecticut to a greater duty of care.
In a case of first impression, the California Court of Appeal found that
“an insurance broker, after procuring a policy of insurance for a developer
on a construction project, [has no] duty to apprise a subcontractor that
was later added as an insured under that policy of the insurance company’s
subsequent insolvency.”111 In Pacific Rim Mechanical Contractors, Inc. v. Aon
Risk Services West, Inc.,112 the developer of a construction project in down105. Id. at 813.
106. 44 A.3d 208 (Conn. App. Ct. 2012).
107. Id. at 211.
108. Id.
109. Id. at 215.
110. Id. at 214.
111. Pac. Rim Mech. Contractors, Inc. v. Aon Risk Ins. Serv. W., Inc., 138 Cal. Rptr. 3d
294, 295 (Ct. App. 2012).
112. Id. at 294.
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town San Diego hired Aon Risk Services to broker an owner-controlled
insurance program (OCIP) in 1999.113 Plaintiff subcontractor was added
as an insured under the OCIP in 2000.114 Aon procured the policy with
Legion Indemnity Co., which, although it was solvent at the time the policy
was purchased, was declared insolvent in 2003.115 When Pacific Rim was
named in a lawsuit brought by the project’s homeowners association in
2009, the subcontractor alleged that, had it known of the insolvency, it
“could [have] and would have immediately suspended work and insisted
that [the contractor] obtain alternative insurance coverage.”116
The trial court dismissed the subcontractor’s claims and the California
Court of Appeal affirmed.117 In so doing, the court noted that requiring
brokers to monitor and advise clients about the solvency of insurers after
procuring coverage would fundamentally change the relationship between
brokers and their insureds.118 Moreover, it would impose an ambiguous
duty because the questions of what might constitute an adverse change in
the insurer’s financial condition sufficient to trigger a duty to notify the
insured would be uncertain.119 The court noted that, although at least
ten states and Puerto Rico have elected to impose a statutory duty upon
brokers to notify an insured of an insurer’s subsequent insolvency following
placement of coverage, California had thus far chosen not to do so.120 The
court firmly concluded that “imposing the duty on insurance brokers as
PacRim requests is properly the role of the Legislature, not the courts.”121
B. Duty to Procure
In American Building Supply Corp. v. Petrocelli Group, Inc.,122 the New York
Court of Appeals held that where issues of fact exist as to a request for
specific coverage, the insured’s “failure to read and understand the policy
should not be an absolute bar to recovery” for negligence and breach of
contract against an insurance broker for failure to procure adequate insurance coverage.123 In 2004, plaintiff engaged a broker to procure CGL
insurance for its leased warehouse facility in the Bronx. Plaintiff allegedly
“specifically requested general liability coverage for its employees in case
113. Id.
114. Id.
115. Id. at 297.
116. Id.
117. Id.
118. Id. at 297–98 (“Insurance brokers owe a limited duty to their clients, which is only
‘to use reasonable care, diligence, and judgment in procuring the insurance requested by an
insured.’ ” (citations omitted)).
119. Id. at 300–01.
120. Id.
121. Id.
122. 979 N.E.2d 1181 (N.Y. 2012).
123. Id. at 1185.
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299
of injury, as required by the lease agreements,” after telling defendant that
“only employees entered the premises, never customers, as no retail business was conducted at the Bronx location.”124 When an employee was injured in a work-related accident, the insurance company denied coverage
based on the terms of the policy.125
The court noted a divergence among lower appellate courts on the
issue of whether failure to review a policy is necessarily a bar to an action
for negligence or breach of contract:
Various appellate courts have held that once an insured has received his or her
policy, he or she is presumed to have read and understood it and cannot rely
on the broker’s word that the policy covers what is requested (citations omitted). However, other appellate courts have been more forgiving and have held
that receipt and presumed reading of the policy does not bar an action for negligence against the broker (citations omitted). This may be such a case.126
This case may be somewhat extreme, involving the alleged purchase of
CGL coverage for a facility that explicitly excluded employees, when
employees were the only people to enter the building.127 As such, it is
possible, as the court noted, that the holding was only that summary judgment was “inappropriate in this matter.”128 However, it makes a significant departure from substantial prior precedent.
v. climate change tort claims
In 2012, courts issued two separate but related decisions addressing the
viability of certain climate change-related nuisance cases and the duty
of insurers to defend such claims. In Native Village of Kivalina v. ExxonMobil Corp., the Ninth Circuit affirmed the dismissal of allegations that
multiple utility companies and other energy producers have emitted massive quantities of greenhouse gases that may have contributed to global
warming and rising sea levels endangering a Native Alaskan village.129
In AES Corp. v. Steadfast Insurance Co., the Virginia Supreme Court affirmed its previous decision to reject the coverage claims of one of the
Kivalina defendants, which had requested its insurer to defend the underlying climate change-related litigation.130 This year also produced the latest chapter in the ongoing efforts of Mississippi coastal residents and
landowners to recover damages and other relief relating to Hurricane
124.
125.
126.
127.
128.
129.
130.
Id. at 1183.
Id. at 1184.
Id. at 1185.
Id.
Id.
696 F.3d 849 (9th Cir. 2012), pet. for reh’g filed Oct. 4, 2012.
AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532 ( Va. 2012).
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Katrina, which they allege was more severe as a result of industrial greenhouse gas emissions that contributed to global warming.131 Although further developments are more than likely, these decisions have provided
some additional clarity concerning the future path of climate changerelated tort litigation and related coverage litigation.
A. Native Village of Kivalina v. Exxon-Mobil Corp.
In Kivalina, an Inupiat Native Alaskan village alleged that the greenhouse
gas emissions from several utility companies contributed to global warming, the melting of Arctic sea ice, and the resulting erosion of the Kivalina
coastline.132 The plaintiffs sought monetary damages from the defendants, which included twenty oil, coal, and electric utility companies, alleging that these entities were substantial contributors to global warming.133
As discussed in last year’s update,134 the Kivalina defendants successfully
moved to dismiss based on arguments that plaintiffs lacked standing and
presented a non-justiciable political question.135
On September 21, 2012, the Ninth Circuit affirmed the trial court’s
decision, focusing its analysis on the displacement of the federal common
law action by the Clean Air Act (CAA) and U.S. Environmental Protection Agency (EPA) actions authorized by the CAA.136 The court relied
heavily on American Electric Power Co. v. Connecticut,137 in which the
Supreme Court held “that the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement” of carbon dioxide emissions.138 The court acknowledged that the Kivalina lawsuit presented a “slightly different context” than the AEP case because
plaintiffs were not seeking abatement of emissions, but rather “damages
for harm caused by past emissions.”139 Interpreting current Supreme
Court jurisprudence, however, the Ninth Circuit determined that “displacement of a federal common law right of action [also] means displacement of remedies.”140 The court observed that “the solution to Kivalina’s
131. Comer v. Nationwide Mut. Ins. Co., 2006 WL 1066645 (S.D. Miss. Feb. 23, 2006),
rev’d en banc sub nom. Comer v. Murphy Oil USA, 607 F.3d 1049 (5th Cir. 2010).
132. Native Vill. of Kivalina v. Exxon-Mobil Corp., 663 F. Supp. 2d 863 (N.D. Cal.
2009).
133. Id. at 854.
134. Todd A. Rossi, Roberta D. Anderson, Jason W. Hall, Joanne L. Zimolzak, Stuart
Tonkinson, Brian Margolies & Wystan Ackerman, Recent Developments in Insurance Coverage
Litigation, 47 TORT TRIAL & INS. PRAC. L.J. 279, 302–03 (2012).
135. Kivalina, 663 F. Supp. 2d at 863.
136. Native Village of Kivalina v. Exxon-Mobil Corp., 696 F.3d 849, 854 (9th Cir. 2012),
pet. for reh’g filed (Oct. 4, 2012).
137. Id. at 855–57 (citing Am. Elec. Power Co., Inc. v. Connecticut, 131 S. Ct. 2527 (2011)).
138. AEP, 131 S. Ct. at 2537–38.
139. Kivalina, 696 F.3d at 857.
140. Id. (citing Exxon Shipping Co. v. Baker, 554 U.S. 471 (2008); Middlesex Cnty.
Sewerage Auth. v. Nat’l Sea Clammers Ass’n, 453 U.S. 1 (1981)).
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301
dire circumstance must rest in the hands of the legislative and executive
branches of our government, not the federal common law.”141
The majority opinion did not address plaintiffs’ state law claims or
whether they had standing to raise their claims in federal court. In a
lengthy concurrence, Judge Pro opined that plaintiffs could refile their
state law nuisance claims in state court and pursue state law remedies to
the extent their claims are not preempted by federal law.142 Although
he ultimately agreed with the majority’s decision that “federal common
law nuisance abatement claims are displaced by the CAA,” he discussed
the “tension in Supreme Court authority on whether displacement of a
claim for injunctive relief necessarily calls for displacement of a damages
claim.”143 In addition to his comments on the doctrine of displacement,
Judge Pro opined that plaintiffs did not establish Article III standing.144
The Kivalina plaintiffs sought rehearing en banc on October 4, 2012.
B. AES Corporation v. Steadfast Insurance Company
1. Recap of the AES Litigation
AES Corporation, one of the defendants in Kivalina, sought coverage for
the Kivalina plaintiffs’ claims under several CGL policies issued by its
insurer, Steadfast Insurance Company.145 Steadfast accepted the defense
subject to a reservation of rights and then filed a declaratory judgment
action against AES in Virginia state court, seeking a declaration that
AES had no coverage under the affected policies.146 Steadfast raised
three principal grounds for denying coverage: (1) the Kivalina complaint
did not allege property damage caused by an occurrence as defined in
the policies; (2) the alleged injuries arose before the inception of coverage;
and (3) the policies’ pollution exclusions prevented coverage for greenhouse gases.147 In granting Steadfast’s motion for summary judgment,
the trial court focused its analysis solely on the definition of occurrence
in the policies, holding that the release of greenhouse gases into the
atmosphere by AES did not constitute an occurrence as defined by the
policies.148
The Virginia Supreme Court upheld the trial court’s decision on
appeal by applying the eight-corners rule.149 The court reviewed the alle141. Id. at 858.
142. Id. at 862 (Pro, J., concurring).
143. Id. at 858–64.
144. Id. at 867–70 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)).
145. See Rossi et al., supra note 134, at 299.
146. Id.
147. Id.
148. Steadfast Ins. Co. v. AES Corp., 2010 WL 1484811 (Va. Cir. Ct. Feb. 5, 2010).
149. AES Corp. v. Steadfast Ins. Co., 715 S.E.2d 28 (Va. 2011), reh’g granted, opinion set
aside ( Jan. 17, 2012), superseded, 725 S.E.2d 532 (2012).
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gations of the complaint to determine whether plaintiffs alleged an occurrence, which was defined in the policies as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”150 The complaint alleged that AES “intentionally emits millions of
tons of carbon dioxide and other greenhouse gases into the atmosphere
annually” and that AES “knew or should have known of the impacts of
[its] emissions. . . .”151 The court concluded that plaintiffs alleged that
AES committed intentional acts, which could not involve an “accident,”
and did not satisfy the definition of occurrence as defined by the policies.152 The court also rejected the argument that plaintiffs’ allegations
of negligence in the alternative satisfied the occurrence requirement.153
A concurring opinion by two justices suggested that the majority opinion should not be read too broadly.154 Their concurrence attempted to
limit the holding to the “unique language” used both by plaintiffs in
their complaint and in the definition of occurrence in the CGL policies
at issue.155
AES filed a petition for rehearing, contending that the Virginia Supreme
Court wrongly concluded that the Kivalina plaintiffs did not allege an
occurrence under the policies.156 AES argued that an insurer has a duty
to defend unless the underlying complaint alleges that the policyholder
defendant “should have known to a substantial probability” that its conduct
would cause the alleged harm.157 If this standard were applied, AES further
argued, the allegations made by plaintiffs were too “attenuated” for AES to
have known “to a substantial probability” that AES’s emission of greenhouse gases would result in climate change, the melting of the Arctic ice,
and the resulting coastal erosion.158
2. Decision on Rehearing
On April 20, 2012, the Virginia Supreme Court issued its decision on
rehearing and upheld its original decision.159 The court’s opinion on rehearing echoes its original decision nearly verbatim. It did not directly
address AES’s argument that the court should apply a “substantial probability” standard. Instead, the court inserted into its original opinion what
amounts to a restatement of Virginia law:
150.
151.
152.
153.
154.
155.
156.
157.
158.
159.
Id. at 30.
Id. (original emphasis).
Id. at 33–34.
Id.
Id. at 34–35 (Koontz, J., joined by Carrico, J., concurring).
Id.
AES Corp. v. Steadfast Ins. Co., 283 Va. 609, 613 (2012).
Id. at 614.
Id. at 615.
Id. at 617-21.
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303
For coverage to be precluded under a CGL policy because there was no
occurrence, it must be alleged that the result of an insured’s intentional act
was more than a possibility; it must be alleged that the insured subjectively
intended or anticipated the result of its intentional act or that objectively,
the result was a natural or probable consequence of the intentional act.160
The court also added some new citations, footnotes, and two additional
paragraphs (partly adopted from the original concurrence) that were
apparently designed to clear up the issue of when allegations of negligence
can constitute an accident sufficient to trigger coverage in a CGL policy.
The court concluded that plaintiffs alleged that their “damages were the
natural and probable consequences of AES’s intentional actions,” not the
“result of a fortuitous event or accident.”161 Accordingly, there was no coverage because there was no occurrence as defined by the CGL policies.162
Justice Mims provided the only concurrence to the opinion. He argued
that, contrary to the assertions of the majority opinion, under Virginia
law, “allegations of negligence and allegations of accident must be mutually exclusive.”163 In short, he argued that to prove breach in a negligence
action, the plaintiff must demonstrate that the injury was “the natural and
probable consequence” of the breach.164 That would mean that all negligence actions would never involve an accident.
The majority opinion responded to Justice Mims’ concerns primarily
in a footnote, stating that accidental acts and negligent acts are “not mutually exclusive in most instances.”165 The majority opined that whether a
defendant’s acts were in breach of a legal duty (as required in a negligence
action), the focus is primarily on the “manner in which the act was done” as
opposed to the “doing of the act.”166 The majority also reintroduced the
legal reality that they were limited to reviewing the eight corners of the
complaint and policies to determine whether Steadfast had a duty to defend
the claims.167 Here, the Kivalina plaintiffs did not allege that AES’s intentional act of emitting carbon dioxide and other gases was done in a negligent
manner; they alleged only that AES was “negligent” in the sense that it
“knew or should have known” that its intentional acts would cause injury
to plaintiffs regardless of the manner in which it performed the acts.168
To the Virginia Supreme Court, this allegation did not involve an occurrence that would require Steadfast to defend AES’s claims.
160.
161.
162.
163.
164.
165.
166.
167.
168.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
at 618.
at 621.
at 622 (Mims, J., concurring).
at 620 n.3.
at 620.
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C. Other Climate Change-Related Civil Litigation
One additional climate change-related civil case was actively litigated during 2012 and remains ongoing after a lengthy and convoluted history.
Plaintiffs in Comer v. Murphy Oil USA169 refiled their climate change
tort action last year in the U.S. District Court for the Southern District
of Mississippi, alleging public and private nuisance, trespass, and negligence causes of action under Mississippi law.170 In March 2012, the
trial court granted defendants’ motions to dismiss, holding that plaintiffs
did not have standing to assert their claims because their alleged injuries
are not fairly traceable to defendants’ conduct, and the lawsuit presented a
nonjusticiable political question.171 The court additionally found that
plaintiffs’ claims were barred by the applicable statute of limitations and
that the Comer plaintiffs “cannot possibly demonstrate” that their injuries
were proximately caused by defendants’ conduct. Plaintiffs have appealed the
case for the second time to the Fifth Circuit. A decision is expected in 2013.
D. Looking Ahead
The Ninth Circuit’s decision in Kivalina appears to be the latest in a series
of setbacks for litigants seeking recovery for alleged harm due to climate
change, and the AES decision on rehearing by the Supreme Court of
Virginia establishes the first precedent regarding whether insurance companies have a duty to defend such claims. However, the Kivalina decision
(like the AES decision before it) only holds that federal common law public nuisance claims against carbon dioxide emitters are displaced by the
CAA and EPA actions. Both decisions leave open the possibility that a private party may pursue climate change-related nuisance claims under state
law theories, pursue other state law remedies to the extent such claims are
not preempted by federal law, or both.
For insurers faced with the prospect of defending such claims in the
future, the AES decision may provide support for a declination of coverage. At a minimum, the AES decision may have a deterrent effect, giving
policyholders pause about whether to press coverage claims in connection
with climate change liability litigation. On the other hand, if the AES
decision is narrowly construed in the future, or if any future coverage dispute is governed by the law of a jurisdiction with different jurisprudence
concerning the occurrence issue, insurers may face a more challenging
path when faced with whether to defend future claims alleging harm due
to contributions to global warming.
169. Comer v. Nationwide Mut. Ins. Co., 2006 WL 1066645 (S.D. Miss. Feb. 23, 2006),
rev’d en banc sub nom. Comer v. Murphy Oil USA, 607 F.3d 1049 (5th Cir. 2010).
170. Comer v. Murphy Oil USA, 585 F.3d 855, 859–60 (5th Cir. 2009).
171. Id. at 860.