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Table of Contents
INTRODUCTION .....................................................................................................................................................1
CHAPTER ONE -RULES OF CONSTRUCTION .......................................................................................................3
GENERAL RULES OF POLICY CONSTRUCTION ..............................................................................................3
INSURANCE COVERAGE DISPUTES ..................................................................................................................3
BASIC RULES OF CONSTRUCTION ................................................................................................................4
INSURANCE COVERAGE DISPUTES ..............................................................................................................4
The Plain Meaning of Insurance Contract Terms Will Be Enforced .................................................................4
Intent of Parties When There is a Policy Term Ambiguity ................................................................................5
When Other Rules of Construction May Apply.................................................................................................6
Interpretation of Binders When There is no Formal Policy ...............................................................................6
DETERMINING WHETHER AN AMBIGUITY EXISTS ..................................................................................7
INTERPRETING AMBIGUOUS INSURANCE POLICIES ...............................................................................8
Extrinsic Evidence as Proof of Intent ................................................................................................................8
Rules of Construction "Against the Insurer" ......................................................................................................9
The Contra-Insurer Rule ................................................................................................................................9
The Reasonable Expectations Doctrine ........................................................................................................... 10
Defining a Policy Provision Using the Reasonable Expectations Doctrine ................................................. 10
Should "Contra-Insurer" Rules of Construction Apply to Business Insurance? .............................................. 11
Size of the Business Insured ........................................................................................................................ 12
Involvement of Counsel ............................................................................................................................... 12
Involvement of Brokers ............................................................................................................................... 12
Use of Manuscript Policy ............................................................................................................................ 13
Insurance Sophistication of the Insured ....................................................................................................... 13
Disputes Between Insurers ........................................................................................................................... 14
Bargaining Power Generally ........................................................................................................................ 14
CHAPTER TWO - RESERVATION OF RIGHTS ..................................................................................................... 17
INTRODUCTION ................................................................................................................................................... 17
RESERVATION OF RIGHTS LETTERS .............................................................................................................. 17
Purpose and Effect of Reservation of Rights Letter ............................................................................................ 17
Substance of Reservation of Rights Letter........................................................................................................... 18
Timing and Addressee[s] of Reservation of Rights Letter ............................................................................... 18
Excess Insurers Not Obligated To Issue Reservation of Rights Letter ............................................................ 19
CONFLICTS OF INTEREST.............................................................................................................................. 19
Insured's Right To Obtain Independent Counsel ............................................................................................. 19
Limitations on the Insured's Right To Select Independent Counsel ................................................................ 20
Limitations on the Insurer's Duty To Pay Defense Costs for Independent Counsel ........................................ 21
Disqualification of Counsel ............................................................................................................................. 21
Insurer's Liability for Insurance Adjuster's Misuse of Information ................................................................. 21
NON-WAIVER AGREEMENTS............................................................................................................................ 22
DISCLAIMERS................................................................................................................................................... 22
Notice of Disclaimer ........................................................................................................................................ 22
Timeliness of Notice .................................................................................................................................... 22
General Considerations Regarding Timeliness of Disclaimer ..................................................................... 23
Excess Insurers' Obligations Regarding Timeliness .................................................................................... 23
Non-Asserted Defenses May Be Waived ........................................................................................................ 24
Cases Holding That Non-Asserted Defenses May Not Be Waived ................................................................. 24
On Whom Notice Is To Be Served .............................................................................................................. 25
Effect of Wrongful Disclaimer ........................................................................................................................ 25
WAIVER AND ESTOPPEL AS DEFENSES TO DISCLAIMERS ....................................................................... 25
Waiver ......................................................................................................................................................... 25
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Estoppel ....................................................................................................................................................... 26
RESCISSION ...................................................................................................................................................... 27
LACK OF COOPERATION ............................................................................................................................... 27
General Rules Concerning the Cooperation Clause ......................................................................................... 27
Privilege Issues ............................................................................................................................................ 28
CHAPTER THREE - MATERIAL MISREPRESENTATION ................................................................................... 31
THE EFFECT OF A MATERIAL MISREPRESENTATION ................................................................................ 31
FAILURE TO DISCLOSE .................................................................................................................................. 31
INTENT TO DECEIVE ...................................................................................................................................... 32
Minority View: Fraudulent Intent Required .................................................................................................... 32
MATERIALITY TEST ....................................................................................................................................... 32
PURPOSE OF THE RULE ................................................................................................................................. 32
STATUTORY PROVISIONS ................................................................................................................................. 33
SPECIAL ISSUES RE. MISREPRESENTATIONS OR OMISSIONS .............................................................. 33
THE NOTICE REQUIREMENT ............................................................................................................................ 33
THE NOTICE REQUIREMENT ............................................................................................................................ 33
POLICY LANGUAGE ........................................................................................................................................ 34
Standard CGL Notice Provisions ..................................................................................................................... 34
Duty To Forward Demands and Court Process ............................................................................................... 34
Excess Insurance Policies ................................................................................................................................ 35
CLAIMS-MADE POLICIES ............................................................................................................................... 35
Awareness Provision ....................................................................................................................................... 37
FIRST-PARTY POLICIES ................................................................................................................................. 38
LATE NOTICE CONSEQUENCES ............................................................................................................... 38
UNNECESSARY OR PRESUMED PREJUDICE .......................................................................................... 38
DEFINITION OF PREJUDICE....................................................................................................................... 39
PREJUDICE BURDEN OF PROOF ................................................................................................................... 39
PROVIDING NOTICE .................................................................................................................................... 40
NOTICE MUST BE GIVEN TO THE PROPER RECIPIENT ....................................................................... 40
INSURED MUST SUBMIT NOTICE ............................................................................................................ 41
TIME REQUIREMENTS FOR NOTICE ........................................................................................................... 41
REASONABLENESS IS A MATTER OF FACT .............................................................................................. 42
–OR AS A MATTER OF LAW .......................................................................................................................... 42
JUSTIFICATIONS FOR LATE NOTICE....................................................................................................... 42
Insured's Lack of Knowledge of Occurrence ............................................................................................... 42
No Reasonable Basis To Believe Claim Will Arise..................................................................................... 43
Lack of Knowledge of Coverage ................................................................................................................. 43
Ignorance of Policy Provisions .................................................................................................................... 43
ACCEPTABLE SITUATIONS EXCUSING LATE NOTICE ....................................................................... 44
Insurer Disallowing Coverage ..................................................................................................................... 44
Waiver by Insurer ........................................................................................................................................ 44
CHAPTER FOUR - INSURER'S DUTY TO DEFEND ............................................................................................. 46
PREFACE................................................................................................................................................................ 46
THE SCOPE OF THE INSURER'S DUTY TO DEFEND ..................................................................................... 46
The Duty To Defend Determined by the Allegations ...................................................................................... 47
"FOUR/EIGHT - CORNERS" RULES ............................................................................................................... 47
Eight-Corner Rule ............................................................................................................................................ 47
"The Four Corners of the Complaint" Test .................................................................................................. 48
What Did the Insurer Know Other Than by the Complaint ............................................................................. 48
Reliance on Extrinsic Facts To Avoid the Duty To Defend ............................................................................ 49
Insurer Knowledge of Reasonable Possibility of Coverage ......................................................................... 49
JURISDICTIONS WHERE INSURER CAN CONSIDER EXTRINSIC FACTS .............................................. 49
Duty to Defend if Complaint Alleges Harmful, Intentional or Wrongful Act ................................................. 50
NO DUTY TO DEFEND ................................................................................................................................ 50
Termination of Duty to Defend ....................................................................................................................... 51
Duty to Appeal................................................................................................................................................. 51
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Affirmative Claims .......................................................................................................................................... 52
Duty To Defend an "Additional Insured" ........................................................................................................ 52
PRIMARY INSURER'S DUTY TO DEFEND LIMITS ..................................................................................... 52
Standard Form CGL Policies ........................................................................................................................... 52
Termination of Duly To Defend in Mass Tort Litigation ................................................................................ 53
Present Trends in Law ..................................................................................................................................... 53
SETTLEMENTS BEYOND POLICY LIMITS ...................................................................................................... 53
Multiple Claims ............................................................................................................................................... 53
BREACH OF THE DUTY TO DEFEND DAMAGES ....................................................................................... 54
Compensatory Damages for Breach of Contract ............................................................................................. 54
Attorneys' Fees Incurred in Declaratory Relief Action ................................................................................ 54
Implied Covenant of Good Faith/Punitive Damages ....................................................................................... 55
THE RIGHT OF EITHER PARTY TO SETTLE W/O CONSENT OF OTHER PARTY ................................. 55
Settlement by Insured ...................................................................................................................................... 55
Insurer Agrees To Pay for the Defense ............................................................................................................ 56
But the Insurer Refuses To Defend? ................................................................................................................ 57
Reasonableness of an Insured's Settlement .................................................................................................. 57
Settlements Involving the Assignment of the Insured's Rights to the Injured Party .................................... 58
Sue and Labor Expenses (Marine) ............................................................................................................... 59
Remember Y2K? ............................................................................................................................................. 60
Settlement by Insurer ................................................................................................................................... 61
Subrogation Rights .......................................................................................................................................... 61
Subrogation Against the Co-Insurer ............................................................................................................ 61
Subrogation Against the Insured .................................................................................................................. 61
INSURER'S RIGHT OF REIMBURSEMENT FROM INSURED..................................................................... 61
Settlement Payments ........................................................................................................................................ 62
Mistaken Payments .......................................................................................................................................... 62
"NO DUTY TO DEFEND" PRECLUDES INDEMNITY COVERAGE ........................................................... 62
CHAPTER FIVE - ALLOCATING DEFENSE COSTS ............................................................................................ 65
INSURANCE COVERAGE DISPUTES ................................................................................................................ 65
INTRODUCTION ............................................................................................................................................... 65
APPORTIONING COSTS BETWEEN PRIMARY INSURERS ....................................................................... 65
Pro-Rata Apportionment-Primary Insurers and the Insured ............................................................................ 66
Where the Insured Lost or Destroyed Policies................................................................................................. 66
The Minority Rule—Equal Shares .................................................................................................................. 66
Alternate Approaches ...................................................................................................................................... 66
Allocation Between Primary Insurer and Self-Insured .................................................................................... 67
EXCESS INSURER'S DUTY TO DEFEND ...................................................................................................... 67
Definitions–Primary, Excess and Umbrella Insurance .................................................................................... 67
Conventional View .......................................................................................................................................... 68
Type of Allocation Primary vs. Excess Insurer (Minority View) .................................................................... 68
Multiple Policy Periods ................................................................................................................................... 69
Excess Insurer's Right To Associate ................................................................................................................ 70
DUTY TO DEFEND OF INSURER EXCESS TO A SELF-INSURED RETENTION ..................................... 70
CHAPTER SIX - GENERAL LIABILITY INSURANCE (I) .................................................................................... 72
INTRODUCTION ................................................................................................................................................... 72
SPECIFIC INSURED HAZARDS ...................................................................................................................... 72
Premises/Operations Provision ........................................................................................................................ 72
Completed Operations ..................................................................................................................................... 73
Off-Premises Requirement .............................................................................................................................. 73
Completed Operations ..................................................................................................................................... 74
Professional Services Exclusion ...................................................................................................................... 75
Completed Operations Provision re. Toxic Waste Cases ................................................................................. 76
Abandoned Property" Exception ..................................................................................................................... 76
Products Hazard ............................................................................................................................................... 76
Unambiguous Products Hazard Provision ....................................................................................................... 77
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Broad "Products" Definition/Application ........................................................................................................ 77
"Insured Contract" ........................................................................................................................................... 77
Sistership Exclusion......................................................................................................................................... 78
"PRODUCTS-COMPLETED OPERATIONS" & "PREMISES OPERATIONS" ............................................. 78
THE NATURE OF DAMAGE COVERED ............................................................................................................ 79
BODILY INJURY LIABILITY .......................................................................................................................... 79
EMOTIONAL DISTRESS .................................................................................................................................. 81
Emotional Distress per se ................................................................................................................................ 81
Emotional Distress when Accompanied by Physical Injury ............................................................................ 81
Emotional Distress Resulting from "Uncovered Economic Loss" ................................................................... 82
PROPERTY DAMAGE LIABILITY ...................................................................................................................... 82
Policy Definition .............................................................................................................................................. 82
Injury to Tangible Property.............................................................................................................................. 83
Defective Components ................................................................................................................................. 83
Intangible Property .......................................................................................................................................... 84
Pure Economic Loss ........................................................................................................................................ 85
Economic Losses as Consequential Damages ................................................................................................. 86
Diminution in Value of Property ..................................................................................................................... 87
Loss of Use of Tangible Property .................................................................................................................... 88
PERSONAL INJURY AND ADVERTISING INJURY COVERAGE .............................................................. 89
Personal Injury Coverage ................................................................................................................................ 89
Racial Discrimination ...................................................................................................................................... 90
INSURABILITY OF DISCRIMINATION OR SEXUAL HARASSMENT BY STATE .................................. 90
CHAPTER SEVEN - GENERAL LIABILITY INSURANCE (II) ............................................................................. 93
ADVERTISING INJURY COVERAGE ............................................................................................................. 93
ADVERTISING ACTIVITIES............................................................................................................................ 93
UNFAIR COMPETITION .................................................................................................................................. 94
SECURITIES FRAUD CLAIMS ........................................................................................................................ 95
PATENT INFRINGEMENT CLAIMS ............................................................................................................... 96
TRADEMARK, TRADE SECRET CLAIMS ..................................................................................................... 97
DUTY TO DEFEND ONLY FOR DAMAGE CLAIMS .................................................................................... 97
FEDERAL STATUTE VIOLATIONS ............................................................................................................... 97
Telephone Solicitation ..................................................................................................................................... 98
EXCLUSION FOR PRIOR PUBLICATION ...................................................................................................... 98
PUBLICATION WITH KNOWLEDGE OF FALSITY ..................................................................................... 98
CONTRACTUAL LIABILITY COVERAGE ........................................................................................................ 98
VENDOR'S ENDORSEMENT ............................................................................................................................... 99
DIRECT ACTION STATUTES ........................................................................................................................ 101
CHAPTER EIGHT - OCCURRENCE BASED COVERAGE ................................................................................. 104
CGL POLICIES COVER ONLY ACCIDENTAL OR FORTUITOUS DAMAGE ............................................. 104
ACCIDENT ....................................................................................................................................................... 105
The "Loss in Progress" Rule .......................................................................................................................... 107
OCCURRENCE-BASED COVERAGE ............................................................................................................... 108
"OCCURRENCE" POLICY LANGUAGE ....................................................................................................... 108
Expected or Intended Damage is Not Occurrence ......................................................................................... 110
Expectation And Intention Standard Is That Of A "Reasonable Person." ..................................................... 111
When Injury or Damage Is Not an Occurrence .............................................................................................. 111
Burden of Proof to Determine Damage as Expected or Intended .................................................................. 112
Inherently Harmful Acts .................................................................................................................................... 113
Illegal Acts ..................................................................................................................................................... 114
"Willful Acts" (California Insurance Code) ................................................................................................... 115
Corporate Knowledge Needed for "Expected or Intended" Coverage Defense ............................................. 115
CHAPTER NINE - TRIGGER AND SCOPE OF OCCURRENCE-BASED COVERAGE .................................... 118
SINGLE VS. MULTIPLE OCCURRENCES ....................................................................................................... 118
CAUSE-ORIENTED/SINGLE OCCURRENCE CASES ..................................................................................... 118
Effects-Oriented/Multiple Occurrence Cases ................................................................................................ 121
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The Batch Clause ........................................................................................................................................... 123
DATE OF OCCURRENCE ................................................................................................................................... 124
Date of Injury Triggers Coverage ...................................................................................................................... 124
When Injury Occurs ....................................................................................................................................... 124
Exposure Rule Decisions ................................................................................................................................... 125
Manifestation Rule Decisions ............................................................................................................................ 125
Adopting Hybrid Rules Decisions ................................................................................................................. 128
"Triple Trigger" ......................................................................................................................................... 128
Double Trigger .............................................................................................................................................. 130
Injury-in-Fact Rule ........................................................................................................................................ 131
DEEMER OR TELESCOPIC CLAUSES ......................................................................................................... 131
ALLOCATION OF LIABILITY ........................................................................................................................... 131
JOINT AND SEVERAL LIABILITY ............................................................................................................... 132
PRO-RATA ALLOCATION ............................................................................................................................. 133
Stacking ......................................................................................................................................................... 134
"Per Occurrence" Limit in Multi-Year Policies ............................................................................................. 134
Pre-Judgment Interest .................................................................................................................................... 135
Insured Against Insurers ............................................................................................................................ 135
Insurer Against Co-Insurers ........................................................................................................................... 135
Limitations on Award of Pre-Judgment Interest ............................................................................................ 135
CHAPTER TEN - "OTHER INSURANCE" CLAUSES .......................................................................................... 138
INTRODUCTION ................................................................................................................................................. 138
TYPES OF "OTHER INSURANCE" CLAUSES ................................................................................................. 139
PRO-RATA CLAUSES..................................................................................................................................... 139
EXCESS CLAUSES.......................................................................................................................................... 139
ESCAPE CLAUSES .......................................................................................................................................... 139
OTHER "OTHER INSURANCE" CLAUSES .................................................................................................. 140
NONCUMULATION CLAUSES ..................................................................................................................... 140
RESOLUTION OF CONFLICTS INVOLVING "OTHER INSURANCE" CLAUSES ...................................... 141
No "Other Insurance" Clause in Either Primary Policies ............................................................................... 141
"Other Insurance" Clause in Only One Primary Policy ................................................................................. 141
Pro-rata Clause vs. Pro-rata Clause ........................................................................................................... 141
Excess Clause vs. Excess Clause ............................................................................................................... 142
Escape Clause vs. Escape Clause .................................................................................................................. 142
Dissimilar "Other Insurance" Clauses in Two Primary Policies .................................................................... 142
Majority Approach..................................................................................................................................... 142
Pro-rata Clause vs. Excess Clause ............................................................................................................. 143
Pro-rata Clause vs. Escape Clause ............................................................................................................. 143
Excess Clause vs. Escape Clause ............................................................................................................... 143
Conflicting Clauses in "Specific" Secondary Policies ................................................................................... 144
Conflicting Clauses in General or Umbrella/Catastrophe Excess Policies .................................................... 145
APPORTIONING LOSSES BETWEEN CO-INSURING POLICIES ................................................................. 146
ALLOCATING THE DUTY TO DEFEND BETWEEN CO-INSURERS ........................................................... 147
When One Is Held To Provide Coverage................................................................................................... 147
Coverage on a Pro-rata Basis ..................................................................................................................... 147
One Primary Insurer and One Excess Insurer ............................................................................................ 147
Intended Insurer Relationship .................................................................................................................... 147
Overlapping Self-Insurance ........................................................................................................................... 148
CHAPTER ELEVEN -BAD FAITH AND WRONGFUL REFUSAL TO SETTLE ................................................ 150
INTRODUCTION ................................................................................................................................................. 150
CALIFORNIA LAW ......................................................................................................................................... 150
STATE UNFAIR INSURANCE PRACTICES ACTS ...................................................................................... 151
California Unfair Settlement Practices Act ................................................................................................ 151
States That Do Not Recognize a Private Right of Action .............................................................................. 152
States That Recognize a Private Right of Action for Breach of Unfair Insurance Practices ......................... 152
THE INSURER'S DUTY OF GOOD FAITH IN PURSUING SETTLEMENT ............................................... 153
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Insurer Insulated from Bad Faith Claim ........................................................................................................ 153
DELAYED SETTLEMENT OFFERS .............................................................................................................. 154
ATTEMPTS TO OBTAIN CONTRIBUTION FROM THE INSURED .......................................................... 154
ADVICE OF COUNSEL ................................................................................................................................... 155
DAMAGES RECOVERABLE FOR INSURER BAD FAITH ......................................................................... 155
Economic and Compensatory Damages ........................................................................................................ 155
Attorneys' Fees .............................................................................................................................................. 156
Punitive Damages .......................................................................................................................................... 156
Emotional Distress ......................................................................................................................................... 157
THE SCOPE OF DISCOVERY IN BAD-FAITH ACTIONS ......................................................................... 158
FIRST-PARTY CLAIMS .................................................................................................................................. 158
General Rule .................................................................................................................................................. 158
"REVERSE BAD FAITH" AND "COMPARATIVE BAD FAITH"................................................................ 159
POST-DISCLAIMER BAD FAITH .................................................................................................................. 160
CHAPTER TWELVE - PROPERTY INSURANCE ................................................................................................ 163
OVERVIEW .......................................................................................................................................................... 163
Differences Between Property Insurance and Liability Insurance ................................................................. 163
Types of Property Insurance .......................................................................................................................... 164
Direct Physical Loss ...................................................................................................................................... 164
Faulty Construction Claims ........................................................................................................................... 166
Environmental Damage and Pollution ........................................................................................................... 166
Claims as Physical Loss ............................................................................................................................. 166
Computer Data and Software ......................................................................................................................... 167
Covered Property ........................................................................................................................................... 167
Covered Peril—Efficient Proximate Cause Rule ........................................................................................... 168
Number of Occurrences ............................................................................................................................. 169
Date of Occurrence .................................................................................................................................... 170
Collapse ......................................................................................................................................................... 171
Actual Collapse .......................................................................................................................................... 171
Emerging View: Imminent Collapse ......................................................................................................... 171
EXCLUSIONS .................................................................................................................................................. 172
Mold Exclusions ............................................................................................................................................ 172
Water Damage Exclusions ............................................................................................................................. 173
Pollution and Contamination Exclusions ....................................................................................................... 173
Design Defect Exclusion ............................................................................................................................... 174
Inherent Vice Exclusion ................................................................................................................................ 174
Earth Movement Exclusions .......................................................................................................................... 174
Ensuing Loss Clauses .................................................................................................................................... 175
OBLIGATIONS OF THE INSURED ............................................................................................................... 176
PROPERTY VALUATION .............................................................................................................................. 178
Replacement Cost Versus Actual Cash Value ............................................................................................... 178
The Election To Recover Actual Cash Value and/or Replacement Costs ..................................................... 179
EXHIBIT I ............................................................................................................................................................. 182
WHETHER EMOTIONAL DISTRESS W/O PHYSICAL MANIFESTATION CONSTITUTES "BODILY
INJURY" — SURVEY ................................................................................................................................... 182
EXHIBIT II - SURVEY OF SEXUAL HARASSMENT LAWS BY STATE ...................................................... 185
EXHIBIT III - Homeowner's Ins. Loss Adjustment Method ..................................................................................... 188
The 2006 Florida Statutes ................................................................................................................................... 188
REFERENCES .......................................................................................................................................................... 191
The Legal Environment of Risk Management and Insurance, First CPCU Edition .................................................. 191
Inland Marine Insurance, Volume I ........................................................................................................................... 191
Inland Marine Insurance, Volume II.......................................................................................................................... 191
A Comprehensive Guide to Understanding Your Homeowners Policy ..................................................................... 191
Dictionary of Insurance Terms, Third Edition ........................................................................................................... 191
Inland Marine Insurance ............................................................................................................................................ 191
Principles of Insurance Production, Volume 1 .......................................................................................................... 191
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Black’s Law Dictionary, Seventh Edition ................................................................................................................. 191
Principles of Risk Management and Insurance, Vol. II ............................................................................................. 192
Commercial Property Risk Management and Insurance ............................................................................................ 192
Inland Marine Insurance, An Interpretation of the Policy ......................................................................................... 192
Marine Insurance: Ocean and Inland ........................................................................................................................ 192
References are made to various forms of the Insurance Service Office .................................................................... 192
Commercial Insurance ............................................................................................................................................... 192
CITATION REFERENCES .................................................................................................................................. 193
92. Shuster v. South Broward Hosp. Dist. Physicians' Professional Liab. Ins. Trust, 591 So. 2d 174, 177-78 (Fla.
1992). ......................................................................................................................................................................... 195
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INTRODUCTION
Recent changes in case law in respect to the insurance industry are addressed in
this text, such changes occurring rather rapidly in recent years for a variety of reasons. A
prime example is the result of the destruction of the twin towers in New York on 9-11-01
which raised the question as to whether these acts of terrorism constituted one act for
insurance purposes, and whether, indeed, there was insurance coverage at all.
The property damage created by hurricanes, wind and water in recent years, raised
more questions as to coverage, although, surprisingly to some, there were not as many
new court decisions as some anticipated—which speaks well of those who created the
insurance contracts in anticipation of such unusual events or of events with unusual
impact on the insurance industry.
Changes in regulations, laws and in case law also result because of changes in
public perception as to the function of the insurance industry, changes in morals and
attitudes towards businesses as a whole, and even towards each other. In case there ever
was a question about it, insurance is always in the public eye, and in case of loss of
property and changes in liability the public is well-informed sometimes ill-informed—
about the role of insurance. The "sword" of federal regulation and intervention always
hangs over the state regulation of insurance, particularly because of the publicity
provided by a diligent media as to problems arising from the settlement of claims after
hurricanes and storms creating billions of dollars of property damage.
Insurance has been, and probably will always be, considered by the public as
having "deep pockets" and as a source of unlimited funds when John Q. Public needs to
rebuild or to be compensated for a loss. A fact that seems to escape the eyes of the public
and the media is that an insurance company is not an eleemosynary institution. Since the
adjuster is generally the person that the claimant will look to for restitution, the adjuster
must not only be knowledgeable in respect to determining the value of the loss, but as the
representative of the insurance company and often, the representative of the industry as a
whole in the eyes of the public and the media the adjuster must be aware of any changes
in the laws that govern insurance. Changes are reflected not only in new laws and
regulations, but also in how courts decide legal questions that come before them.
Insurance law is difficult for not only those who are legally trained. Perhaps the
biggest problem in insurance law is that it is result-oriented. Courts have strained at
times so as to compensate litigants with the result that courts have manipulated concepts
of contract law and interpretations of insurance contracts, and they have vastly expanded
theories of liability and contractual relationships. While the motives can hardly be
questioned, the result is that there is little stability in the law and rarely can one predict
the result in any given case. The end result has been an expansion of law that imposes
retrospective liability on defendants and an explosion of issues on coverage with differing
results in each court that has considered the problem. This will be apparent in this text as
the results can vary greatly from jurisdiction to jurisdiction. This text attempts to show
the prevalent decisions and those of the majority, along with a few examples of other
related decisions.
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Case law also reflects the attitude of the public in insurable situations, particularly
in liability cases where the public is clamoring for the courts to decide who is financially
responsible for the damages and the losses that they suffer. Insurance is, after all,
contract law and there is a plethora of attorneys who are ready and willing to bring any
actual or perceived malfeasance of insurers to the attention of the courts.
It may be noticeable that a large number of court decisions are from courts in
California. This is not unexpected as California has always been a precedent-setting state
and it is quite true that changes in attitudes, regulations, and laws start on the West Coast
and work towards the East—although in recent years, Texas and Florida, in particular,
have responded to these influences as rapidly as California. Florida court decisions are
pointed out in particular, but decisions from various states that does, may or can reflect
legal decisions in Florida and other states are discussed.
Asbestos cases have had nationwide impact on the insurance industry, and recent
decisions in that respect are discussed. Hurricane damage in Louisiana and Texas will
have an impact on court decisions in Florida and other Gulf states. And, of course, the
tragedies of 9-11 created insurance problems that have affected decisions throughout the
entire nation.
In addition, it must be pointed out that throughout this text, when discussing a
legal point, the court citation will be referenced for the principal or basic decision in the
Reference section in the back of this text. Ancillary decisions are not so referenced for
several reasons, principally because it would take up so much space that this text would
be twice the size that it is now, and also because this text is to be used by insurance
adjusters and professionals and such legal citations and precise rulings are of little
importance in the context of this discussion. Therefore, the primary decisions will be
referenced, other decisions that add to or modify such decisions will be shown as "the
court or in some cases, the jurisdiction and/or the date of the decision will be shown. If
more detailed information in respect to these decisions is needed, they can be obtained
through the legal department of the insurer, Google, or some other source.
2
CHAPTER ONE -RULES OF CONSTRUCTION
The contract of insurance will be discussed first as that is the base upon which the
greatest majority of court decisions rest. While contract/policy construction may be of
more interest to administrators, underwriters and administrative personnel in the
insurance company, there are many court cases that affect the settlement of claims (read:
adjusters) that look first to what the policy says—and does not say. Much of this part of
the discussion may appear elementary; still the court interpretation may not be so simple
or so straightforward.
GENERAL RULES OF POLICY CONSTRUCTION
A New York court in 1988 stated that it is well settled that insurance contracts
must be interpreted to effectuate the intent of the parties at the time the contract was
formed. "The ascertainment of the substantial intent of the parties is the fundamental rule
in the construction of all agreements."1
An insurance contract must be read as a whole to determine what the parties
reasonably intended by its terms. All parts and clauses must be considered together so
that it may be seen if and how far one clause is explained, modified, limited or controlled
by the others. However, each exclusion in a policy is meant to be read with the insuring
agreement, independently of every other exclusion, so sayeth a New Jersey court in 1987.
INSURANCE COVERAGE DISPUTES
In interpreting an insurance contract, the court must first look to the grant of
coverage in the insuring agreements to determine whether coverage exists. If it does, the
court must next determine whether the policy contains any exclusion from or limitations
on that coverage. "If coverage does not exist under the insuring agreement, the inquiry is
at an end. There is no need to look to the exclusions because they cannot expand the
basic coverage granted in the insuring agreement."2 In short, an exclusion from insurance
coverage cannot create coverage. In the same vein, a "whereas" clause, while sometimes
useful as an aid to interpretation, "cannot create any right beyond those arising from the
operative terms of the document." (D.C. Circuit court in 1995)
It can be quite instructional to understand the position that a court—in this case,
the Wisconsin Supreme Court—takes in applying the rules of construction of an
insurance policy:
"First, we examine the facts of the insured's claim to determine whether the
policy's insuring agreement makes an initial grant of coverage. If it is clear that the
policy was not intended to cover the claim asserted, the analysis ends there. If the claim
triggers the initial grant of coverage in the insuring agreement, we next examine the
various exclusions to see whether any of them preclude coverage of the present claim.
Exclusions are narrowly or strictly construed against the insurer if their effect is
uncertain (our emphasis). . . We analyze each exclusion separately; the inapplicability of
one exclusion will not reinstate coverage where another exclusion has precluded it.
3
Exclusions sometimes have exceptions; if a particular exclusion applies, we then look to
see whether any exception to that exclusion reinstates coverage. An exception pertains
only to the exclusion clause within which it appears; the applicability of an exception will
not create coverage if the insuring agreement precludes it or if a separate exclusion
applies."
BASIC RULES OF CONSTRUCTION
Exclusions are generally construed narrowly, while exceptions to exclusions are
generally construed broadly to find coverage.3
The phrase "'arising out' of will be liberally construed in coverage portions of the
policy, but not in exclusions.” (2d Dist. court, 1998).
INSURANCE COVERAGE DISPUTES

"Any limitation in coverage must be described in clear and explicit
language.” 4
A West Virginia court continued by observing that the "exclusionary effect of
policy language, not its placement, controls allocation of the burden of proof. An insurer
. . . must make exclusionary clauses conspicuous, plain, and clear, placing them in such a
fashion as to make obvious their relationship to other policy terms, and must bring such
provisions to the attention of the insured. It is the insurer's burden to prove the
applicability of exclusion.”5
The Plain Meaning of Insurance Contract Terms Will Be Enforced
As a general rule, the language of an insurance policy will be given its plain
meaning and there will be no resort to rules of construction unless an ambiguity exists.6
An Illinois court determined in 2002 (based upon Illinois law) that if the language of the
policy is clear and unambiguous and the meaning of the contract can be discerned, a court
will give effect to that meaning.
It is well accepted in contract law, particularly applicable to insurance policies,
that whenever there is any question of interpretation of a written contract, the court will
seek to determine the intention of the parties as derived from the language employed.
(Maryland court in 2001) Courts "may not disregard clear provisions which the
insurers inserted in [an insurance policy] and the insured accepted. . . ." 7 "Courts may
not by construction add or excise terms, nor distort the meaning of those used and thereby
make a new contract for the parties under the guise of interpreting the writing." Courts
"should be extremely reluctant to interpret an agreement as impliedly stating something
which the parties have neglected to specifically include."8
Endorsements generally supersede and control conflicting printed terms and a
later endorsement supersedes a conflicting earlier one.

Simply put, any clause which has been inserted in an insurance policy
with the insured's consent "is valid as long as it is clear, unambiguous and not in
contravention of public policy."9
4
However, an Illinois court in 2003 ruled that finding that where an insurer has
failed to provide notice as to the addition of a new exclusion in a renewal policy, "that
exclusion will not be considered part of the policy, and thus the insurer may not rely on
that exclusion to withhold defense obligations." This would indicate that an endorsement
on a renewal policy is different in the eyes of the law, than an endorsement of the original
policy. While it is necessary sometimes, with some types of policies, to use endorsement
at time of renewal, great care must be taken to make certain that it will not be later
thrown out by the court. At the very least, a written acceptance signed by the insured
stating that the insured not only agrees to the endorsement, but fully understands it would
be necessary.
Policy provisions that exclude coverage may also need to be "conspicuous, plain
and clear" in order to be enforced. 10
Evidence of an insurer's revision in policy language after notification of a loss that
is the subject of a dispute "should be inadmissible because it lacks relevance, i.e., has no
tendency to prove a material fact—is not probative on the issue of liability."11 But a New
York court in 2004 decided that that a pollution exclusion does not apply to lead paint
claims where the policy was subsequently changed to specifically exclude lead paint.
Intent of Parties When There is a Policy Term Ambiguity

The parol evidence rule generally precludes consideration of extrinsic
evidence of the meaning of an insurance contract unless the policy language is
ambiguous.12
A Second Circuit court in 1988 ruled that "If the text of the agreement is
unambiguous, then the court is without authority to resort to extrinsic evidence in
interpreting its meaning." However, if a court concludes that the policy language is
ambiguous, it must look beyond the language of the policy to discern the intent of the
parties at the time the contract was made. The determination of whether a provision in an
insurance policy is ambiguous, and whether extrinsic evidence of intent is therefore
admissible, "is a threshold question of law for the court."13 A contract is unambiguous if
the language it uses has "a definite and precise meaning, unattended by danger of
misconception in the purport of the [agreement] itself, and concerning which there is no
reasonable basis for a difference of opinion. Thus, if the agreement on its face is
reasonably susceptible of only one meaning, a court is not free to alter the contract to
reflect its personal notions of fairness and equity."14
If there appears to be an ambiguity in the policy, a court must consider extrinsic
evidence submitted by the parties to assist in determining the actual intent of the parties.15
However, other courts have ruled that extraneous or extrinsic evidence must relate to the
mutual intent of the parties.
Extrinsic evidence of an undisclosed unilateral intent is immaterial to the
interpretation of a contract.16 If extrinsic evidence raises credibility issues regarding the
intent of the parties and the interpretation of a policy provision depends upon a choice
among reasonable inferences to be drawn from the extrinsic evidence, the meaning of the
ambiguous policy term must be decided by the trier of fact. 17
5
When Other Rules of Construction May Apply
If the intent of the contracting parties cannot be determined after the trier of fact
considers extrinsic evidence about the meaning of an ambiguous policy term, other rules
of construction may then be applied only as a last resort.18 Then, if the ambiguity is not
resolved by extrinsic evidence, rules of construction are applicable." As one
commentator has observed, "[t]his notion of invoking the contra proferentem
("preferentum: offeror or drafter of the language—"contra" would indicate "against"
such person/language) principle as a tie breaker only after consideration of extrinsic
evidence specific to the case is the better reasoned modern view of contract law."19 Thus,
the issue of whether an insured is entitled to contra-insurer rules of construction (against
the wishes of the insurer who had created the contract) does not arise unless it is first
demonstrated that: (a) the policy is ambiguous; and (b) the ambiguity may not be
resolved by resort to extrinsic evidence of intent.20
In many jurisdictions, the sophistication and bargaining power of the parties play
major roles in determining whether an insured is entitled to the benefit of contra-insurer
rules.21 Thus, it has been held that contra-insurer rules have "no realistic application to a
contract confected by a large corporation and a large insurance company each advised by
competent counsel and informed experts." Further, in certain jurisdictions, the
application of contra-insurer rules is disapproved. " Maryland does not follow the rule,
adopted in many jurisdictions, that an insurance policy is to be construed most strongly
against the insurer.”22 (which does not seem to be the case in Florida…)
Interpretation of Binders When There is no Formal Policy
One of the "9-11 cases" addressed the use of a binder and the Circuit Court ruled
that in the event a loss occurs before issuance of a formal policy, courts will apply the
terms and conditions provided in the insurance binder.23 Courts and laws do not always
accept the fact that an insurance binder is a common and necessary practice in insurance,
where speed often is of the essence, for the agent to use this quick and informal device to
record the giving of protection pending the execution and delivery of a more
conventionally detailed policy of insurance.
Courts, recognizing that the cryptic nature of binders is born of necessity and that
many policy clauses are either stereotypes or mandated by public regulation do not
hesitate to find that conditions and limitations usual to the contemplated coverage were
intended to be part of the parties' contract during the binder period.24 Thus, "an insurance
binder is a temporary or interim policy until a formal policy is issued," so sayeth a New
York Superior Court in 2003.
Although an enforceable contract, a binder is as the word implies, a document
which is necessarily incomplete, therefore courts will often look outside of the binder to
determine the obligations to which the parties intended to be bound. This was of question
in the World Trade Center Properties case, and the New York Court stated that in
interpreting a binder, courts generally look to two items, (1) the specific terms contained
in the binder or incorporated by reference, and (2) to the terms used in the actual policy in
use so as to compare terms between the binder and the final policy. Courts will first
consider evidence of the parties' pre-binder negotiations to determine what terms should
be implied, and, in particular, "any policy form that was exchanged in the process of
negotiating the binder, together with any express modifications to that form, is likely the
6
most reliable manifestation of the terms by which the parties intended to be bound while
the binder [is] in effect" (holding that binder incorporated the terms of the policy form
submitted to insurer by the broker in soliciting the insurer's participation). Absent
sufficient extrinsic evidence of the parties' intentions, courts may imply the customary
terms of the insurers' own policy form.25 The binder, however, is "a present contract of
insurance."26 Evidence that "would be relevant only to the parties' post-binder
relationship" is irrelevant with respect to the terms of the binder in existence at the time
of a loss (as determined by the court in the World Trade Center case).
DETERMINING WHETHER AN AMBIGUITY EXISTS
An ambiguity exists when a word or phrase is reasonably susceptible to more than
one construction.27

A provision in an insurance policy is ambiguous when it is reasonably
susceptible to more than one reading.
Minn. Court of Appeal in 1992 stated "A contract is said to be ambiguous when
its words may reasonably be understood in different ways (the existence of multiple
dictionary definitions does not prove a word in an insurance policy is ambiguous)."
Courts will find an ambiguity only where each of the competing interpretations is
objectively reasonable:
A word or phrase is ambiguous when it is capable of more than a single meaning
"when viewed objectively by a reasonably intelligent person who has examined the
context of the entire integrated agreement and who is cognizant of the customs, practices,
usages and terminology as generally understood in the particular trade or business." (2d
Cir. 1988)
A Michigan Appeals Court in 1998 stated "An appellate court should not strain to
create an ambiguity where, in common sense, there is none."
An ambiguity may be either patent or latent. A patent (apparent) ambiguity exists
on the face of the contract, while a latent (possible or potential) ambiguity exists when
the language becomes unclear "in light of extrinsic or collateral circumstances."28
Therefore, the meaning of a policy was clear as long as the policy remained in effect until
the anniversary date of the policy. However, a latent ambiguity in the policy became
apparent when the policy was cancelled prior to the anniversary date and it was unclear
how the annual aggregate feature of the policy operated.
"A court should not torture the language of the policy in order to create
ambiguities."29 A Missouri court in 1967 stated that the rules of construction of
insurance policies " [do] not authorize a perversion of language, or the exercise of
inventive powers for the purpose of creating an ambiguity when none exists." "The court
should not find the language ambiguous on the basis of the interpretation urged by one
party, where that interpretation would `strain the contract language' beyond its reasonable
and ordinary meaning." (New York Court 1995)
There "is no rule of contract construction which requires that every term in an
insurance contract must be defined. And the mere fact that a term is not defined does not
render the contract ambiguous."30 Other courts have stated that an ambiguity does not
exist simply because terms are not defined in the policy.31 The drafter of a policy need
7
not define each word in the policy "ad infinitum." A North Carolina court in 1997 stated:
"If definitions are not provided, 'nontechnical words' are to be given a meaning consistent
with the sense in which they are used in ordinary speech, unless the context clearly
requires otherwise."
INTERPRETING AMBIGUOUS INSURANCE POLICIES
Where the meaning of a policy is not clear, the court will consider extrinsic
evidence of the parties' intentions.32 Where the meaning of a contract is ambiguous and
the parties have by their acts and conduct placed their own meaning on its doubtful terms,
the court should and usually will adopt that construction."33
Extrinsic Evidence as Proof of Intent
In attempting to construe ambiguous policy language, courts will consider
extrinsic evidence regarding the mutual intent of the parties at the time of contracting34
—but only to the extent that it may not vary or modify the terms of the agreement nor to
add to or detract from its terms, but to aid in ascertaining the true intent of the parties.

The test of admissibility of extrinsic evidence to explain the meaning
of a written instrument is whether the offered evidence is relevant to prove a
meaning to which the language of the instrument is reasonably susceptible.
Many forms of extrinsic evidence are admissible to prove the meaning of policy
provisions: "Preliminary consideration of all credible evidence offered to prove the
intention of the parties [requires that the trial court consider evidence which] includes
testimony as to the circumstances surrounding the making of the agreement . . . including
the object, nature and subject-matter of the writing. . ." so that the court can "place itself
in the same situation in which the parties found themselves at the time of contracting."35
The size of the premium and the terms of payment may be a factor considered in
construing doubtful clauses in a policy.
If the court finds the policy language ambiguous, the court can consider extrinsic
evidence to determine whether a custom or usage exists that gives a particular meaning to
a word or phrase. However, custom or usage is not established by showing that an expert
in the field would attach a particular meaning to the terms of the policy.36 Thus, while
pertinent insurance industry literature and expert testimony may give some indication of
what the drafters of a standard policy intended, such evidence is not conclusive. Courts
are, therefore, willing to look beyond what is said to the intent which is what they are
supposed to do.
In a Michigan case, the court noted it "must look more to the words used and the
intent of the parties to the contract than to the intent of the drafters of the standard
policy." Even a discernible and clear drafters' intent would not necessarily correspond to
that of the insurers using the form language since many of the insurers had incomplete
and contradictory knowledge as to what was the drafters' intent vis-à-vis their own
intent(s) in issuing the policies containing that language.37
Courts have, however, allowed and considered evidence of insurance industry
publications such as interpretations of the Insurance Services Office, Inc. ("ISO"), a
"non-profit organization that provides rating, statistical and actuarial policy forms and
8
related services to all American property and casualty insurers," and the Fire Casualty &
Surety Bulletin ("FC&S Bulletin"), published by the National Underwriters Association
and "used by insurance agents and brokers to interpret standard insurance policy
provisions."38
In an insurance dispute arising from the destruction of the World Trade Center, an
Illinois court ruled that the Property Loss Research Bureau ("PLRB") was required to
produce documents which could demonstrate the insurance industry's custom and usage
of policy terms relevant to the pending actions.39 The PLRB, a non-profit association
owned and operated by insurance companies and underwriting organizations, provides
research and analysis of coverage issues and policy language. In this case, the court had
determined that the term "occurrence" was ambiguous. In resolving this ambiguity, the
court held it was essential to determine what meaning the insurance industry at large
would have attributed to that term prior to September 11, 2001. The court rejected the
PLRB's contention that the documents were confidential and proprietary. Notably,
similar documents had already been produced by the ISO.
Rules of Construction "Against the Insurer"
The Contra-Insurer Rule

The general rule is where a policy of insurance is so framed as to leave
room for two constructions, the words used should be interpreted most strongly
against the insurer."40
The insurer "has the responsibility of making its intention clearly known," and
where an insurer attempts to limit liability by use of an ambiguously worded term which
is subject to more than one reasonable construction, most courts will construe such an
ambiguity strictly against the insurer.41 The court also said that in determining whether
to construe the language against the insurer, the court should decide "whether more
precise language by the insurer, had such language been included," would have resolved
the question beyond a reasonable doubt.
The rationale for the contra-insurer rule was summarized by the New York Court
of Appeals:42
"The policy, although of the standard form, was prepared by insurers, who are
presumed to have had their own interests primarily in view; and hence, when the meaning
is doubtful, it should be construed most favorably to the insured, who had nothing to do
with the preparation thereof."
Thus, the contra-insurer rule is based upon the doctrine of contra proferentem,
which literally means "against the offeror" or drafter of the language. In choosing among
the reasonable meanings of a promise or agreement or a term thereof, that meaning is
generally preferred which operates against the party who supplies the words or from
whom a writing otherwise proceeds.43
9
If extrinsic evidence and all other aids to construction do not resolve the
ambiguity, then, as a last resort, the agreement will be construed against the drafter and
under the doctrine of contra proferentem. "If tendered extrinsic evidence is itself
conclusory and will not resolve the equivocality of the language of the contract . . . the
ambiguity must be resolved against the insurer which drafted the contract." "Contra
proferentem "is used only as a matter of last resort after all aids to construction have been
employed but have failed to resolve the ambiguities.44
Contra-insurer rules of construction apply with particular force when there is an
ambiguity in an exclusionary clause.45 Exclusionary clauses "never grant coverage, but
rather limit the scope of the basic protection statement." The insurer therefore has the
duty to use precise language.
Most courts apply the contra-insurer rule only in cases where there is an
ambiguity in policy terms which cannot be resolved by resort to extrinsic evidence.
Absent ambiguity, there is no room for construction and the policy will be enforced
according to its terms.
When extrinsic evidence does not resolve an ambiguity, the insured typically can
invoke the application of contra-insurer rules of construction by presenting a reasonable
construction of an ambiguous policy term. Courts have stated that construing contract
terms against the drafter "is generally inappropriate if both parties are sophisticated."
The application of the contra-insurer rule is often outcome-determinative in
coverage disputes.46 This may seem like over-emphasis, but the multi-million dollar
asbestos coverage dispute was resolved against various insurers by application of the
contra-insurer rule .
The Reasonable Expectations Doctrine
The courts of many states have applied a variation of the contra-insurer rule
known as the "reasonable expectations doctrine". This doctrine, which was first
articulated and sponsored by Professor Keeton of Harvard Law School Keeton,47
provides that a policyholder's "reasonable expectations" regarding the nature, scope and
terms of his insurance coverage should be honored by the courts even though a careful
review of the policy language reveals a particular limitation or exclusion.
Defining a Policy Provision Using the Reasonable Expectations Doctrine

The "reasonable expectations" doctrine is a principle by which policy
language is construed in accordance with the objectively reasonable expectations of
the insured.48
Under this doctrine, "the reasonable expectation of the insured may be given
effect in unique circumstances, even if careful examination of the policy provision would
negate that expectation."
The test of the meaning of a word or phrase under the reasonable expectations
doctrine is not what the drafter of a policy provision actually intended, but rather what a
reasonable person in the position of the insured would have understood it to mean.
Reasonable expectations doctrine is not intended as a substitute for inquiry into
insured's actual expectations. Thus, "[t]he plain meaning of policy language is not
10
measured. . . by the understanding of a layperson, but by the understanding of a person
engaged in the insured's course of business."49 A reasonable court interpretation was that
"The best and most recent explanation is that the policy should be viewed as if by a
reasonably intelligent business person who is familiar with the agreement and with the
industry in question." An insurance policy should be read as a lay[person] would read it
and not as it might be analyzed by an attorney or an insurance expert.
The application of the reasonable expectations doctrine is typically
limited to cases in which the policy is ambiguous and the mutual intent of the parties
cannot be determined.
"Only if the Court makes a preliminary finding that the policy language at issue,
taken either on its face or in the context of the entire policy, is ambiguous should the
Court consider the reasonable expectations of the insured.50 Courts stated that the
reasonable expectations of an insured are not assessed unless the language of the
insurance policy is found to be ambiguous.
The courts in forty-two jurisdictions have recognized some variation of the
reasonable expectations doctrine.
The courts in Florida, Utah, Ohio, South Carolina, Washington, Michigan and
Idaho have generally rejected all formulations of the reasonable expectations doctrine in
favor of the traditional principles of contract interpretation.52 The Florida courts have
held that there is no legal basis under Florida law for plaintiffs' claim. . . [of]
reasonable expectations of coverage.53" Further, the court stated "We decline to
adopt the doctrine of reasonable expectations . . .. Construing insurance policies'
upon a determination as to whether the insured's subjective expectations are
reasonable can only lead to uncertainty and unnecessary litigation."
Should "Contra-Insurer" Rules of Construction Apply to Business
Insurance?
The "reasonable expectations doctrine" and other variations of the contra-insurer
rule developed as a judicial response to the unequal bargaining power of the typical
insurance consumer in relation to his insurer, particularly in cases involving "standard
form" personal lines insurance policies drafted by the insurer and marketed to insureds on
a "take it or leave it" basis.55

Some courts feel that the contra-insurer rule "rests upon the ground
that the company's attorneys, officers or agents prepared the-policy, and it is its
language that must be interpreted.
Since business insurance policies, by contrast, are typically negotiated (and often
drafted) on behalf of the insured by sophisticated brokers, risk managers and/or counsel,
it can be argued that a business insurance policy should not automatically be construed
"against the insurer." There is a substantial body of case law holding that contra-insurer
rules of construction should not apply to business insurance.
The courts that have declined to apply the contra-insurer rule have relied upon
evidence establishing the comparability of bargaining power between the insurer and
insured, including:
11
1. the large size of the business insured;
2. the involvement of counsel on behalf of the insured in the negotiation of the
policy;
3. the representation of the insured by an independent broker in negotiation of the
policy;
4. the use of a "manuscript," or individually negotiated policy;
5. the "insurance" sophistication of the insured;
6. whether the dispute is between two insurance companies; and
7. whether the parties possess equal bargaining power.55A
Size of the Business Insured
Although no court has declined to apply the contra-insurer rule solely on the basis
of the size of a business insured, some courts have cited size as a factor to be considered
in the determination of whether to apply the contra-insurer rule. A court, for instance,
court refused to interpret a policy against an insurer given the size and recognizability of
the business, the size and complexities of the insurance contracts and the evidence that, in
some cases, certain provisions were added or subtracted. Further, contra-insurer rules
were inapplicable to a situation where "two large corporate entities, each represented by
specialized insurance brokers or risk managers, negotiated the terms of the insurance
contracts."
Involvement of Counsel
A number of courts have refused to apply the contra-insurer rule in circumstances
in which a business insured was represented by sophisticated counsel at the time that the
insurance policy in dispute was negotiated.
Another court rejected the argument that the terms of an excess policy should be
construed against the insurer, reasoning that sophisticated counsel represented the
insured at the time the coverage was secured:
"This [contra-insurer] rule is apt when the insured is an innocent and naive party
unfamiliar with the insurance field. But where the insured is a corporation, as here,
represented by counsel on the same professional level as the counsel for the insurers,
then ambiguous provisions should not be construed strictly against the insurer, but
should be construed in favor of what reason and probability dictate was intended by the
parties with respect to coverage."
Involvement of Brokers
Most corporations place their insurance through independent brokerage firms.
Although there is some confusion in the case law, particularly with respect to "Lloyd's
brokers," in which case most courts have held that (with certain exceptions) only brokers
who have been approved by the Committee of Lloyd's are permitted to negotiate
insurance at Lloyd's. These firms are denominated "Lloyd's brokers." The major
independent brokerage firms in London are all Lloyd's brokers. Conversely,
"Independent brokerage firms" act as "agents" for the insureds whose insurance coverage
they place.
12
The bargaining power that independent brokerage firms bring to bear on behalf of
their business clients in negotiating insurance coverage was the subject of the following
observation by Justice Frankfurter in 194056:
"The broker . . . is an independent middleman, not tied to a particular company.
He meets more specially the needs of large customers, using their concentrated
bargaining power to obtain the most favorable terms from competing companies."
The participation in negotiations by a broker acting on behalf of a business
insured has been cited by several courts which declined to apply contra-insurer rules. For
example, the Supreme Court of New Jersey refused to apply contra-insurer rules in
construing a business insurance policy which was negotiated on behalf of the insured by
independent insurance brokers. The court held that a limited number of courts have held
that Lloyd's brokers act as agents for the Lloyd's insurers rather than for the underwriters
for whom they place policies.
Contra-insurer rules have been found inapplicable in numerous cases in which the
broker supplied the policy language in question, such as where the policy drafted by
independent broker hired by insured and agreed upon by insurer, rendered contra-insurer
rule inapplicable, where a broker selected the policy forms, prepared the policies and sent
them to the insurance companies for execution, and particularly where the policy
language was supplied by a broker (such as in a case involving Goodrich and represented
by Johnson & Higgins). Thus, in another case, the court refused to construe alleged
ambiguities in a fire insurance policy in favor of the insured, noting:
"When it is the insured or his broker who supplies the language in question … the
reasons behind the rule of construction favoring the insured completely disappear."57
Use of Manuscript Policy
Since business risks are often extremely complicated and specialized, many
business insurance arrangements are consummated in the form of individually negotiated
and drafted policies known in the industry as "manuscript" policies. While "standardform" policies that characterize many personal insurance arrangements may properly be
viewed as contracts of adhesion for which a contra-insurer rule is appropriate,
individually negotiated manuscript policies, by their nature, reflect the bargaining power
of the insured.
Numerous courts have refused to apply the contra-insurer rule in the construction
of manuscript policies, such as where certain changes were made at the insistence of the
insured.58
Similarly, a court declined to construe any existing ambiguity in a bankers blanket
bond against the insurer. The contract, a Bankers Blanket Bond, was the product of
negotiation between the banking and surety industries, thus making the rule of contra
preferentem [sic] unavailable.
Insurance Sophistication of the Insured
Since the contra-insurer rule developed, in part, to protect the inexperienced
insured, it has been held that where the insured has the same insurance experience as the
insurer, the rule should not apply. This has worked against Johnson & Johnson who was
known as a large sophisticated corporation of substantial worth guided in its insurance
13
negotiations by an able staff, which in turn was led by a most competent and capable
director," who was assisted by world-prominent domestic and international insurance
brokers.
Also, an appellate court held that the contra-insurer rule should not be applied on
behalf of a business insured that utilized a sophisticated insurance adjusting firm to
administer its workers' compensation policy, stating "While it is true that (Plaintiff) is
not an insurance company, where, as here, it acts as a self-insurer with respect to workers'
compensation claims through its agent, a licensed insurance adjusting company, its status
is more akin to that of an insurance company than to that of an individual who is
inexperienced in matters of insurance coverage for whose benefit the rule was
promulgated."59
A Washington court stated "There is no purpose in following a legal platitude that
has no realistic application to a contract confected by a large corporation (Boeing)and a
large insurance company (Aetna) each advised by competent counsel and informed
experts."60
Disputes Between Insurers
Some courts have held that contra-insurer rules should not be applied "to a dispute
between two insurance companies. A 2d Circuit Court in 1991 held that: "The
touchstone for applying contra proferentem is the insured's lack of sophistication. Where
the dispute is between two insurance companies, both parties are sophisticated business
entities, familiar with the market in which they deal and armed with relatively equivalent
bargaining power; hence, the contra insurer rule serves little purpose."
Bargaining Power Generally
A number of courts have recognized that a business insured often has "the market
power to negotiate with its insurers on an even field."
In summary, if the business is large and sophisticated, they generally will have
little chance of "poor-mouthing" their expertise if they try to convince a court that the
insurer has taken advantage of them in preparation of the insurance policy.
STUDY QUESTIONS -CHAPTER ONE
1. Any limitation in coverage must be described
A. in clear and explicit language.
B. on the cover sheet of the document.
C. in an Addendum or Annex to the policy.
D. in at least two languages inside the policy.
2. Any clause which has been inserted in an insurance policy with the insured's consent
"is valid
A. as long as it is approved by the agent or broker.
14
B. only after it has been pre-approved by the Department of Insurance.
C. as long as it is clear, unambiguous and not in contravention of public policy.
D. only for the initial policy term, then it must be annually renewed.
3. The parol evidence rule generally precludes consideration of extrinsic evidence of the
meaning of an insurance contract
A. unless the policy language is unambiguous,
B. in every case and under any jurisdiction.
C. unless such evidence is pre-approved by a judge or other trier-of-fact.
D. unless the policy language is ambiguous.
4. Extrinsic evidence of an undisclosed unilateral intent is
A. very important and material to the contract.
B. immaterial to the interpretation of a contract.
C. required to be sworn to and provided to the trier-of-fact.
D. used only when there is a legal and technical question involved in coverage.
5. In the event a loss occurs before issuance of a formal policy,
A. courts will apply the terms and conditions provided in the insurance binder.
B. the policy will be voided ab initio (from conception).
C. the insurer has the option of accepting or rejecting the policy terms.
D. the Department of Insurance must determine the status of the policy.
6. A provision in an insurance policy is ambiguous when
A. it can only has one interpretation.
B. it is reasonably susceptible to more than one reading.
C. there is similar coverage in force with another policy.
D. it is easily understood.
7. Where the meaning of a contract is ambiguous and the parties have by their acts and
conduct placed their own meaning on its doubtful terms, the court
A. will, nearly always, determine that it is ambiguous.
B. should and usually will adopt that construction."
C. usually moves to void the contract.
D. must provide an alternative construction.
8. The test of admissibility of extrinsic evidence to explain the meaning of a written
instrument is
A. whether the offered evidence is relevant to prove a meaning that is logically
important to the instrument.
B. whether a reasonably normal person can understand it.
C. never available in a court setting.
D. whether it is acceptable by the Department of Insurance.
9. The general rule is that where a policy of insurance is so framed as to leave room for
two constructions, the words used
15
A.
B.
C.
D.
should be interpreted most strongly against the insured.
must be submitted to arbitration.
must be determined by the Department of Insurance.
should be interpreted most strongly against the insurer.
10. The principle by which policy language is construed in accordance with the
objectively reasonable expectations of the insured, is the
A. "reasonable expectations" doctrine.
B. "meaningful interpretation" rule.
C. "anticipated definitions" principle.
D. "nole ventre" doctrine.
ANSWERS TO STUDY QUESTIONS
1A
2C
3D
4B
5A
6B
7B
8A
9D
10A
16
CHAPTER TWO - RESERVATION OF RIGHTS
INTRODUCTION
When an insurer first receives notice of a claim or suit against its insured, the
insurer must promptly take one of the following actions:
(i) acknowledge receipt of the notice and advise the insured that it will provide
coverage;
(ii) advise the insured that it will defend the insured subject to a reservation of its
right to deny coverage on one or more specified grounds;
(iii) enter into a Non-Waiver Agreement with the insured;
(iv) deny coverage on the grounds that the claim is either not covered under the
policy or that the insured has breached a policy condition; or
(v) rescind the policy if it appears that the policy was procured through fraud,
mutual mistake of fact, or the insured's misrepresentation or concealment of
material facts in the application.
In respect to the adjuster, most of these actions go beyond the scope of the
adjuster's normal duties to an insurance company but the adjuster should be familiar with
the legal process of areas in which they may not often become personally or
professionally involved as in many cases they may be brought into the case before or
after a reservation of rights letter has been served. In any event, it doesn't hurt to know
the process.
RESERVATION OF RIGHTS LETTERS
When an insured's claim appears to be within the scope of coverage under the
policy, the insurer may acknowledge the claim and indicate to the insured that coverage
will be provided. However, if the insurer does not raise any defenses to coverage, i.e., if
the insurer does not issue a reservation of rights letter, and the insurer defends the
insured, then the insurer may later be estopped from asserting any defenses to coverage.
When a liability insurer's admission of coverage under a liability policy, binds the insurer
to pay judgment or settlement against the insured, and bars the insurer from recovering
any payment from the insured, it does not affect the insurer's rights against other insurers.
The preferable course for an insurer in cases in which coverage is questionable is
to defend the insured subject to a reservation of rights and, if appropriate, seek a
declaratory judgment determining the obligations of the insurer.
Purpose and Effect of Reservation of Rights Letter
A reservation of rights letter fairly informs the insured of the insurer's coverage
position and enables the insurer to fulfill its duty to defend the insured while preserving
the insurer's right to assert defenses to coverage in a declaratory judgment action. Courts
generally support the thesis that defense under reservation of rights is sufficient to protect
the insurer's right to deny coverage on the basis of subsequently obtained information.
17
If an insurer undertakes the defense of its insured without reserving its right to
deny coverage for stated reasons, the insurer may be precluded from raising any policy
defense of which it was on notice at the time it assumed the defense.
Thus, "if reservation of rights is a means by which prior to determination of the
liability of the insured, the insurer seeks to suspend the operation of waiver and
estoppel." Therefore, an insurer that timely and adequately reserves its right to deny
coverage is not collaterally estopped from contesting coverage by a judgment in favor of
a third-party against its insured. Moreover, through a reservation of rights, an insurer
may effectively reserve its rights to recover defense costs in the event it is determined
that there is no coverage
Substance of Reservation of Rights Letter
A reservation of rights letter must inform the insured in detail of all of the
potential defenses to coverage the insurer has developed in its preliminary analysis of a
claim or suit.

"A reservation of rights letter must give fair notice to the insured that
the insurer intends to assert defenses to coverage or to pursue a declaratory relief
action at a later date."60
Courts have ruled that a reservation of rights letter that "identifies the policy,
informs the defendants that the insurer will provide a defense under a reservation of
rights, points out specific policy provisions that may result in non-coverage, and tells the
defendants that because there may be liability in excess of policy limits, they have the
right to secure independent counsel, is clear and unambiguous as a matter of law and will
be supported by the courts. An insurer may not generally reserve its right to assert
defenses based upon "such other reasons as may appear during our investigation of this
claim or suit."
If further investigation is required to determine whether coverage is available, the
reservation of rights letter should state that the insurer reserves the right to disclaim
coverage based upon further development of the facts. If additional grounds for a
potential denial of coverage come to light either during the course of discovery in the
underlying lawsuit or during the insurer's investigation of a claim, the insurer may
supplement its reservation of rights letter to add newly discovered coverage defenses.
Timing and Addressee[s] of Reservation of Rights Letter

A reservation of rights letter should be sent as soon as a coverage
question is
recognized by the insurer.
Where there are multiple insureds, the better practice is to send a copy of the
reservation of rights letter to each person or entity that may assert a right to be covered
under the policy as a named insured or an additional insured. In some jurisdictions, it has
been held that a reservation of rights letter must also be sent to the underlying claimant or
plaintiff.
18
In respect to whether the insured believes that an insurer will pay the judgment,
courts have ruled that in the absence of knowledge as to a potential coverage defense, an
injured plaintiff may reasonably believe that an insurer that is defending an action will
also pay any judgment.
Although prompt transmittal of a reservation of rights letter is favored, a
declaratory judgment action may not be readily available to the insurer. An insurer's
indemnity obligations often cannot be determined until after the underlying claim against
the insured is resolved. For example, in cases in which the insured is charged with both
negligent and intentional conduct, the insured may have coverage for the former but not
the latter. A coverage determination cannot be made until a trier of fact determines
whether the insured is an intentional wrongdoer or merely negligent. Basically, it is
premature to determine coverage until the insured is confronted with an actual loss.
Makes sense.
Excess Insurers Not Obligated To Issue Reservation of Rights Letter
An excess insurer which has no contractual duty to defend or contribute toward a
settlement or payment of a judgment until after the underlying coverage or self-insured
retention has been exhausted or exceeded is not required to issue a reservation of rights
letter or notice of disclaimer to preserve the right to deny coverage.
CONFLICTS OF INTEREST
Insured's Right To Obtain Independent Counsel
An insurer that contests coverage generally cannot control the insured's defense of
the underlying action. Where the insurer either asserts a reservation of rights or disclaims
liability as to some grounds for recovery alleged in the complaint against its insured, the
courts have often held that a conflict of interest arises between the insurer and insured,
entitling the insured to a "defense by an attorney of his own choosing, whose reasonable
fee is to be paid by the insurer."
Where there is a conflict of interest, the Seventh Circuit (1983) court explained
the general rule as follows:
"A conflict of interest between the insurer and the insured does not relieve the
insurer of its contractual duty to defend. Where there is a conflict, the insurer must either
provide an independent attorney to represent the insured or pay the costs incurred by the
insured in hiring counsel of the insured's own choice."
In California, a District court held that a conflict of interest exists whenever the
insurer reserves its right to deny coverage at a later date. Thus, under California law,
where an insurer reserves its rights and there is a conflict of interest between the insured's
defense of the underlying lawsuit and potentially applicable coverage defenses, the
insurer is obliged to appoint and pay for independent counsel to represent the insured.
Relying on a 1997 decision,61 the court of appeal held that since most of the
claims in the underlying action were not covered under the policy, the insured was not
entitled to the "windfall" of full reimbursement of defense costs. In rejecting the
insured's argument that the appointment of an independent counsel was required, the
court stated:
19
"We turn now to the issue … of whether an insurer in an action involving covered
and uncovered claims is automatically obliged to provide independent counsel pursuant
[specified Civil Code]. Does the insurer breach its duty to defend when it assigns
competent outside counsel pending a further analysis of the … issue? As we explain, the
answers to each of these questions is no. Not every reservation of rights entitles an
insured to select [his own] counsel. There is no such entitlement, for example, where the
coverage issue is independent of, or extrinsic to, the issues in the underlying action or
where the damages are only partially covered by the policy."
Another court correctly stated that "a conflict of interest does not exist as to
allegations or facts in the litigation for which the insurer denies coverage."
While some jurisdictions allow for the right of an insured to select independent
counsel at the expense of the insurer, there are states that allow this but with reservations.
Conversely, there are a number of courts that recognize that the insured does not have the
right to select independent counsel at the insurer's expense in all cases. "It is only
necessary where the `question of insurance coverage is . . . intertwined with the question
of the insured's liability." "Such a case arises when the defense attorney's duty to the
insured would require that he defeat liability on any ground and his duty to the insurer
would require that he defeat liability only upon grounds which would render the insurer
liable."
Limitations on the Insured's Right To Select Independent Counsel
When the insured has the right to select independent counsel, the courts have
made certain (sensible) requirements. For instance, the insured has a duty of good faith
to act reasonably in selecting independent counsel. In a California case, the Second
District (1991) held that the insured has an obligation to select an experienced attorney
who can present a meaningful defense, "Moreover, the attorney selected has to be
"willing to engage in ethical billing practices susceptible to review at a standard stricter
than that of the marketplace."

The insured's unilateral right to select independent counsel is subject
to an implied covenant of good faith and fair dealing, which requires the insured to
select counsel reasonably thought to be competent to present an effective defense.
The court further held that the insured must select an attorney "who will bill
reasonably for his or her services." These requirements "provide a measure of protection
for insurers against over billing-and over-litigating by independent counsel."
In New York State in 1983, the district court granted the insurer's motion to
substitute independent counsel chosen by the insurer to represent the insured instead of
the law firm that had represented the insured in a coverage action against the insurer.
The court reasoned:
"[The insurer] is under a duty to provide only an impartial defense - not to
sacrifice its own interests. Allowing [the insured] to appoint as "independent counsel" a
firm that bears . . . any animus to [the insurer] would reintroduce, albeit in a converse
manner, the very difficulties that necessitate in the first instance the appointment of
independent counsel."
20
Some courts have held that, even in the absence of a policy provision so requiring,
the insurer should have the right to approve the engagement of independent counsel, but
such approval may not be unreasonably withheld. The insurer is entitled to right of
approval because "total expense of the defense is to be assumed by the insurer under its
promise to defend."
Limitations on the Insurer's Duty To Pay Defense Costs for Independent
Counsel
When the insured is entitled to control its defense, the insurer must underwrite
only the reasonable costs incurred in defending the action (New York law).
Some courts have extended this reasonableness requirement outside of the context
of a defense provided under a reservation of rights. An insurer that wrongfully refuses to
defend "is manifestly bound to reimburse its insured for the full amount of any obligation
reasonably incurred by him." An insured was entitled to recover costs of appeal from the
insurer where the appeal, though unsuccessful, was reasonable. However, if the insurer
provided adequate defense, the insured was not entitled to recover costs incurred by
engaging separate counsel.
The burden of establishing the reasonableness of attorneys' fees is on the insured.
There are a variety of cases that address the appointment of attorneys by the
insured and the method of payment of the attorneys, and much other detail in this respect.
However, for the purposes of this text, suffice it to say that in nearly all cases, the courts
have used "common sense" in determining this relationship. Obviously, the attorneys
must be of good character, be competent, and their fees must be reasonable. Throughout
the years—and probably in the future—there are attorneys who have charged more than
their usual fee because of the "deep pockets" of an insurance company who will be
paying them, but courts are making a deliberate attempt to restrict this abuse as much as
is possible.
Disqualification of Counsel
Once an insured consents to representation by counsel chosen by the insurer after
full disclosure regarding a potential conflict between the interests of the insurer and the
insured, an insurer's subsequent reservation of rights will not mandate disqualification of
counsel absent the existence of a conflict of interest "great enough to taint the trial." The
insurer must pay for counsel retained independently by the insured for liability suits,
where the insurer disputes coverage for some or all of claims, creating a conflict between
insurer and insured.
Under Model Rules of Professional Conduct as modified and applied in Florida, a
motion by the insurer to disqualify counsel for the insured is granted where the attorney
had previously represented the insurer in the same action and threat of disclosure of
confidential information was present.
Insurer's Liability for Insurance Adjuster's Misuse of Information
When coverage is disputed and the insurer retains independent counsel to
represent the insured, courts have found that the insurance adjuster or claim handler is
permitted to function in a dual role–as monitor of the insured's independent defense
21
counsel and as liaison with the insurer's coverage counsel. However, these courts
strongly imply that the insurer maybe held liable for misuse of information obtained from
the insured.
When an insurer agrees to defend under a reservation of rights, "it is obvious that
the [insurance] adjuster's loyalties are divided and the insured and his counsel cannot
reasonably expect that he represents only the interest of the insured." The concept of
independent counsel was created to address this precise issue and adequately protects the
interest of the insured.
NON-WAIVER AGREEMENTS
A non-waiver agreement is, in essence, a reservation of rights to which the
insured has assented. The `reservation of rights' letters do not require the assent of the
insured but are given the same effect as a non-waiver agreement. A non-waiver
agreement affords an insurer no greater protection than a properly drafted reservation of
rights—it will permit an insurer to assume the insured's defense without waiving policy
defenses, but it will not permit the insurer to breach its duty to defend and avoid an
estoppel as a matter of law
A non-waiver agreement is subject to the same limitations as a reservation of
rights letter, which means that a non-waiver agreement must be specific as to the grounds
for potentially denying coverage that are being reserved to the insurer. Any possible
ground for denying coverage that is known to the insurer and not recited in the agreement
is waived.
An insurer cannot compel the insured to enter into a non-waiver agreement as a
condition to the insurer's assumption of the insured's defense. Where the insurer sought
to have its insured sign a broad non-waiver agreement providing that the defense of the
underlying action would not foreclose the insurer from asserting"…any defense which it
may choose to make under the policy," the court held that the insurer could not condition
the performance of its contractual duty to defend upon the execution of a non-waiver
agreement.
If the insured insists on an unconditional defense and rejects a proposed nonwaiver agreement, the insurer may nevertheless have the right under the policy to
undertake the defense of the insured without waiving policy defenses. However, if the
insurer elects to defend without asserting a reservation of rights, the insurer will be
deemed to have abandoned any coverage defenses.
DISCLAIMERS
A disclaimer is an outright denial of coverage. Unlike a reservation of rights
letter, a disclaimer does not entail an agreement by the insurer to defend the insured.
Rather, the disclaimer communicates to the insured that the insurer will not provide
coverage for either defense or indemnity.
Notice of Disclaimer
Timeliness of Notice
22
A disclaimer or denial of coverage must be sent to the insured "as soon as is
reasonably possible" after the insurer learns of grounds for disclaiming. An untimely
disclaimer can constitute a waiver or estoppel of policy defenses.
The requirement of prompt notice of a disclaimer of coverage has been interpreted
as "an unconditional rule." The requirement is intended to "avoid prejudice to all
concerned parties."
General Considerations Regarding Timeliness of Disclaimer
Whether a notice of disclaimer is timely is generally a question of fact. A
disclaimer in a death action 16 months after an accident was found timely by the court,
since the insurer had considerable difficulty in resolving who had been driving the car
and whether the owner had consented.
However, an unexplained delay in providing notice of disclaimer may be deemed
unreasonable as a matter of law. "Unreasonable" periods ranging from 2 months to four
years were considered unreasonable by courts, but an unexplained 2-month period was
considered unreasonable in one case—yet in another case where the insurer waited four
years to disclaim was unreasonable as a matter of law. There seems to be no hard-andfast rule.
Interestingly, a court ruled that an insured's delay of nearly four years in reporting
a claim may not excuse an insurer's two-month delay in disclaiming as the insurer offered
no explanation for the 2-month delay.
Where the insurer is providing a defense because it is obligated to do so by reason
of the allegations of the complaint against its insured, the insurer must give notice within
a reasonable time after becoming aware of grounds for disclaiming liability or denying
coverage based on policy exclusions.
The obligation to disclaim coverage within a reasonable time may apply in cases
where the insurer wishes to rescind a policy ab initio because of insured's
misrepresentation in the application for insurance.
With respect to bodily injury cases, New York has codified the general rule which
requires insurers to give prompt notice of disclaimer:
"If under a liability policy delivered or issued for delivery in this state, an insurer
shall disclaim liability or deny coverage for death or bodily injury arising out of a motor
vehicle accident or any other type of accident occurring within this state, it shall give
written notice as soon as is reasonably possible of such disclaimer of liability or denial of
coverage to the insured and the injured person or any other claimant." This law has been
upheld in the courts, and several other states have either introduced such a law or are
contemplating doing so.
Where such a statute applies:

the insurer has the burden of demonstrating the reasonableness of
any delay in notifying the insured of its disclaimer or denial.
The New York statute is not applicable to disclaimers relating to accidents that
happen in other states.
Excess Insurers' Obligations Regarding Timeliness
23
The obligation to give prompt notice of a disclaimer applies to excess insurers
as well as primary insurers. However, if the insured has both primary and excess
coverage and fails to file a claim with its primary insurer, the excess insurer has no duty
to serve a notice of disclaimer upon the insured.
In 1977, a court determined that a malpractice insurer which issued both
primary and excess policies to the insured was permitted to deny coverage under an
excess policy although it had not reserved its right to do so. Moreover, where there is
no duty to defend under an excess policy, there is no obligation to issue a reservation of
rights letter, and the excess insurer cannot be estopped from asserting coverage defenses
for failing to do so.
Non-Asserted Defenses May Be Waived
By stating the grounds for its disclaimer, the insurer waives all other possible
grounds.
In a case illustrating this point, the personal injury plaintiffs commenced an action
arising out of an accident by mailing a copy of the summons and complaint to the
defendant's insurer two and a half years after the accident. The insurer failed to locate its
insured and four months after receiving the complaint mailed a letter to the plaintiffs
disclaiming liability on the grounds that the insured failed to report the accident and
failed to cooperate. In considering the effectiveness of the disclaimer, the court held:
"Absent such specific notice, a claimant might have difficulty assessing whether
the insurer will be able to disclaim successfully. This uncertainty could prejudice the
claimant's ability to ultimately obtain recovery. Although, under the facts of this case a
disclaimer might have been premised on the late notice furnished by the third parties
themselves to the insurer, since this ground was not raised in the letter of disclaimer, it
may not be asserted now. In addition, the insurer's responsibility to furnish notice of the
specific ground on which the disclaimer is based is not unduly burdensome, the insurer
being highly experienced and sophisticated in such matters."
Similarly, where a disclaimer is based on non-cooperation, courts have held that
the insurer may not subsequently issue a disclaimer based upon late notice. The New
York courts also have held that a disclaimer based on a specific policy exclusion waives
any defense based upon the insured's failure to forward suit papers. Another court rules
that the original disclaimer based on failure to obtain full insurance for a trailer "cannot
now be expanded to include additional reasons for disclaimer."
Cases Holding That Non-Asserted Defenses May Not Be Waived
The cases which hold that an insurer waives the right to disclaim coverage for
reasons other than those specifically identified in the original disclaimer letter cannot
always be reconciled with the concept of waiver as the voluntary and intentional
relinquishment of a known right. Thus, a number of courts have held that an insurer's
failure to include in its disclaimer letter all possible grounds for disclaimer will create a
waiver or estoppel only where the insured is able to show some prejudice resulting from
the omission. As one court put it:
"No party is required to name all his reasons at once, or any reason at all; and the
assignment of one reason for refusal to pay cannot be a waiver of any other existing
24
reason, unless the other is one which could have been remedied or obviated, and the
adversary was so far misled or lulled into security by the silence as to such reason that to
enforce it now would be unfair or unjust."
On Whom Notice Is To Be Served
Each interested party is entitled to receive its own notification. A notice of
disclaimer to one claimant does not operate as a disclaimer to any other party who has not
received proper notice from the insurer. A notice to named insured contractor was
insufficient notice to injured party, and to co-defendant who had cross-claimed against
insured; however, service of a copy of the disclaimer letter on the injured party's attorney
has been held sufficient.
Effect of Wrongful Disclaimer
An insurer that wrongfully refuses to defend a policyholder forfeits the right to
assert policy defenses to coverage. Under Illinois law and several other states following,
a failure to defend is wrongful and gives rise to such an estoppel if the underlying suit is
potentially covered and the insurer does not seek a judicial declaration of its rights and
obligations. However, the Illinois estoppel rule applies only where an insurer has
breached the defense obligation under a traditional insurance policy. Ordinary contract
principles govern any breach of obligation where the insurance policy at issue is a
"fronting" contract or a part of some other relationship where the insurer has not assumed
true risk in exchange for a premium.
Where an insurer acted in bad faith in denying coverage without explanation;
accordingly insured's underlying settlements are presumed to be reasonable and the
insurer is estopped from denying coverage.
WAIVER AND ESTOPPEL AS DEFENSES TO DISCLAIMERS
Waiver and estoppel differ in the following respect: Where a loss is not covered
by the policy, the insurer's waiver of a defense cannot create coverage. However, an
insurer maybe estopped by its conduct from asserting a lack of coverage.
Waiver

Waiver is a voluntary and intentional relinquishment of a known
right with full knowledge of the facts upon which the existence of the right depends.
The doctrine of waiver evolved to prevent forfeitures of the insured's coverage
which would otherwise result when an insured breaches a policy condition. Courts have
found waiver where there is direct or circumstantial proof that an insurer intended to
abandon a policy.
However, a waiver should not be lightly presumed. Evidence of communications
or settlement negotiations between an insured and its insurer either before or after
expiration of a limitations period contained in the policy is not, without more, sufficient
to prove waiver or estoppel.
Waiver maybe asserted by the insured when the insurer fails to assert a known
policy defense.
25
Any defenses which relate to the existence or scope of coverage are not waivable,
because the courts will not create coverage where none exists, or the doctrine of waiver
cannot be used to expand an insuring clause or restrict the exceptions to such clause.
Estoppel
Estoppel differs from waiver in that it arises because the insurer has taken some
action upon which the insured has justifiably relied upon to his detriment. (For those
who do not work with the term "Estoppel" everyday, estoppel is a "bar that prevents one
from asserting a claim or right that contradicts what one has said or done before or what
has been legally established as true."62 Or as one fully-appreciated law professor
explained it: "If you didn't do then, what you should have done then, you can't do it
now.") For example, if an insurer assumes the defense of an action against an insured
with knowledge of facts constituting a coverage defense and without reserving its right to
contest coverage, the insurer maybe estopped from later asserting that the policy does not
cover the claim.
However, an indemnity insurer will not be estopped to set up the defense of nonliability by reason of having participated in defense of the action against the insured if it
has given timely notice to the assured that it does not waive the benefit of such defense.
Where estoppel is found, the insurer is barred from asserting what could
otherwise be a legitimate policy defense. The general rule was stated as follows:
"Distinguished from waiver, of course, is the intervention of principles of
equitable estoppel, in an appropriate case, such as where an insurer, though in fact not
obligated to provide coverage, without asserting policy defenses or reserving the
privilege to do so, undertakes the defense of the case, in reliance on which the insured
suffers the detriment of losing the right to control its own defense. In such circumstances,
though coverage as such does not exist, the insurer will not be heard to say so."
A primary insurer may also be estopped from adopting an inconsistent position in
subsequent litigation with an excess insurer.
For there to be estoppel, the insured must show a "change of position and
prejudicial reliance on the insurer's conduct or representations."
One of the best discussions of the application of estoppel was in the case where
the insurer's reservation of rights letter stated that the insurer was reserving its rights
during an investigation of the accident. When, thereafter, the insurer retained an attorney
who filed an answer on behalf of the insured and entered into settlement negotiations
with the injured party, all without issuing a supplemental reservation of rights, the insurer
was estopped from relying on its policy defenses.
One exception to the estoppel rule has been recognized where a conflict of
interest exists between the insurer and the insured which prevents the insurer from
assuming the defense. In this situation, the insurer should not participate in the defense,
although it will be required to reimburse the insured for the costs of defending the claim.
It has also been held that where an insurer defended the action against its insured because
one cause of action was covered, and the insured was not prejudiced by delay in
disclaiming as to the remaining causes of action, there was no estoppel.
However, when an insurer controls the insured's defense of an underlying claim
and obtains information through this relationship that is later used to deny coverage, such
26
conduct is so contrary to public policy that the insurer is estopped from disclaiming
liability.
RESCISSION
An insurer is within it's rights to rescind a policy if it appears that the policy was
procured through fraud, mutual mistake of fact, or the insured's misrepresentation or
concealment of material facts in the application. This should be no big surprise, as these
are basic to rescission of not only insurance policies, but contracts for other areas as
well.64 This is so well known, that even though there are quite a few court decisions
regarding rescission, they pretty much are all the same.
LACK OF COOPERATION
Many comprehensive general liability policies contain a "Cooperation Clause"
which provides that: "The insured shall cooperate with the company and . . . shall not . . .
voluntarily make any payment. . . ." The cooperation clause allows the insurer to obtain
promptly, while the information is still fresh in the minds of all parties, "all knowledge,
and all information as to other sources and means of knowledge, in regard to the facts,
material to their rights, to enable them to decide upon their obligations, and to protect
them against false claims." The purpose of a cooperation clause is to protect the insurer's
interest and to prevent collusion between the insured and the third-party tortfeasor.
General Rules Concerning the Cooperation Clause

The willful failure of an insured to cooperate with the insurer with
respect to material matters is a breach of a condition precedent of the policy which
precludes
recovery under the policy.
In one case, the insured was barred from recovering because of willful obstruction
of insurer's defense of underlying litigation. A condition of a policy requiring the
cooperation and assistance of the assured in opposing a claim or an action lodged against
him by an injured person is material to the risk and of the utmost importance in a
practical sense. Without such cooperation and assistance the insurer is severely
handicapped and may in some instances be absolutely precluded from advancing any
defense. However, an Alabama court in 1980 stated that a failure to cooperate "is
inconsequential unless it is both material and substantial."
Materiality is determined by the relevance of the information to the investigation
at the time the information is sought and not by the information's ultimate importance to
the insurer. As an example, an insured's failure to answer material questions at an
examination under oath has been held to be a breach of the cooperation clause which
releases the insurer from all obligations under an indemnity policy. And in case you were
wondering, there is a line of cases holding that it is a breach of the cooperation clause for
an insured to invoke the Fifth Amendment right of self-incrimination rather than to
answer questions relating to a claimed loss.
In order to avoid coverage on the ground of lack of cooperation, according to
many jurisdictions, "the insurer must demonstrate that it acted diligently in seeking to
27
bring about the insured's cooperation . . ., that the efforts employed by the insurer were
reasonably calculated to obtain the insured's cooperation . . . and that the attitude of the
insured, after his cooperation was sought, was one of willful and avowed obstruction."
The trend of the cases appears to be that a breach of the Cooperation Clause will
not relieve the insurer of its obligations under the policy unless the insurer can
demonstrate substantial prejudice as a result of the breach, or show a material failure to
cooperate which substantially prejudiced the insurer.
Some states, emphasizing that cooperation with the insurer is a condition upon
which the insurer's obligations are dependent, do not require the insurer to show it has
been prejudiced by a lack of cooperation by the insured. The absence of prejudice to the
insurer, however, may bear on the question of the materiality of the breach by the
insured. The insurer has the burden of proving non-cooperation by the insured.
Privilege Issues
A number of courts have held that an insured's duty to cooperate does not imply a
duty to disclose privileged communications in a coverage dispute. Other courts, by using
the common interest doctrine, have held that communications between an insured and its
attorney in connection with the defense of an underlying litigation are normally not
privileged in coverage litigation between the insured and its insurer.
More significant cases address the "in issue" or "issue injection" doctrine wherein
insureds seeking coverage may not withhold otherwise privileged communications and
documents from their insurers if these materials relate to claims or defenses put in
controversy by an insured. It has been pretty well established that whether an insured
complied with policy terms can only be determined by examination of the conduct of the
insured and its counsel in the underlying litigation, as, otherwise, this would permit an
insured to seek coverage for claims while at the same time denying the insurer access to
information about the underlying claims which is substantially, if not exclusively, within
the communications claimed to be privileged.
Limitations to the application of the "in issue" doctrine have been addressed by
courts that have held that an insured has not necessarily put all of its privileged files "in
issue" merely by bringing a coverage action. Therefore, whether or not an insured has
waived a privilege under the "in issue" doctrine depends upon the claims and defenses of
the insured and case specific facts.
STUDY QUESTIONS - CHAPTER TWO
1. A document that gives fair notice to the insured that the insurer intends to assert
defenses to coverage or to pursue a declaratory relief action at a later date, is a
28
A.
B.
C.
D.
reservation of rights letter.
binder.
subpoena .
notification of contest.
2. A reservation of rights letter should be sent
A. to the insurer by the insured.
B. as soon as a potential claim arises.
C. to the insured with the policy.
D. as soon as a coverage question is recognized by the insurer.
3. An insurer that contests coverage generally
A. has total control over the contesting, including the insured's defense.
B. will not prevail in a court action.
C. is prevented from any subrogation actions involving the claim at any level.
D. cannot control the insured's defense of the underlying action.
4. The insured's unilateral right to select independent counsel is subject to an implied
covenant of good faith and fair dealing, which requires the insured to select counsel
A. selected by the insurer.
B. that is the least expensive and that is available.
C. reasonably thought to be competent to present an effective defense
D. from a list provided by the insurer with the court approval.
5. For defense costs, the burden of establishing the reasonableness of attorneys' fees
A. is on the insured.
B. will be determined by the local Bar Association.
C. will be determined by the presiding judge.
D. is on the insurer.
6. A disclaimer is
A. illegal in most jurisdictions.
B. an outright denial of coverage.
C. is a method used by a legal counsel to withdraw from a case.
D. a method of disagreeing with the other party in a lawsuit.
7. The insurer has the burden of demonstrating the reasonableness of any delay in
notifying the insured of its disclaimer or denial
A. only in Florida, Kentucky and Mississippi.
B. unless there is a prompt notice statute.
C. where a prompt notice statutes exists.
D. only in punitive damage cases.
8. A voluntary and intentional relinquishment of a known right with full knowledge of
the facts upon which the existence of the right depends is
A. a waiver.
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B. voiding a right ab initio.
C. a technique only used by third parties in a lawsuit.
D. an abscondination.
9. The willful failure of an insured to cooperate with the insurer with respect to material
matters is a breach of a condition precedent of the policy
A. which actually has no effect on recovery under the policy.
B. that will have the eventual effect of a court-ordered full recovery.
C. which precludes recovery under the policy.
D. that will make the insured liable for damages to the extent of the value of the
policy.
10. For an insured to invoke the Fifth Amendment right of self-incrimination rather than
answering questions relating to a claimed loss
A. this can be considered as a breach of the cooperation clause.
B. is the legal constitutional right of the insured and there is nothing that can be done
about
it.
C. this is not only a breach of the contract, it is illegal under federal law.
D. makes it mandatory for the court to immediately render a ruling as to
contestability.
ANSWERS TO STUDY QUESTIONS
1A
2D
3D
4C
5A 6B
7C
8A
9C
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10A
CHAPTER THREE - MATERIAL
MISREPRESENTATION
THE EFFECT OF A MATERIAL MISREPRESENTATION
The general rule is that a material misrepresentation or omission made in an
application for insurance will void the insurer's obligations under the policy.
Courts have generally held that a material misrepresentation in an insurance
application permits the insurer to invalidate the policy and to avoid responsibility for
losses claimed there under and further, insurers are entitled to rescind insurance policies
in light of insured's material misrepresentations regarding its claims history. If a party
applying for insurance makes a misstatement of a material fact in the application, the
insurer is entitled to declare the policy issued in reliance thereon, void ab initio.
If a misstatement or omission is not material to the risk insured and has been
made in good faith, courts will usually permit the insured to recover under the policy. On
the other hand, "when the misrepresentation is of an egregious nature, courts often find
that it is material."
Where the insurer accepted premiums for several months after having discovered
alleged misrepresentations on which it claimed to have relied when it issued the policy,
the court held the insurer had waived the right to cancel or rescind.
FAILURE TO DISCLOSE

A failure to disclose is as much a misrepresentation as a false affirmative
statement.
If a party fails to disclose a fact that a reasonable insured would have believed
was something the insurer would consider material, the insurer is entitled to rescind the
policy. Absent such belief, there is not actually a misrepresentation in the sense of a
knowing failure to disclose. However, many jurisdictions will not void policies where
the insured makes an otherwise material omission, if the insured was under no duty to
disclose the information. However, if the insurer fails to inquire about some fact, these
jurisdictions will hold that the fact is not material.
Courts have addressed a multitude of situations where there has been
misrepresentation, and in most cases, they allow for rescission—such as where the
insured failed to disclose past fraudulent conduct when obtaining professional liability
insurance; an insured failed to disclose misstatements and omissions in public filings
when obtaining officer and director liability insurance; the insured did not disclose two
DWI convictions when obtaining automobile insurance; an insured did not disclose that
an airplane lacked an airworthiness certificate; and an insured failed to disclose terminal
illness when obtaining life insurance. The rule is also that the insured must disclose
circumstances which he knows would influence an insurer—the insured who failed to
disclose DWI convictions surely knew that he should so inform his insurance company
(one would think!).
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INTENT TO DECEIVE
Most courts have held that if the fact misrepresented or the undisclosed
information is material to the risk, whether the misrepresentation or non-disclosure is
intentional or by mistake is immaterial. The insurer will be relieved of liability even
though the material misrepresentation was not made knowingly, willfully, or with an
intent to deceive.65
Minority View: Fraudulent Intent Required
Conversely, a minority of jurisdictions require a finding that the policyholder
intended to deceive the insurer before a material misrepresentation or omission can
provide a basis for voiding the policy. In Pennsylvania, in order to rescind a policy for
misrepresentation, an insurer must establish that the insured knew the representation was
false when the representation was made, or he acted in bad faith. The reasoning of the
minority view is that this helps to protect policyholders who make innocent
misrepresentations or omissions.
MATERIALITY TEST
Under the most widely accepted test of materiality, a fact that has been misstated
or omitted is deemed "material" if it could reasonably be considered as affecting (1) the
insurer's decision to enter into the contract, (2) its evaluation of the degree or character of
the risk, or (3) its calculation of the premium to be charged.
Courts have held that the standard by which materiality is judged is an objective
one and "materiality" must be assessed as of the time the contract was entered into, i.e.,
viewed at the time of application and not in hindsight.

The test of materiality is to determine whether the misrepresentation
has deprived the insurance company of its free choice as to the nature of the risk it
wishes to insure.
As one court so succinctly put it, "The question is not whether the company might
have issued the policy even if the information had been furnished; the question . . . is
whether the company has been induced to accept an application which it might otherwise
have refused."
Materiality is ordinarily a question of fact, but can be a matter of law when the
misrepresentations are so gross that anyone would know they are material.
PURPOSE OF THE RULE
There are a number of cases involving material misrepresentations and/or
omissions in which courts have enforced policy provisions stating that the policy is void
able if the insured has concealed or misrepresented any material fact. Even in the
absence of such a policy provision, courts have applied general principles of contract and
insurance law to void policies issued in reliance upon material misrepresentations.
The obvious reason for this result is the equitable notion that an insurer, in
making underwriting decisions and in setting premiums for the risks it underwrites "has
32
the right . . . to secure information from the applicant, and to rely upon the information
furnished as true and to govern its actions accordingly."
These principle agree with the well-known and well-trod maxim of elementary
contract law that when a contracting party's assent to a contract is induced by another
party's fraudulent or material misrepresentation upon which there is justifiable reliance,
the contract is void able by the recipient of the misrepresentation.66
STATUTORY PROVISIONS
Many states have enacted statutes that, to a large extent, codify the common law
with respect to misrepresentations in insurance applications. For example, the California
Insurance Code imposes disclosure obligations upon both parties to a contract of
insurance.
Massachusetts statute provides for the requirement of actual intent to deceive or
unless the misrepresented matter increases the risk of loss.
In North Carolina, any false or fraudulent statement on an insurance application
made knowingly or willfully by any party to the contract shall be punishable as a felony.
Some other states make is a Class 1 misdemeanor.
SPECIAL ISSUES RE. MISREPRESENTATIONS OR OMISSIONS
The evolution of laws regarding misrepresentations or omissions primarily were
concerned with direct insurance, although there has been some significant litigation
involving misrepresentation in reinsurance. In particular, whether material information
has been disclosed is a continual problem with respect to Directors and Officers
coverage.
Also, recently there has been considerable litigation in respect to hazardous waste
claims involving (alleged) misrepresentations and omissions in insurance applications. In
some cases, a business insured may have had knowledge of a pre-existing toxic waste
problem which gives rise to the claim for which it seeks coverage. What has become alltoo-frequent are policies that have been purchased after a governmental agency has
notified the insured of a potential hazardous waste problem. Obviously, if the insured
fails to disclose such information to the insurer, this will probably be a sufficient basis for
the insurer to deny coverage.
THE NOTICE REQUIREMENT
This section will discuss the requirement of notice in the presentation of claims by
an insured to its insurer, and will consist of discussions relating to (a) the notice
requirement; (b) applicable policy languages; (c) the consequences of late notice; and (d)
the notice procedures. The next section discusses the predominant legal and factual
issues in respect to the timeliness of notice.
THE NOTICE REQUIREMENT
While specific notice provisions vary from policy to policy, the
purpose of all notice provisions is to enable insurers to adequately investigate and
respond to claims.
33
Courts universally recognize that it is extremely important to receive prompt
notice so that the insurer can conduct an investigation while witnesses are still available
and their memories are fresh.
Courts have also acknowledged that prompt notice allows the insurer to gather the
information necessary to determine whether a claim is fraudulent and in many cases, the
notice provisions enable insurers "to end or correct dangerous conditions." The object of
all of these goals is to provide the insurer with an opportunity to protect its interests.
Realistically, courts have agreed that prompt notice is necessary so that the
insurer can establish adequate reserves against potential liability and, in some cases, to
calculate premiums.
POLICY LANGUAGE
Standard CGL Notice Provisions
Standard comprehensive general liability ("CGL") policies contain provisions that
require the insured to provide notice to the insurer of all claims asserted against the
insured. Most of them also require that the insured provide notice to the insurer of all
occurrences that may result in a claim—the insured has a duty to inform the insurer of
any situation or circumstance where it can reasonably be determined that a claim may be
made against the insured.
A typical notice provision in an "occurrence-based" CGL policy reads:
"In the event of an occurrence, written notice containing particulars sufficient to
identify the insured and also reasonably obtainable information with respect to the time,
place and circumstances thereof, and the names and addresses of the injured and of
available witnesses, shall be given by or for ed to the company or any of its authorized
agents as soon as practicable."
Therefore, (always subject to policy language and in this case, the definition of
"occurrence") the insured has a duty to notify the insurer of an actual claim or suit against
the insured, and in addition, he has a duty to report to the insurer accidents or occurrences
which may give rise to a claim that could be covered under the policy.
Duty To Forward Demands and Court Process
After the insured has fulfilled his obligation to the insurer to notify the insurer of
a claim or occurrence, CGL policies also usually have a requirement that the insured
provide the insurer with copies of all demands or court process received by the insured.
A typical CGL policy will state:
"If claim is made or suit is brought against the insured, the insured shall
immediately forward to the company every demand, notice, summons or other process
received by him or his representative."
Some courts have determined that, in their view, compliance with a provision
requiring notice of an occurrence does not necessarily satisfy the insured's obligation to
forward demands or other court process. However, if the insurer has actual notice of the
claim, an insured's failure to forward copies of the summons and complaint to the insurer
is not a complete defense to coverage.
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In a majority of jurisdictions the insured's failure to forward
demands or other court papers will not relieve an insurer of its duties to defend or
indemnify if there is no indication of prejudice to the insurer.
Excess Insurance Policies
A common excess policy notice clause reads:
"Whenever the Insured has information from which the Insured may reasonably
conclude that an occurrence covered [by the policy] involves injuries or damages which,
in the event that the Insured should be held liable, are likely to involve this policy, notice
shall be sent to the Company as soon as practicable, provided however, that failure to
notify the Company of any occurrence which at the time of its happening did not appear
to involve this policy, but which at a later date would appear to give rise to claims
hereunder, shall not prejudice such claims."
Thus, an insured's duty to provide notice to its excess insurers typically arises
when the insured has reason to believe that an occurrence is likely to involve the excess
coverage. A New York court stated that a notice to an excess insurer was held to be
timely since it was given after insured's Director of Risk Management reasonably
concluded damage would reach the excess layer. Some Courts have held that the primary
insurer, not the insured, has the responsibility for providing notice to an excess insurer.
Further, the insured must act reasonably and "not sit idly by, allowing the case to
languish."
CLAIMS-MADE POLICIES
Unlike an occurrence-based CGL policy that covers injury that takes
place during the policy period regardless of whether the loss is reported during that
period, a claims-made policy covers liability for bodily injury or property damage
only if a claim is asserted during the policy period.
The notice requirement in a claims-made policy has the advantage to an insurer as
it "allow[s] the insurer to close its books on a policy when the policies expires, thereby
allowing the insurer to be better able to predict the experience of such policies at a level
that is not attainable under policies with the standard "occurrence" provision.
Under a claims-made type of policy, coverage is invoked when the insurer is so
notified of a claim or pending claim, and some such policies do not consider a claim as
such until notice is provided by the insured. This would increase the importance of
proper notification as if notice is not made during the time that the policy is in force,
coverage can be, and usually is, lost.
Since the insurer is able to ascertain the length of its liabilities, this facilitates
greatly the posting of necessary claims reserves as the insurer is no longer liable for such
claims after a certain date, plus it allows for more accurate premium computation. This
limits the exposure period—called the "tail"—and by doing so, eliminates or controls
unexpected expenses, such as future inflation, increasing jury awards and even future
changes in the law that could substantially affect the premium and claims. This,
obviously, leads to lower premiums on claims-made types of policies than on the
occurrence policies.
35
In a New York case in 1987, the court concluded that for a "claim" to trigger a
claims-made policy it "must relate to an assertion of legally cognizable damage, and must
be a type of demand that can be defended, settled and paid by the insurer." Another court
ruled that an SEC subpoena requiring production of documents and testimony constitutes
a "claim" because it is a "demand for relief' by a federal agency with the ability to enforce
its demand. (This could have some interesting ramifications…)
Conversely, a mere request for an explanation of the manner in which a case was
handled, or a request for a copy of the client's file, has been held not to be a "claim." Just
in case it was not clear exactly what a "claim" is, a District Court defined it well in 1994:
"The word claim is derived from the Latin word clamor, meaning a call or demand. In its
ordinary sense the term imports the assertion, demand or challenge of something as of a
right."
A claim does not arise just because the insurer is aware of an alleged injury, and
courts have ruled that the circumstance that the insurer is aware of an alleged injury is not
enough to constitute a claim. "Awareness is not a demand and the use of the word claim,
unless modified by other language, requires that a demand be made. "An" assertion that a
“wrongful act" has occurred is "not the same thing as a claim for payment on account of a
wrongful act," —a claim for payment is required to invoke coverage (sayeth a 9th circuit
court in 1990).
A typical claims-made policy covers acts and omissions occurring either before or
during the policy period—for prior acts, the policy may provide full retroactive coverage
or it may only cover claims arising out of acts and omissions after the "retroactive date"
specified in the declarations. The purpose of the "retroactive date" in a claims-made
policy was summarized in a 1991 case decided by the 7th Circuit:
"Insurers asked to issue claims-made policies protect themselves against liability
for old occurrences by including a `retroactive date,' specifying the earliest occurrence to
be covered, no matter when the claim is made."
There are several types of claims-made policies. For example, a "claims-made
and reported" policy requires not only that the claim be first made during the policy
period, but also that it be reported to the insurer during the policy period.
The most restrictive type of claims-made policy is one that requires not only that
the claim be both made and reported to the insurer during the policy period, but also that
the claim arise out of wrongful acts that take place after the inception of the policy and
during the policy period.
Some claims-made policies contain a "savings" clause, which typically provides
that claims-made during a limited period after the expiration of the policy period will be
deemed to have been made during the policy period if the insured gives timely notice to
the insurer of the facts or circumstances underlying the claim. Courts have divided over
whether only actual claims, or also acts or occurrences likely to give rise to future claims,
may be reported, and thus covered, during any extended reporting period (or "discovery
period") after expiration of a claims-made policy.
Courts have also been divided over whether giving notice of acts or occurrences
likely to give rise to future claims will relieve the insured of the obligation to give timely
notice of such claims if and when they actually arise.
36
Awareness Provision

Most "claims-made and reported" policies contain "awareness
provisions" that allow the insured to report potential claims or events, acts or
circumstances that the insured reasonably believes may give rise to a claim against
it in the future.
If such notice is given by the insured and received by the insurer and, thereafter, a
claim is made or suit is brought arising out of the event or circumstances reported, the
claim will be deemed to have been made during the time the policy was in effect when
notice of the potential for a claim was given.
Therefore, an "awareness provision" provides "a method of extending coverage
beyond the policy period where a situation may arise that creates a claim, but no claim
has been asserted against the insured." "It provides the insured with additional protection
for a claim or suit that may not be brought until years after the policy has expired, as long
as the insured provided notice to the insurer, during the policy period, of the facts,
circumstances, or events out of which the claim or suit arises."
Typically, such an "awareness provision" will allow the insured to report two
different and distinct types of events or occurrences:
1) Receipt by the insured of written or oral notice from any third-party that it is
the intention of that third-party to hold the insured responsible for the results of any
specific wrongful act, error or omission by any insured, or
2) Awareness on the part of the insured of any event, fact, or circumstance that
may subsequently give rise to a claim being made against any insured for a wrongful act
that arises out of the reported event, fact, or circumstance.
For an insured to take advantage of such an "awareness clause," the insured must
comply with the stated responsibility of the insured, which is reporting all acts and
occurrences that could become future claims. The "notice of claim" requirement in a
claims-made policy is only satisfied by a notice that clearly informs the insurer of a
covered claim and such notice is strictly construed and so defined by the courts. In a
2004 case where the claim at issue accrued at the end of 1999 policy period, but was not
reported until a few hours after inception of the 2000 policy period, the Eleventh Circuit
reversed the lower court's denial of coverage, stating that is was "illogical and inequitable
to deny coverage to the insured who chooses to renew its claims-made policy for
successive years with the same insurer" and holding that insured's election to do business
with the same insurer by renewing its claims-made policy "should not precipitate a trap
wherein claims spanning the renewal are denied."
In general, courts have upheld the validity of the claims-made policy and courts
have stated that because the reporting of a claim to the insurer during the policy period is
one of the essential terms of a claims-made policy, a failure to give timely notice should
be less excusable under a claims-made policy than it would be under an occurrence
policy.
A Florida court has stated that coverage depends on the claim being made and
reported to the insurer during the policy period. "If a court were to allow an
extension of reporting time after the end of the policy period, such is tantamount to an
extension of coverage to the insured gratis, something for which the insurer has not bar-
37
gained. This extension of coverage, . . . so very different from a mere condition of the
policy, in effect rewrites the contract between the two parties." 67
For this reason some courts in jurisdictions that excuse late notice under a general
liability policy unless the insurer is prejudiced have strictly enforced notice provisions in
claims-made policies. A Maryland statute requiring an insurer to demonstrate actual
prejudice in order to deny coverage based on lack of notice, applies to "claims-made"
policies, but not to "claims-made and reported" policies.
Some jurisdictions (New York in particular), however, hold that a mandatory
requirement that the insured report a claim within the policy period is against public
policy and unenforceable, unless the claims-made policy includes a reasonable extended
reporting provision.
FIRST-PARTY POLICIES
The obligation to provide timely notice of loss applies to first-party insurance as
well as to third-party liability policies.
A New York court has ruled that the insured was denied coverage for a fire loss
because of its failure to comply with a policy provision "requiring that the insured shall
as soon as practicable, report in writing to the Company or its agent every loss, damage
or occurrence which may give rise to a claim under the policy."
In a California Superior Court ruling (often quoted) they defined the term
"inception of the loss" in a first-party policy to be "that point in time when appreciable
damage occurs and is or should be known to the insured, such that a reasonable insured
would be aware that his notification duty under the policy has been triggered."
LATE NOTICE CONSEQUENCES
A finding that an insured has unreasonably delayed its compliance with the notice
requirement can have disastrous consequences for the insured. Courts have held that
unexcused delay in notifying the insurer of a claim or occurrence relieves the insurer of
liability.
Whether unexcused late notice to the insurer will result in a loss of benefits to the
insured often depends on whether the court requires a showing of prejudice to the insurer
by reason of its failure to receive timely notice.
UNNECESSARY OR PRESUMED PREJUDICE

The traditional approach to late notice treats proper notice as a
condition precedent to coverage.
In New York and many other jurisdictions, an insured's unexcused delay in
satisfying the notice requirement relieves the insurer of its duties to defend and indemnify
regardless of whether the delay prejudiced the insurer.
Courts have also held that the 'no-prejudice rule' applied where the insured had
failed to give notice "in a reasonable time" of a claim or suit, even where insured had
earlier given timely notice of occurrence. Still, on occasion, a court will hold that "where
an insured previously gives timely notice of the accident, the carrier must establish that it
is prejudiced by a late notice of [the] claim before it may properly disclaim coverage."
38
The rule that is emerging in a majority of jurisdictions is that late notice does not
relieve the insurer of its duties under the policy unless the insurer is prejudiced as a result
of the delay in receiving notice.
Several jurisdictions that normally require a showing of prejudice before an
insurer is relieved of liability because of the insured's noncompliance with notice
provisions have held that, where the policy language requires prompt notice as an express
condition precedent to coverage, or where the policy specifies a time period within which
notice must be given, the insured's non-compliance with these provisions bars recovery
under the policy regardless of prejudice to the insurer.
DEFINITION OF PREJUDICE
Since the purpose of the notice requirement is to allow the insurer to investigate
claims or occurrences, an insurer may be prejudiced by its inability to investigate the
claim, interview witnesses or make an early settlement of the claim in a timely fashion.
In one case, the delay also prevented the insurer from adopting certain cleanup
procedures. "Prejudice will be found where the delay `materially' impairs an insurer's
ability to contest its liability to an insured or the liability of the insured to a third-party."
In 1990, a court held that there was a triable issue of fact as to whether insurers
were prejudiced by late notice that prevented the insurers from compromising a claim
prior to judgment. Significantly, the court noted that the insurers could have been
prejudiced by the loss of the right to settle over the insured's objection "without giving up
the right to pursue [the] insured for the amount paid in settlement."

Whether the insurer was prejudiced by a late notice is usually a
triable issue of fact because key witnesses had died, available witnesses' memories
had faded, and certain relevant documents had been lost or destroyed prior to
notice.
The relevant factors in determining whether the insurer has been prejudiced by
late notice include the availability of witnesses (such as to an accident), the ability to
discover other information regarding the conditions of the locale where the accident
occurred; any physical changes in the location of the accident during the period of the
delay, the preparation and preservation of demonstrative and illustrative evidence, etc.
There are other situations where prejudice will be found, such as where late notice
prevents the insurer from determining whether an affirmative defense is available, or
where the insured admits liability, consents to judgment or makes damaging statements
prior to giving notice, etc.

In short, an insurer may establish "prejudice" by demonstrating that
it was made worse off by a delay in receiving notice.
PREJUDICE BURDEN OF PROOF
In most jurisdictions in which prejudice is an element of a late notice defense, the
insurer has the burden of demonstrating prejudice as a result of a delay in receiving
notice.
39
A minority of jurisdictions hold that an unreasonable delay in providing notice
gives rise to a presumption of prejudice and that the insured bears the burden of showing
that the delay in providing notice has not prejudiced the insurer.
PROVIDING NOTICE
When faced with a claim or an occurrence that could give rise to a claim, the
insured must first determine what coverage is potentially implicated. The insured should
thoroughly review all potentially applicable policies to determine its notice obligations.
All insurers with potential coverage, including excess insurers, should be notified of any
claim or occurrence likely to give rise to a claim.
The notice should be in writing because oral notice is generally insufficient, but it
may be waived where the insurer was notified by telephone, assigned the matter a claim
number and began an investigation.
It has been held that the notice need only contain the details necessary to enable
the insurer to determine whether a claim is likely to be asserted against the insured.
However, notification as to one claim or loss does not constitute notice as to another.
If notice provided to an insurer is considered by the insurer to be defective, good
faith requires the insurer to notify the insured of the insurer's objections within a
reasonable time, and if the insurer fails to do so, it has waived any right to assert that the
notice is defective.
NOTICE MUST BE GIVEN TO THE PROPER RECIPIENT
For notice to be effective it must be given to the proper representative of the
insurer. Absent a policy provision to the contrary, notice to an agent of the insurer that
has either express or apparent authority to accept such notice should satisfy the policy's
notice requirement and if the policy requires direct notice to the insurer, notice to an
agent is not substantial compliance; however, noncompliance may be legally excused
based on the actions of the agent.
Notice to the insured's broker will ordinarily not be deemed notice to the insurer
because the insurance broker is the agent of the insured.
An interesting situation arose where the insured learned of a fire at his property,
and subsequently heard a rumor that two firemen were injured in the fire. The insured
reported this information to his insurance broker and wrote a follow-up letter. The broker
determined that there was no need to report the rumored incident to the insurer. One
month later the insured read a news story that reported that the two firemen had filed a
claim against the city and the owner of the property. The insured sent a copy of the
article along with a letter to the broker stating that the insured believed that the article
should be forwarded to the insurer. Again the broker determined that it was unnecessary
to forward notice to the insurer. After the insured received a summons it forwarded that
notice to the insurer some 19 months after the fire. The court held that notice 19 months
after the fact constituted late notice and granted judgment to the insurer. In a footnote the
court explained that notice to the broker, even with an instruction to forward the notice to
the insurer, does not constitute notice to the insurer because the broker is normally the
agent of the insured.67
40
Courts generally consider that a notice to the broker who obtained insurance for
the insured is not sufficient to show compliance with a provision requiring notice to
insurer. However, if the insured's broker transmits notice to the insurer, the notice
obligation is satisfied.

Where evidence exists of an agency relationship between the broker
and the insurer, notice to the broker may satisfy the notice requirement.
INSURED MUST SUBMIT NOTICE
In many jurisdictions, an insured is not relieved of its obligation to provide timely
notice because the insurer obtains independent knowledge of an occurrence from other
sources. However, it has been held that notice of a claim from a source other than the
insured is sufficient.
New York Insurance Law (§ 3420(a)(3)) provides an injured party with an
independent right to give notice to the insurer and such notice "shall be deemed notice to
the insurer" in compliance with the policy's notice provision. Where an insurer has a
defense to coverage against its insured for late notice, the injured party, having been
granted an independent right to give notice, "is not to be charged vicariously with the
insured's delay."
In evaluating the timeliness of notice by the injured party, the "injured person's
rights must be judged by the prospects for giving notice that were afforded to him, not by
those available to the insured." What is reasonably possible for the insured may not be
reasonably possible for the person he has injured. While the injured party's notice to the
insurance company is "measured less rigidly, [it] must nonetheless be reasonable under
the circumstances." The injured party should notify the insurer directly.
If the injured party relies upon the insured to provide notice, a disclaimer against
the insured for untimely notice will also be effective against the injured party.
The burden is on the injured party to prove that "he or his counsel acted diligently
in attempting to ascertain the identity of the insurer and, thereafter, expeditiously notified
the insurer."
TIME REQUIREMENTS FOR NOTICE
Policy provisions that require the insured to provide notice to the insurer of a
claim or occurrence usually contain a time requirement within which the notice must be
given. Such time limits are rarely specific but rather require that notice be given
"immediately," "as soon as practicable," "promptly," or "within a reasonable time."'
Regardless of the precise form of the notice requirement, courts focus on the
reasonableness of the notification to determine whether the insured has complied with the
notice provision of the policy.
The timeliness of notice is judged by what a reasonable insured would have done
in like circumstances. Notice must be given when the circumstances known to the
insured "would have suggested to a reasonable person the possibility of a claim
State statutes may prescribe time periods within which the insured must notify its
insurer. For instance, under New York "no-fault" insurance law, notice of accident must
41
be given "as soon as reasonably practicable." Insurers cannot reduce the statutory notice
periods.
A requirement to notify the insurer "as soon as practicable" has been interpreted
to mean that the insured must provide the insurer with notice within a reasonable time
under all the circumstances. Notice given almost 180 days after accident was deemed
timely when policy expressly required notice "within 20 days after the occurrence . . . or
as soon thereafter as is reasonably possible." In another case, a two-year delay in
notifying the insurer of an accident was unreasonable under policy requiring notice "as
soon as practicable."
While a policy requirement that notice to the insurer be "prompt" might be
construed more strictly than a provision requiring notice "as soon as practicable," as a
notice will ordinarily be "prompt" if it is given within a reasonable time after the claim or
occurrence.
In sum, courts will examine the facts and circumstances of each particular case in
assessing the reasonableness of the notification.
REASONABLENESS IS A MATTER OF FACT
The courts routinely hold that the timeliness of notification to the insurer, or the
reasonableness of the insured's justification for late notice, is a question of fact. As an
example, if legitimate excuses for delay are claimed, a triable issue exists as to timeliness
of notice.
–OR AS A MATTER OF LAW
When the insured has unreasonably delayed in providing notice to its insurer, and
the insured has no legally recognized excuse for that delay, the notice can be untimely as
a matter of law—such as in one case, two and a half year delay unreasonable as a matter
of law. In Florida, in upholding pertinent Florida law; an insurer was prejudiced as a
matter of law by a three-year delay because the insured did not notify the insurer of a
sexual harassment claim until after the entry of a large adverse judgment.68 (Ooops!)
Courts have decided that a one year, five year, thirteen year (?) and various
amounts of time in between, were unreasonable delays as a matter of law. The courts
also have not sympathized with those who claim delay because the insured was not aware
of the requirement, or even where the notice was delayed because the insured expected
another party to repair the damage.

Courts are not sympathetic to insureds who delay notice of loss to
insurer for most reasons.
JUSTIFICATIONS FOR LATE NOTICE
But, of course, there are some circumstances that will excuse an insured's failure
to provide timely notice to the insurer that courts have accepted.
Insured's Lack of Knowledge of Occurrence
An insured's lack of knowledge of an occurrence or loss may excuse a delay in
giving notice absent a showing of a lack of due diligence on the part of the insured, such
42
as in one case where delay in notifying the insurer of underlying occurrence in a
negligence action was considered reasonable where the insured was unaware that the
tenant's death was the result of criminal activity by an intruder.
Most courts will maintain, that where a reasonable person could envision liability,
that person has a duty to make some inquiry, and they have excused a failure to give a
timely notice of claim where the insured has a good-faith belief in non-liability or noncoverage, provided that the belief is reasonable under the circumstances.
Specific situations excused by the courts, have arisen where, for instance, insured
parents were unaware of the severity of injuries suffered by a teacher at the hands of their
son and it was felt that it was reasonable for them, as laypersons with no legal training, to
believe they had no liability. An excuse where the insured conducted an unreasonably
limited investigation of the facts underlying the claim was not accepted, and further under
the law in several states, the insured's belief in non-liability does not excuse late notice of
a claim.
No Reasonable Basis To Believe Claim Will Arise
However, if the circumstances of the loss furnish no reasonable basis for the
insured to believe that a claim will arise, the insured's failure to provide timely notice
may be excused.
Lack of Knowledge of Coverage
An insured's failure to give timely notice to the insurer may also be excused if the
insured reasonably believed that the occurrence or loss was not within the scope of the
coverage provided by the policy, so long as notice is given promptly after the insured
becomes aware of potential coverage. A lack of knowledge of coverage may be a
justifiable excuse for delayed notice if the insured exercised due diligence or the insured
must not have been negligent and must have at least made a reasonable effort to discover
the existence of coverage.
On the other hand, there are jurisdictions in which lack of knowledge of coverage
and lack of knowledge that a claim could be made are not, as a matter of law, good
excuses for complying with the provisions of the policy concerning notice. Examples
are where courts have held that that lack of awareness of possible eligibility for "no-fault"
benefits does not excuse late notice; late notice not excused when insured failed to
familiarize itself with policies; or ignorance of policy provision or belief that coverage is
questionable is no excuse for failure to give notice. Courts may not excuse late notice if
the insured read the policy but misinterpreted the relevant provisions.
Ignorance of Policy Provisions
A court held that "a lack of knowledge of an insurance policy does not excuse
delay in notification of an occurrence." The insured in this case asserted that its delay of
over two years in notifying the insurer should be excused because of its failure to
discover the policies at issue until that time. In rejecting this argument, the court held
that the insurer is not responsible for the insured's loss of a policy and therefore "it is the
responsibility of the insured, not the insurance company, to keep track of which carriers
have provided it with liability insurance."'
43
What if the insured did not know that a policy actually existed? Other courts have
found that lack of knowledge of the existence of the policy may excuse failure to give
timely notice, where the lack of knowledge is not due to the negligence or fault of the
insured, provided that the insured exercises due diligence in discovering the policy and
notifies the insurer within a reasonable time after the discovery.
ACCEPTABLE SITUATIONS EXCUSING LATE NOTICE
Insurer Disallowing Coverage
An insured's failure to comply with the notice requirement maybe excused if the
insurer, or its agent, disclaims coverage under the policy.
Waiver by Insurer
In some states the insurer's failure to object promptly to the insured's form of
notice may constitute a waiver of any defects in the notice. The Second Circuit Court has
held that an insurer is conclusively presumed to have waived a late notice defense when
the insurer asserts several grounds for denying coverage without asserting late notice.
STUDY QUESTIONS - CHAPTER THREE
1. A failure to disclose is
A. of little value in an insurance transaction.
B. as much a misrepresentation as a false affirmative statement
C. not nearly as important as a false affirmative statement.
D. not considered as a misrepresentation in insurance matters.
2. If a party fails to disclose a fact that a reasonable insured would have believed was
something the insurer would consider material,
A. the insurer is entitled to rescind the policy.
B. there is nothing that the insurer can do at this point.
C. the insurer can cancel the policy as of the date that they were made aware of the
fact.
D. the agent could lose his license for not informing his client of the consequences.
3. Determining whether the misrepresentation has deprived the insurance company of its
free choice as to the nature of the risk it wishes to insure, is called
A. commissionability.
B. determination of legal status.
C. the test of materiality.
D. the test of tort or criminal acts.
4. While specific notice provisions vary from policy to policy, the purpose of all notice
provisions is
A. so that the insurer can arrange for proper cash flow for the claim.
B. so that proper declination procedures are in place.
44
C. so that the commissions can be property adjusted.
D. to enable insurers to adequately investigate and respond to claims.
5. In a majority of jurisdictions the insured's failure to forward demands or other court
papers (if there is no indication of prejudice to the insurer)
A. will not relieve an insurer of its duties to defend or indemnify
B. is entirely immaterial.
C. will allow the insurer to deny coverage although it may have to defend.
D. means that the insurer has no responsibility to the insured whatsoever.
6. A claims-made policy covers liability for bodily injury or property damage
A. regardless of when the claim is asserted.
B. only if a claim is asserted during the policy period.
C. only if the bodily injury claim is less than the claim of property damage.
D. for a period of 6 months prior to the policy issue and 6 months after lapse.
7. Most "claims-made and reported" policies contain a provision that allows the insured
to report potential claims or events, acts or circumstances that the insured reasonably
believes may give rise to a claim against it in the future—these are called
A. "extraneous provisions."
B. "allegation provisions."
C. "awareness provisions."
D. "potential claims" provisions.
8. The traditional approach to late notice treats proper notice as
A. a miscellaneous duty.
B. expected.
C. a precursor to denial of claim.
D. a condition precedent to coverage
9. Because key witnesses had died, available witnesses' memories had faded, and certain
relevant documents had been lost or destroyed prior to notice, a late notice created
A. a triable issue of fact in regards to whether the insurer was prejudiced by the late
notice.
B. an irrefutable advantage to the insurer.
C. an irrefutable advantage to the insured.
D. the possibility of a court taking immediate action in favor of the insured.
10. Notice to the broker may satisfy the notice requirement
A. if the broker is a member of the Independent Insurers Association.
B. regardless of any other requirement.
C. where evidence exists of an agency relationship between the broker and the
insurer.
D. only in the state of Colorado.
ANSWERS TO STUDY QUESTIONS
1B
2A
3C
4D
5A
6B
7C
8D
9A
10C
45
CHAPTER FOUR - INSURER'S DUTY TO DEFEND
PREFACE
The duty of a general liability insurer to provide a defense for claims asserted
against its insureds is contractual, and the courts will therefore look to the language of the
policy at issue to determine an insurer's defense obligations. Courts have very carefully
decided that each case involving a promise to defend must be considered independently
on the basis of the particular language in the contract at issue. Some courts have held that
an insurer has no "duty to defend" unless the obligation is expressed in the policy as the
nature of insurer's duty to defend is purely contractual. There is no common law duty as
to which the courts are free to devise rules.
However, an increasing number of courts have held that an insurer has a duty to
defend where the policy language gives the insured a reasonable expectation that the
insurer will provide a defense. This approach can be traced to a "landmark" California
case where under California Law an insurer bears the obligation to defend where the
policy reasonably leads the insured to expect a defense and they found that even an
apparent exclusion of coverage cannot defeat that duty.
THE SCOPE OF THE INSURER'S DUTY TO DEFEND
It has been uniformly held that the policy covenant to defend is "separate from"
and "broader than" the covenant to indemnify.
Most courts hold that an insurer has a duty to defend a claim against its insured
unless it can establish "as a matter of law, that there is no possible factual or legal basis
on which the insurer might eventually be obligated to indemnify [the] insured under any
policy provision." An insurer therefore cannot escape its obligation to defend by
contending that any damages which may be proved at the trial will fall outside the policy
coverage. For example, if an exclusion may operate to relieve an insurer of its duty to
indemnify and the applicability of the exclusion cannot be determined until after a trial,
the insurer must defend the underlying suit.

On the other hand, there is obviously no duty to defend cases for
which, as a matter of law, there is no coverage.
Where an insured employee alleged no injury but the employee's son alleged lead
poisoning, insurer had no duty to defend because condition precedent to insurer's
liability—injury to employee—was not met. Where the language of an insurance policy
plainly obligates an insurer to defend an action for damages against an insured, the
insurer has no obligation to defend an insured in criminal or administrative proceedings
where damages are not sought.
In addition, it is generally held that declaratory relief is appropriate to negate a
duty to defend. As a general rule, "an insurer has no duty to defend until it receives notice
of a claim and thus is not responsible for pre-tender defense costs." This rule applies
irrespective of whether there is a "no voluntary payment" provision in the insurance
policy. But defense costs incurred prior to notice to the insurer are not excluded absent a
showing of prejudice.
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Pre-tender defense costs consistently have been held not recoverable under an
insurance policy that contains a clause prohibiting voluntary payments made without the
consent of the insurer. Voluntary pre-tender defense costs are not reimbursable. If the
insured makes no demand for a defense, there is no duty to defend and pre-tender defense
costs are lawfully precluded by the no-voluntary payment provision.
The Ninth Circuit, applying California law, held that where the insured had time
to identify its insurer and tender the defense, but did not do so, it incurred defense costs
voluntarily and could not recover them from the insurer.
It is generally held that "a tender of defense is a condition precedent to the
creation of a duty to defend," and tender of defense cannot occur until the insured notifies
the insurer of the claim against it and an insured does not invoke its insurer's duty to
defend until it properly tenders a defense request.
Some courts have held that specific tender of defense is required to trigger the
insurer's defense obligation. However, others deem notice alone to constitute tender of
defense. "Notice from the insured does not have to meet technical requirements in order
to trigger the duty of the insurer to defend; if an insurer is made aware of a lawsuit
against one of its insureds, the burden is on the insurer to clarify the needs of the
insured."
The rule that pre-tender defense costs are not recoverable does not result in a
complete forfeiture of coverage, but gives the insured the option of defending a claim on
its own. "There are tactical reasons why an insured may want to with held the defense
from an insurer that clearly covers a risk. For example, especially in a high profile case,
an insured may not want to lose control of events to the insurer." An insured may forego
an insurer's assistance for various reasons, such as the insured's fear that premiums would
be increased, or the policy cancelled, in the future. Moreover, an insured's ability to
forgo that assistance should be protected.
The Duty To Defend Determined by the Allegations
"FOUR/EIGHT - CORNERS" RULES
The four-corners rule is a principle that a document's meaning is to be gathered
from the entire document and not from its isolated parts. 69 Also, it is the principle that no
extraneous evidence should be used to interpret an unambiguous document. This stems
from the (legal) parol evidence rule which states that a writing intended by the parties to
be a final embodiment of their agreement, cannot be modified by evidence that adds to,
varies, or contradicts the writing. This rule is usually used to stop a party from
introducing extrinsic evidence of negotiations that occurred before or while the
agreement was being reduced to its final written form.
Eight-Corner Rule
This rule illustrates the principle that a liability insurer's duty to defend its
insured—usually triggered if the plaintiff's claims against the insured are within the
policy's coverage—is assessed by reviewing the claims asserted in the plaintiff's
complaint, without reference to matters outside the four corners of the complaint, plus the
four-corners of the policy. Also called the "Allegations of the Complaint Rule."
47
"The Four Corners of the Complaint" Test
The general rule regarding the insurer's duty to defend was is set out in a New
Jersey case,70 where the court stated:
"The complaint should be laid alongside the policy and a determination made as
to whether, if the allegations are sustained, the insurer will be required to pay the
resulting judgment, and in reaching a conclusion, doubts should be resolved in favor of
the insured."
The rule that the insurer's duty to defend is determined by the allegations
contained within the "four corners of the complaint" is widely followed. Thus, the court
noted:
"As long as the claims [asserted against the insured] may rationally be said to fall
within policy coverage, whatever may later prove to be the limits of the insurer's
responsibility to pay, there is no doubt that it is obligated to defend."
It is generally held that if one claim in a multiple claim complaint potentially falls
within the indemnity coverage of the policy, the insurer must defend the entire action.
The only recognized exception to this rule is if the insurer produces "undeniable evidence
of the allocability of specific expenses."
The California courts have given new force to the principle that insurers do not
have to cover defense costs for claims that fall outside the scope of policy coverage. The
California Supreme Court held that where an insurer provides a complete defense to an
action involving both covered and noncovered claims, the insurer may recover the costs
of defending claims that are not potentially covered. And while the insurer has the
burden of proving which costs are allocable solely to the claims that are not potentially
covered, the required showing is by a preponderance of the evidence.
What Did the Insurer Know Other Than by the Complaint
Under the "four corners of the complaint" test, it is often held to be irrelevant that
the insurer may gain knowledge outside the allegations of the complaint to demonstrate
that the claim is in fact not covered. Similarly, it has been held that, "if there is a
reasonable dispute regarding the extrinsic evidence [demonstrating non-coverage of a
claim], the insured is entitled to the benefit of the doubt as to coverage," and the insurer
must defend.
Under the "four corners of the complaint" test, it has been held that the answer to
a complaint has no bearing on an insurer's duty to defend, although an admission in
answer can terminate duty to defend.

An insurer may be required to provide a defense even if it has
independent knowledge of facts demonstrating the groundlessness of a potentially
"covered" claim pleaded in the complaint.
There is authority for the proposition that extrinsic facts known to the insurer may
negate a duty to defend, since the contractual defense obligation depends upon "the facts
which an insurer learns from the complaint, the insured, and other sources."
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Reliance on Extrinsic Facts To Avoid the Duty To Defend
A California Court held that an insurer could negate the duty to defend where
extraneous facts conclusively eliminate any potential for coverage and both the insured
and the insurer may rely on facts extrinsic to the complaint in determining the potential
for coverage and the duty to defend. Thus, "where extrinsic evidence establishes that the
ultimate question of coverage can be determined as a matter of law on undisputed facts,
we see no reason to prevent an insurer from seeking summary adjudication that no potential for liability exists and thus that it has no duty to defend." The court summarized its
analysis as follows:
"Once the insured has established potential liability by reference to the factual
allegations of the complaint, the terms of the policy, and any extrinsic evidence upon
which the insured intends to rely, the insurer must assume its duty to defend unless and
until it can conclusively refute that potential. Necessarily, an insurer will be required to
defend a suit where the evidence suggests, but does not conclusively establish, that the
loss is not covered. . .. A carrier remains free to seek declaratory relief if undisputed facts
conclusively show, as a matter of law, that there is no potential for liability. Still, an
insurer may go beyond the face of the complaint and refuse to defend based on factual
underpinnings of claim."
Insurer Knowledge of Reasonable Possibility of Coverage
It has been held that if an insurer has knowledge of facts which potentially bring a
claim within the indemnity coverage provided by the policy, it must provide a defense
even though the complaint fails to plead all of the requisite facts. The duty to defend is
triggered by facts known to the insurer at the time of tender, including extrinsic evidence,
which demonstrate the possibility of coverage, and duty to defend continues until the
insurer can prove that there is no possibility that the underlying claims are covered.
JURISDICTIONS WHERE INSURER CAN CONSIDER EXTRINSIC
FACTS
As is obvious, where extrinsic facts are considered by insurers in their process of
denying or providing coverage to their insured varies—in some cases, widely—by
jurisdiction.

The general rule is that is an insurer's duty to defend is determined by
the allegations of the third-party complaint.
However, when the insurer is uncertain as to what the complaint is alleging, the
insurer has a duty to investigate the facts surrounding the incident to determine its duty to
defend.
Florida courts have stated "When the actual facts are inconsistent with the
allegations in the complaint, the allegations in the complaint control in determining the
insurer's duty to defend."71 "[I]n determining if there is a duty to defend, the trial court is
restricted to the allegations of the complaint, regardless of what defendant and others say
actually happened." Further, where uncontroverted evidence places the claim outside
coverage, and pleading attempts to prevent consideration of the evidence and does not
49
suggest the existence of other evidence establishing coverage, the insurer is relieved of
duty to defend.
Duty to Defend if Complaint Alleges Harmful, Intentional or Wrongful Act
Courts have held that there is no coverage for "an intentional and wrongful act if
the harm is inherent in the act itself."
Whether there is a duty to defend an insured against a molestation claim may
depend on whether claims of negligence are related to the molestation. In one case,
specifically, the insurer was held to have a duty to defend where the insured had sexually
molested a child because an issue of fact existed as to whether other alleged misconduct
of the insured was related to the molestation.
But in another case, however, the court found that alleged acts of misconduct
were "inseparably intertwined" with the molestation, because they resulted directly from
a molestation investigation. "We do not sanction relabelling child molestation as
negligence in order to secure insurance coverage for the plaintiff s injuries."
NO DUTY TO DEFEND

There may be no duty to defend when factual issues separate from an
underlying action may negate coverage in certain situations.
With the explosion of litigation involving environmental pollution and the long
term effects of exposure to toxic substances, the question of whether an insurer has the
obligation to defend has become increasingly important. Cases in many jurisdictions
have limited the insurer's duty to defend in situations in which the question of coverage
depends upon a factual issue that will not be determined in the underlying action between
the insured and a third-party. In a 1970 case the court stated:
"The insured says the carrier is obligated to defend an action whenever the
complaint alleges a basis in liability within the covenant to pay—which is the general
approach. But when coverage, i.e., the duty to pay, depends upon a factual issue which
will not be resolved by the trial of the third-party's suit against the insured, the duty to
defend may depend upon the actual facts and not upon the allegations in the complaint.
This seems to be an intelligent approach as it does not allow the insurer to dodge its duty
to defend the insured, but instead to reimburse the insured if later it was adjusted that the
claim was within the policy provisions."
The New Jersey Supreme Court used this reasoning where two insurers contested
a common insured's right to recover the costs of defending a products liability suit. The
underlying action against the insured raised questions as to whether the insured, a
pharmaceutical company, failed to warn a physician of the dangers of a particular drug,
whether the alleged failure to warn was a substantial factor in influencing a doctor's
decision to dispense the drug to a patient, and whether the drug was the proximate cause
of the plaintiff's consequent physical injuries. Aetna refused to defend the underlying
claim because its policy expired prior to the injury in question. The court determined that
Aetna had a factual basis for disputing coverage and that resolution of that dispute
depended on facts that would not be resolved in the trial of the claim against the insured.
The court held that [the insurer's] refusal to defend [the insured] in the [underlying] was
50
fully justified by the existence of a substantial issue as to whether its policy provided
coverage for that claim. Accordingly, the court reversed the trial court's order granting
partial summary judgment on the insurer's duty to defend and held that Aetna's obligation
to pay defense costs depended upon whether the policy actually provided coverage.
These cases rest on the principle that an insurer only has a contractual duty to
defend those claims for which it would have a duty to indemnify. Thus, where the duty
to indemnify cannot be resolved in the action against the insured, the duty to defend may
depend upon actual facts and not upon the allegations of the complaint. In such cases, the
insurer may be within its right to deny a defense and await resolution of the coverage
issue, which then translates the insurer's obligation "into one to reimburse the insured if it
is later adjudged that the claim was one within the policy covenant to pay."
Termination of Duty to Defend
There can be a termination of duty to defend when claims become so constricted
that none of them will fall within the terms of coverage.
While an insurer often must defend all claims if any claim in the complaint
potentially falls within the terms of indemnity coverage, it is generally held that the
insurer may withdraw from the defense if the covered claims fall out of the dispute. (The
original statement of this rule was made by Judge Learned Hand in Lee v. Aetna Casualty
& Surety Co., 178 F.2d 750 (2d Cir. 1949), as follows:
"[I]f the plaintiff's complaint against the insured alleged facts which would have
supported a recovery covered by the policy, it was the duty of the defendant to undertake
the defence [sic], until it could confine the claim to a recovery that the policy did not
cover."
Once it is determined that the insurance policy creates a duty to defend against
claims-made within the policy's coverage and it is further determined that the complaint
alleges a cause of action within the policy's coverage, the company is obligated to defend
the suit, notwithstanding alternative allegations outside the policy's coverage, until such
time, if ever, that the claims have been limited to ones outside the policy coverage.
Duty to Appeal
Most courts hold that an non-specific "right and duty to defend" clause in a
liability insurance policy obligates the insurer to appeal a judgment against the insured in
an underlying action where there are reasonable grounds for appeal. It would appear that
an insurer's duty to pursue post-trial remedies such as a motion for judgment
notwithstanding the verdict or motion for new trial would be governed by the same test in
a situation where the insured sued the insurer for failure to appeal an adverse decision.
In one case where the insurer refused to appeal a claim, the insured sued its
insurer on the theory that the insurer abandoned the defense too early. The plaintiffs
asserted that one reason the insurer abandoned the defense was that it would have cost the
insurer less to pay the judgment than to prosecute the appeal. The court held that an
insurer must pursue an appeal on behalf of its insured where there are "reasonable
grounds for appeal."
In Florida—
51

an insurer cannot avoid its obligation to appeal by unilaterally
tendering its policy limits in the amount of the judgment.72
On the other hand, an insurer has no obligation to appeal from an adverse ruling
against its insured on a claim which is not covered, as there is certainly no duty to appeal
a judgment against the insured where there was no duty to defend the insured in the first
place.
Affirmative Claims
In the course of defending claims, insurers are sometimes requested by their
insureds to pay the cost of prosecuting cross-claims or counterclaims. Although
subrogation provisions in the policy may enable the insurer to benefit from any recovery
on affirmative claims, insurers are not required to prosecute such claims.
Duty To Defend an "Additional Insured"
When determining the scope of an insurer's duty to defend, the issue of who is
insured under the policy may arise. For example, an insurance policy may contain an
"additional insured" clause or endorsement which extends coverage to parties who are not
named insureds under the policy. There are certain exceptions to this, particularly where
there is a class-action lawsuit.
When interpreting the scope of coverage afforded by such additional insured
provisions, one court found that the provision was ambiguous and relied in part upon the
customary practices in the insurance industry with respect to such provisions, finding that
a typical additional insured endorsement was only intended to protect parties who are not
named insureds from exposure to vicarious liability for acts of the named insured, and not
for the additional insureds' own acts of negligence. Other courts have similarly limited
the scope of the additional insured provision even after finding that the provision was
unambiguous.
PRIMARY INSURER'S DUTY TO DEFEND LIMITS
Standard Form CGL Policies
Since 1966, the ISO standard form CGL policy has expressly provided that the
Company shall not be obligated to pay any claim or judgment or to defend any suit after
the applicable limit of the Company's liability has been exhausted by the payment of
judgments or settlements.
The cases are divided over whether an insurer, which wrote coverage on a post1966 ISO form, can exhaust its policy limits and thereby terminate its defense obligations
by tendering its policy limits into the court or to its insured. The majority view is that an
insurer cannot discharge its defense obligations by tendering its policy limits unless the
policy expressly authorizes tender.
Where the policy expressly permitted a tender of the limits into court after
judgment, the District of Columbia Court of Appeals granted a primary insurer
permission to deposit its policy limits with the court and transfer the defense to the
52
insured's excess insurer on the ground that the plaintiff had refused to settle the claim at
issue in response to a formal offer of judgment for the amount of the policy limits.
Termination of Duly To Defend in Mass Tort Litigation
The insurer's obligation to defend claims in pending and newly-filed lawsuits
following exhaustion of policy limits has been the subject of a number of reported cases
among manufacturers of asbestos-containing products and their insurers.
A District Circuit in 1985, issued a declaratory judgment that the primary insurers
had an unlimited duty to defend which survived the exhaustion of the primary insurers'
indemnity limits.
Present Trends in Law
Basically, almost all jurisdictions have precedents that state that an insurer may
withdraw from a case brought by a third-party if the insurer can confine the contested
issues to claims outside the coverage of its policy. Also, it is difficult to quarrel with the
court's conclusion that there is no principled distinction between a claim for coverage
which is outside the scope of coverage and a claim for coverage against a policy which
has been exhausted. In both instances the insurer has no duty to indemnify.
SETTLEMENTS BEYOND POLICY LIMITS
An insurer may settle a claim in good faith even if the settlement reduces the
amount of policy proceeds available to other claimants. In toxic tort cases or cases in
which an occurrence gives rise to multiple claims, it is not necessary for the insurer to
wait until all potential claims against its insured have been filed before settling with any
claimant.
Ordinarily, the rule is "first in time, first in right," and when an insurer "has paid
the full monetary limits set forth in the policy, its duties under the contract of insurance
cease." That is true even though a judgment is against the insurance carrier individually
as opposed to the insured.

Settlements undertaken by an insurer that exhaust policy limits will terminate
the insurer's defense obligations only if made in good faith & in the best interests of
the insured.
A payment of the policy limits which does not release the insured from a pending
claim (e.g., unilateral tender of policy limits to court, the claimant or the insured) will
ordinarily not relieve the insurer of its defense obligations for that claim and "raises
serious questions as to whether the insurer has discharged its policy obligations in good
faith."
Multiple Claims
In 1969, a court analyzed the competing interests when there are multiple claims
and where liability was evident and the insurance proceeds would be insufficient to settle
all of the claims.
53
When several claimants are involved, and liability is evident, rejection of a single
offer to compromise within policy limits does not necessarily conflict with the interest of
the insured as the insured hopes to see the insurance fund used to reduce as much of his
potential liability as possible. Usually, if the fund is needlessly exhausted on one claim,
when it might cancel out others as well, the insured suffers from the company's readiness
to settle. Stated differently, even if liability is conceded, plaintiffs will usually settle for
less than they would ultimately recover after trial, if only to save time and attorney's fees.
Each settlement dollar will thus cancel out more than a dollar's worth of potential
liability. Insured defendants will want their policy funds to blot out as large a share of
the potential claim against them as possible. Therefore, insofar as the insureds' interest is
concerned, the fund should not be exhausted without an attempt to settle as many claims
as possible. However, if the insurance proceeds are so small when compared with the
total of the claims so as to preclude any chance of comprehensive settlement, the insurer's
insistence upon such a settlement does not help the insured at all. Obviously, it would be
better to use the insurance money to pay some of the claims, which would reduce his
ultimate judgment debt.
Courts have not bought that situation completely since efforts to achieve a
prorated, comprehensive settlement may excuse an insurer's reluctance to settle with less
than all of the claimants, but need not do so, so courts have warned that considerable
leeway, of course, must be made for the insurer's honest business judgment, short of
mismanagement tantamount to bad faith.
BREACH OF THE DUTY TO DEFEND DAMAGES
Compensatory Damages for Breach of Contract
Since the "duty to defend" is a contractual obligation, an insured can recover
compensatory damages for an insurer's breach of its defense obligations. The
compensatory damages recoverable in some states include consequential damages and
attorneys' fees incurred in any action commenced to enforce the defense obligation.
"Consequential damages" are "those that cannot be reasonably prevented and arise
naturally from the breach, or which are reasonably contemplated by the parties. "Because
an insurable policy is a contract, its breach may result in an award of consequential
damages if they were foreseeable and can be proved."

An insurer which breaches its duty to defend will be held liable to pay
all defense costs, regardless of whether all of the claims are covered by its policy.
An insurer that breached the duty to defend was held liable for a default judgment
that was entered because the insured was unable to defend, even though it was ultimately
determined that the insurer had no obligation to indemnify the insured.
Attorneys' Fees Incurred in Declaratory Relief Action
There is a split in authority regarding recovery of attorneys' fees incurred in a
declaratory relief action filed to determine an insurer's duty to defend. Those cases which
deny recovery of attorneys' fees follow the so-called "American Rule" which states that
in the absence of a contractual provision, statute, or recognized ground of equity,
54
attorneys' fees are not recoverable. Some courts have taken the position that attorney's
fees are not recoverable in absence of statutory or contractual authorization.
Most courts have rebuffed attempts by insureds to secure attorneys' fees under
general declaratory judgment statutes.
However, some courts have ruled that an insurer's responsibility to defend reaches
the defense of any actions arising out of the occurrence, including those brought by the
insurer for a declaratory judgment.

Insureds have argued that where the CGL provides that where the
insurer agrees to pay "the reasonable expenses incurred by the insured at the
insurer's request," this includes coverage litigation legal fees—such a position has
been soundly rejected.
This [clause] obviously contemplates expenses in connection with the underlying
liability and defense which is the subject of the policy. No reasonable insured, on
reading this language, would believe that the insurer was agreeing to pay an insured's
legal expenses in a coverage action should the insurer breach the contract. As some
courts have pointed out, the claim that in breaching an insurance contract, the insurer has
"requested" that the insured incur legal "expenses" within the contemplation of the
contract is a mere play on words.
As expected, however, if the insurer acted in bad faith in refusing to provide
coverage, was fraudulent or stubbornly litigious, they have therefore breached the
implied covenant of good faith and fair dealing with the result that the insured was
entitled to attorney fees. Some states have statutes that expressly addresses this.
A minority of jurisdictions allow recovery of attorneys' fees incurred in a
declaratory relief action if the insurer is found to have a duty to defend and a couple of
states have codified this position.
Implied Covenant of Good Faith/Punitive Damages
California courts have permitted the award of punitive damages against insurance
companies for breach of the "covenant of good faith and fair dealing" implied by law in
every insurance contract.
There are, however, a number of jurisdictions that have refused to recognize the
tort of bad faith as an independent cause of action. (Maine, Florida, Minnesota, Kansas,
New Hampshire, Rhode Island.)
THE RIGHT OF EITHER PARTY TO SETTLE W/O CONSENT OF
OTHER PARTY
Settlement by Insured
Insurance policies usually contain a clause which prohibits the insured from
voluntarily assuming any liability, settling any claims, incurring any expense, or
interfering in any legal proceedings or negotiations for settlement without the insurer's
consent. The purpose of a voluntary payment provision "is to prevent collusion between
the claimant and the insured and to give the insurer control over settlement negotiations."
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Such clauses "obviate the risk of a covinous or collusive combination between the
assured and the injured third-party and . . . restrain the assured from voluntary action
materially prejudicial to the insurer's contractual rights." Courts have uniformly
recognized that "there is no doubt as to the validity of such provisions.
On the subject of the construction of clauses prohibiting an insured from settling a
claim without the insurer's consent, one commentator stated the widely-held view that:
"Clauses are usually found in policies of liability insurance giving the insurer the
right to make such investigation, negotiation, and settlement of any claim or suit as it
deems expedient. Such policies usually also contain a clause which prohibits the insured
from voluntarily assuming any liability, settling any claims, incurring any expense, or
interfering in any legal proceedings or negotiations for settlement, unless with the
consent of the insurer. The settlement clause gives the insurer the exclusive right to make
any settlement of a claim for which it is liable. By virtue of this provision, the insured
may not negotiate and effect a settlement on his own initiative, and if the conduct of the
insured is clearly in violation of the clause under discussion, the insurer is relieved of all
liability for the claim. The proper application of these clauses, however, often depends
on whether an insurer has agreed to pay for the insured's defense."
Insurer Agrees To Pay for the Defense
Conversely, if the insurer agrees to pay for a defense conducted by the insured's
independent counsel, the insured must still seek the insurer's permission to settle the
underlying claim—but permission may not unreasonably be withheld. In such circumstances, the basis for determining whether a settlement should be accepted is "whether a
prudent carrier without policy limits would have accepted the demand." Under certain
circumstances, if an insurer is found to have unreasonably declined to consent to a
settlement offer, the insurer can be held liable for all damages arising directly from the
breach.
Where the insurer has assumed the insured' s defense and the insured
proceeds to settle a case over the insurer's objection, the insurer may be discharged
from all liability under the policy.
However, even where an insured has made a voluntary payment in apparent
violation of the policy, some courts may require the insurer to demonstrate prejudice
before relieving the insurer of the obligation to indemnify the insured. In a New Mexico
case the insured settled an environmental claim without the consent of all insurers. The
court held that even if the voluntary cleanup constituted a material breach of the policy,
the insurer would not be discharged unless it had been substantially prejudiced. In a
Massachusetts case, however, the court held that no showing of prejudice was required
because the insured's voluntary agreement to a settlement, consent judgment and cleanup
had undermined the purpose of the voluntary payment provision, which is to allow the
insurer an opportunity to protect its interests.
Property damage and injury claims settled by the insured without litigation and
without the consent of the insurer are not covered.
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But the Insurer Refuses To Defend?

Where the insurer has refused to provide a defense to the insured, the
insured may make any reasonable settlement without losing his right to seek
recovery under the policy.
"It is well settled that, at least after a denial of liability by an insurer, the insured
may enter into a settlement with a third-party without prejudicing its rights against the
insurer." Reasonable settlement is one which prudence and caution might dictate to be
advisable, made in good faith and not excessive in amount. Even in such situations,
however, an insurer does not necessarily lose its subrogation rights.
An insurer that has wrongfully refused to defend may nevertheless raise policy
defenses to coverage.
The court explained the rationale for this rule as follows:
"[W]hen the insurer breaches the contract by wrongfully refusing to provide a
defense, the insured is entitled to receive only what it is owed under the contract—the
cost of defense. The breach of the duty to defend, however, should not enlarge indemnity
coverage beyond the parties' contract. . . . The insured is in no better position to create
coverage that was never bargained for under its contract."
Reasonableness of an Insured's Settlement
Whether or not a settlement entered into by an insured without its insurer's
consent is reasonable is a question of fact, subject to determination by the appropriate
finder-of-fact. While generally this factual issue is left to the determination of a jury,
some courts have found that the reasonableness analysis must be made by the trial judge.
The determination of this factual issue is not, of course, subject to a precise
mathematical computation. Rather, in the typical case "there is a range of reasonableness
with respect to a settlement." This range "recognizes the uncertainties of law and fact in
any particular case and the concomitant risks and costs necessarily inherent in taking any
litigation to completion." In evaluating the reasonableness of any specific settlement,
courts have focused on (1) the likely size of the plaintiff's potential recovery, and (2) the
degree of probability that the plaintiff would have succeeded had the case actually been
litigated.

Ultimately, the test as to whether the settlement is reasonable and
prudent is what a reasonably prudent person in the position of the defendant would
have settled for on the merits of plaintiff's claim.
The courts are generally less concerned with establishing whether the settlement
was an exact measure of damages and more concerned with determining whether the
negotiations were "done in good faith and the settlement was fair and reasonable."
However, although evidence relevant to the reasonableness inquiry could include
testimony or other material that would not have been admissible in a trial of the settled
matter, the only admissible evidence in the coverage action is information that was
actually available at the time of settlement.. This limitation is designed "to promote the
finality of settlements."
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The courts are split on this issue of which party bears the burden of proof on the
reasonableness issue. Courts have placed the burden on the insured (W.V.); on the
personal injury claimant, (Minn. 1982); and on the insurer (New York, 1986). A number
of courts divide the burden between the parties. The initial burden of demonstrating
prima facie showing of reasonableness falls on the party seeking to enforce it, while the
ultimate burden of showing unreasonableness falls on the insurer.
Where a case involves multiple tortfeasors (only one of which is covered by a
particular insurer) and an insured tortfeasor enters into a settlement, the insurer is entitled
to have a court examine the allocation of liability under the settlement. This rule enables
the insurer to protect against collusive arrangements under which the insured tortfeasor
agrees to take responsibility for a disproportionate share of the liability.
In those circumstances in which courts have ultimately deemed a settlement to be
unreasonable, the court must determine what proportion of an unreasonable settlement
should be covered, if any. At least one court has held that once there is a finding of
unreasonableness, the insured has forfeited all rights to recovery and is barred from
seeking any recovery from the insurer.
Settlements Involving the Assignment of the Insured's Rights to the Injured
Party
If an insured settles a claim and assigns its rights under the policy to the injured
party in exchange for a covenant not to execute against the personal assets of the insured,
some courts have held that the assignee may not recover against the insurer because the
insured never became "legally obligated to pay" anything as damages to plaintiff. The
rationale behind these cases appears to be a concern with collusion: where an insured is
totally insulated from liability, the insured lacks any incentive to limit its own–and thus
its insurer's–exposure.
Other courts, however, have refused to construe the "legally obligated to pay"
language to bar an assignee's claim against an insurer pursuant to a consent judgment
containing a covenant not to execute, at least where the insurer has refused to provide a
defense. "Where the insurer refuses to tender a defense, the insured often can protect
himself only with a covenant not to execute." Still other courts reason that a covenant not
to execute on a judgment is merely a contract and thus is not the same as an
unconditional release from liability. Under this logic an assignment does not release the
insurer from all liability.
While the court did not expressly articulate the applicable rule where one or more
of the factors was not present, a Texas court ruled that "[i]n no event . . . is a judgment
for a plaintiff against defendant, rendered without a fully adversarial trial, binding on
defendant's insurer or admissible as evidence of damages in an action against defendant's
insurer by plaintiff as defendant's assignee." In addition, several courts have recognized
that, in certain circumstances in order to protect its interests, an insurer has the right to
intervene in the underlying plaintiff-insured litigation for which the insurer's policies
might provide coverage.
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Sue and Labor Expenses (Marine)
There are a number of first-party property and marine insurance coverages that
contain a so-called "sue and labor" clause. For example, a typical sue and labor clause in
a hull insurance policy provides:
"And in the case of any Loss or Misfortune, it shall be lawful and necessary for
the Assured, their Factors, Servants and Assigns, to sue, labor and travel for, in, and
about the defense, safeguard and recovery of the Vessel, or any part thereof, without
prejudice to this insurance, to the charges whereof the Underwriters will contribute their
proportion as provided below. . ."
In an older but applicable case, the court observed:
"The original purpose of the suing and laboring clause in a policy of marine
insurance was to permit the insured to take every measure in preserving his vessel
without waiving his right later to tender abandonment and claim a total loss. As there
inured to the insurer a corresponding benefit from the labor bestowed and money
expended, it came about that the insurer, in order to stimulate the insured, assumed
liability for a proportion of any reasonable expense incurred in preserving the subject
insured from the operation of the perils insured against."

It is generally recognized that the purpose of a sue and labor clause is
to provide an incentive for an insured to act to mitigate any loss or damage to the
insured subject matter.
"Sue and labor expenses are those reasonable costs borne by the assured to
mitigate the loss and thus reduce the amount to be paid by the underwriter." An insured
can recover sue and labor damages for costs "reasonably incurred in attempting to reduce
the losses . . . whether or not those attempts were successful." Thus, "the sue and labor
clause protects the insured for its reasonable expenses in preserving insured property." A
recent decision stated that expenses to mitigate damages from seizure of vessel involved
in drug trafficking were not recoverable under sue and labor clause.
The issue of whether litigation expenses incurred by an insured fall within the
scope of the sue and labor clause remains unresolved. For example, one ruling was
where the "insured who avoids or minimizes insurable loss acts for the benefit of the
insurer" and this "benefit conferred . . . creates the duty on the part of the insurer to
reimburse the insured for prevention and mitigation expenses." Conversely, another
court ruled that the sue and labor clause in an insurance policy covering cargo loss
"requires that reimbursable costs must relate it to preserving the cargo or mitigating its
loss, and not simply confer some benefit on [insurers]."
One other confusing point is that in one case, the court affirmed a judgment that
an insured could not recover certain legal expenses under a sue and labor clause because
the expenses were not "incurred to preserve the insured property from a peril insured
against under the basic policy. However, where legal expenses are incurred by an insured
with a view toward minimizing the amount of potentially insurable loss, it appears that
such expenses may constitute recoverable sue and labor expenses. But still:

The sue and labor clause cannot be used to circumvent clear exclusions in a policy.
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In a Florida case73 the insured incurred expenses in remedying certain design
defects in its building. This loss was excluded from coverage under the Design Defect
Exclusion of the insured's first-party policy. The insured argued, however, that the sue
and labor clause required the insurer to provide reimbursement for the insured's expenses,
because such expenses avoided the possible collapse of the building. The court rejected
the insured's argument, stating that the insured "cannot recover simply by attempting to
characterize its work as for the purpose of preventing a collapse of the building." The
insured's actions "were made directly and primarily to correct design defects in the
building, expenses which are excluded under the terms of the policy. Therefore
[insured's] expenses are not recoverable under the Sue and Labor Clause."
Remember Y2K?
One particular area in which the application of the sue and labor clause is disputed
is the recovery of expenses related to reprogramming computers in order to deal with the
change to the year 2000, commonly known as the "Y2K problem." Industry analysts
predicted that when the calendar turned to 2000, older computers that expressed dates
using only the last two digits might revert to the year 1900 or otherwise fail to work
properly. Some companies that upgraded their computer systems to avoid this problem
attempted to recover their expenses under the sue and labor clause, arguing that the
repairs were incurred to prevent imminent loss of computer data and software. Insurers
resisted such claims on the basis that potential losses related to the Y2K problem were
not fortuitous and that policyholders' remediation costs were not incurred to prevent
damage to covered property arising out of a covered loss. The latter argument turns on
the question of whether the policy provides coverage for computer failures caused by
hardware or software that had not been programmed properly to interpret the year 2000
date. Insureds would have even less success in establishing such coverage under "named
perils" policies where Y2K was not a named peril, or under policies that exclude
coverage for loss caused by "electronic computer or electronic data processing
equipment" or for "costs to replace lost data."
In one of the first Y2K coverage cases, the court rejected an insured's Y2K
remediation claim on a variety of grounds, including, inter alia (among other things), that
such remediation expenses were not covered under the policy's sue and labor clause.
Also, the court found that the policyholder's Y2K remediation claim was barred by the
suit limitation clause, the known-loss or known-risk doctrine and the policy's inherent
vice exclusion. Summary judgment also was granted in favor of the insurers on the
ground that the sue and labor clause did not provide coverage for expenses incurred to
prevent a loss that would not have occurred until after the expiration of the policy.
Because most policyholders began their Y2K remediation programs years before
tendering a claim to their insurers, or, in many instances before their policy incepted, late
notice was be a significant hurdle for policyholders. For example, in one New York case
in 2000, the court did not reach the sue and labor coverage question, but found that the
insured's entire Y2K remediation claim was barred by the policyholder's failure to
provide timely notice. The court observed that Xerox did not give its insurers notice of
its Y2K remediation claim for more than three years. As a result, the insurers were
"unable to examine the property before it was altered or repaired in order to determine the
extent and necessity, if any, of remediation."
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Settlement by Insurer

When an insurer wants to settle and the insured does not, defense
counsel may have a conflict of interest, and may be subject to personal liability if he
proceeds with a settlement without disclosing the conflict, even though the policy
gives the insurer the absolute right to settle within its limits.
In a medical malpractice action, the court noted that:
"[T]he contract of insurance involved here is more than a simple liability
insurance policy. In recognition of the value of a professional reputation, the instant
contract gives the insured the express right to control the settlement aspect of litigation
and thereby protect that reputation. The breach of this contract may, therefore, give rise
to damages not generally recoverable in a conventional breach of contract action."
Subrogation Rights
Subrogation Against the Co-Insurer
Where an insurer indemnifies an insured who is entitled to recover compensation
for that loss from a third-party, the insurer is subrogated to the insured's rights of
recovery from that third-party. This means that the insurer, upon payment, is
"substituted" for and "stands in the shoes" of the insured with respect to all rights, both
substantive and procedural, that the insured possesses.
Where a non-settling insurer seeks to offset its liability based on settlements
between the insured and other insurers, the non-settling insurer "has the burden of
establishing what part of the settlement was attributable to the claim it seeks to offset."
Subrogation Against the Insured
When the third-party against whom the insurer seeks subrogation is a named
insured in relation to the loss at issue or is an additional insured with respect to that loss,
the general rule is that the insurer may not bring a subrogation action against its own
insured:

No right of subrogation can arise in favor of the insurer against its
own insured, since by definition subrogation arises only with respect to the rights of
the insured against third parties to whom the insurer owes no duty.
INSURER'S RIGHT OF REIMBURSEMENT FROM INSURED
Courts are divided as to whether an insurer may reserve its right to recover
defense costs in the event it is subsequently determined that there is no coverage. A
small minority of courts have determined that an insurer has no right to recover defense
costs from its insured, even with a judicial declaration that there was no duty to defend.
"An insurer is not entitled to reimbursement of defense costs expended under a
reservation of rights without an express provision to that effect in the insurance contract,
even where a court has determined that there was no duty to defend."
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Courts that allow an insurer to recover defense costs do so only if the insurer
defends under a reservation of rights specifically stating the insurer's intention to seek
reimbursement of defense costs from the insured.
When an insurer has properly reserved its right to recoup defense costs, some
courts imply an additional requirement that the insured agree to the reservation for it to
be effective. Such agreement, however, maybe inferred. The position often is that the
insurer is not entitled to recover litigation costs where the record does not reflect an
agreement or understanding that the insured would reimburse.
In other jurisdictions, an insurer's reservation of rights is sufficient without the
insured's express or implied consent.
Settlement Payments

The trend with regard to settlement payments seems to be that the
insurer is not entitled to reimbursement unless there is a specific provision in the
policy, or a written agreement from the insured, or a court order.
Absent fraud by the insured, settlement by the insurer is "voluntary payment" and
is not subject to reimbursement. A settlement by an insurer "waives any defenses to
coverage which it otherwise might have asserted, and precludes an action against insured
for reimbursement." In order to preserve its right to be reimbursed for settlement
payments, the insurer must obtain either a written agreement with the insured or a court
order.
Where such separate agreement to reimburse settlement payments has been
entered, that agreement will be enforced. Moreover, a provision in the policy can be an
enforceable agreement between the insured and the insurer that the insurer may seek
reimbursement for payments made in settlement of claims later determined not to be
covered.
The California Supreme Court held that, where an insurer defends a personal
injury suit under a reservation of rights, it may recover settlement payments made over
the insured's objection when it is later determined in a declaratory judgment action that
the underlying claims are not covered by the policy.
Mistaken Payments
Two New York courts have ruled that, where the insurer made payments as a
result of a "mistake of fact" or a "clerical error," the insurer is entitled to restitution from
the insured. In both cases, the court determined that there was no policy in effect.
However, courts have treated as "voluntary payment" any amounts the insurer
paid, not as a result of coercion or mutual mistake, but as a result of agreeing to "assume
the risk of mistake" or as a result of "conscious ignorance." In such cases, the insurer is
not entitled to reimbursement.
"NO DUTY TO DEFEND" PRECLUDES INDEMNITY COVERAGE
The question of whether there is insurance coverage for tort claims under CGL
policies is frequently litigated in the context of determining whether an insurer has a duty
to defend. It now appears "settled that because the duty to defend is broader than the
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duty to indemnify—a finding by a court that there is no duty to defend automatically
means that there is no duty to indemnify."
STUDY QUESTIONS - CHAPTER FOUR
1. When factual issues separate from an underlying action may negate coverage in
certain situations to defend cases for which, as a matter of law, there is no coverage
A. and there may be no duty to defend.
B. and there still will always be the duty to defend.
C. and this then becomes a matter for the courts.
D. although underlying actions can never have an effect on a duty to defend ruling.
2. The general rule is that an insurer's duty to defend is determined
A. by the allegations of the third-party complaint.
B. only by the ruling of a court.
C. by the size of the possible judgment.
D. by the qualifications and reputations of the insured's legal counsel.
3. If an insurer unilaterally tenders its policy limits in the amount of the judgment,
A. then the insurer has no other obligation in the case.
B. the court, as a general rule, will accept the amount as full payment for the
coverage.
C. an insurer cannot avoid its obligation to appeal by doing so.
D. the insurer could end up paying the policy obligation plus the amount tendered.
4. Settlements undertaken by an insurer that exhaust policy limits will terminate the
insurer's defense obligations
A. conclusively and without argument.
B. only if made in good faith & in the best interests of the insured
C. regardless if it is in the best interests of the insured.
D. but only with the approval of the Department of Insurance or a court.
5. An insurer which breaches its duty to defend will be held liable to pay all defense
costs,
A. regardless of whether all of the claims are covered by its policy.
B. but only if all of the claims are covered by the policy.
C. and would be liable for punitive damages.
D. which would be paid directly to the court, along with a hefty fine.
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6. Insureds have argued that where the CGL provides that where the insurer agrees to
pay "the reasonable expenses incurred by the insured at the insurer's request," this
includes coverage of litigation legal fees,
A. which argument has been accepted by all courts.
B. and courts have found that this has merit but usually limits the amount to 50% of
the coverage amount.
C. regardless of the amount of the fees.
D. but such a position has been soundly rejected.
7. Where the insurer has assumed the insured's defense and the insured proceeds to settle
a case over the insurer's objection,
A. the insurer still may be responsible for all liability under the policy.
B. the policy will automatically be considered as a co-insured policy and the insured
will pay for half of all defense costs.
C. the insurer may be discharged from all liability under the policy.
D. this is illegal in many jurisdictions and the insured could be criminally liable.
8. What a reasonably prudent person in the position of the defendant would have settled
for on the merits of plaintiff's claim
A. has absolutely no bearing on judging a settlement.
B. must be accepted by the insured or his claim will be null and void.
C. determines if the settlement is reasonable and prudent.
D. is for the courts only to determine.
9. To provide an incentive for an insured to act to mitigate any loss or damage to the
insured subject matter is the purpose of
A. a disclaimer.
B. a sue and labor clause.
C. the "four-corner" rule.
D. contractual liability coverage.
10. Since by definition subrogation arises only with respect to the rights of the insured
against third parties to whom the insurer owes no duty,
A. no right of subrogation can arise in favor of the insurer against its own insured
B. subrogation can arise in favor of the insurer against its own insured.
C. there is no subrogation, therefore, in Commercial Liability policies.
D. third parties can, therefore, sue the insurer under the Subrogation provision.
ANSWERS TO STUDY QUESTIONS
1A
2A
3C
4B
5A
6D
7C
8C
9B
10A
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CHAPTER FIVE - ALLOCATING DEFENSE COSTS
INSURANCE COVERAGE DISPUTES
INTRODUCTION
Courts have recognized that the allegations of a complaint against an insured may
trigger defense obligations of more than one insurer. A majority of courts permit a
subrogation action by one co-insurer seeking contribution for defense costs from a nonperforming co-insurer, which is basically: "Absent an agreement amongst pro-rata
insurers with respect to adjusting and apportioning a loss, no right of contribution
exists in favor of any of them."
The leading case requiring contribution to defense costs by coinsurers is where
the California Supreme Court ruled:
"[I]t is our view that all obligated carriers . . . should be required to share in costs
of the insured's defense, whether such costs were originally paid by the insured himself or
by fewer than all of the carriers."
There are cases that have held that an insurer providing a defense cannot obtain
contribution from a co-insurer that has refused to defend. However, these cases very
much represent the minority view. The rationale for denying a right of contribution was
set forth in follows:
"We hold where two companies insure the identical risk and both policies provide
for furnishing the insured with a defense, neither company, absent a contractual
relationship, can require contribution from the other for the expenses of the defense
where one denies liability and refuses to defend. The duty to defend is personal to both
insurers; neither is entitled to divide the duty."
APPORTIONING COSTS BETWEEN PRIMARY INSURERS
When more than one primary insurer is potentially obligated to indemnify an
insured for a claim either because of concurrent coverage or because the damage for
which coverage is sought implicates several policy periods, defense obligations must be
apportioned horizontally among the primary insurers.
The "majority rule" is that defense costs are allocated among coinsurers on a pro-rata basis in proportion to policy limits.
Some courts have ruled a little differently—"allocation of defense costs among
successive insurers on a pro-rata by "time on the risk" approach was more equitable than
contribution by "equal shares."
In an often-quoted court case, (CNA Casualty v. Seaboard Surety Co.), CNA
Casualty of California (CNA) undertook the defense of the insured and brought an action
for contribution against Seaboard Surety Company (Seaboard), Insurance Company of
North America (INA) and Pacific Indemnity Company (Pacific). CNA, INA and Pacific
each had policy limits of $300,000 while Seaboard had a $100,000 policy limit. After
finding that the non-defending insurers had breached their duty to defend, the trial court
equitably apportioned the costs of defense among the four insurers on the basis of the
relative limits of coverage provided by their respective policies. Thus, the court held that
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CNA, INA and Pacific should each pay 30 percent of the cost of defense and Seaboard
should pay 10 percent.
Pro-Rata Apportionment-Primary Insurers and the Insured
In cases in which it is determined that the insured is self-insured for part of the
coverage period, the weight of authority is that the insured must bear a pro-rata share of
the defense costs. Under Texas law, an insurer's duty to defend its insured on a claim
occurring partially within and partially outside of the policy period was not reduced prorata by the insurer's `time on the risk' or by any other formula.
Where the Insured Lost or Destroyed Policies
The Supreme Court of Connecticut affirmed the pro-rata apportionment of
defense costs to the insured and ruled that proration to the insured was appropriate not
only for situations in which the insured chose to forego insurance, but also in cases in
which the insured had lost or destroyed its policies.
In a 1993 case, the insured sought coverage for a toxic tort case involving
approximately 2000 plaintiffs. The court required that defense costs be apportioned
among several insurers pro-rata according to the time that each insured the risk of
exposure to the insured's chemicals. However, the court held that "the insured must bear
its share of those costs determined by the fraction of time of injurious exposure in which
it lacked coverage." The court remanded the case for a determination of the appropriate
allocation. However, pending the determination of the appropriate allocation, the court
ordered that defense costs would be shared equally by the five insurers and the insured.
The Ninth Circuit confirmed that an insurer may allocate to the insured any
defense costs for an injury or claim that arise from a triggering injury which does not
occur during the insured's applicable policy period. The court held that allocation to the
insured was appropriate for injuries occurring, continuing or deteriorating during the
insured' s period of self-insurance, "not because [the policyholder] was self-insured, but
because those injuries are triggering injuries that occurred after the [insurers'] policies
expired for which they cannot be held liable."
The Minority Rule—Equal Shares
The "minority rule" for apportioning defense costs among primary insurers is that
defense costs are apportioned on an equal basis among all of the insurers owing a duty to
defend a common insured. The rationale for the "equal shares" theory of allocating
defense costs is that each insurer assumed an obligation to defend and thus should bear an
equal share of the defense costs: "We are persuaded that [the policies] adequately
manifest an intent for the application of contribution by equal shares under the
circumstances."
Alternate Approaches
A third approach adopted by a number of courts is to allocate defense costs based
upon the amount of time that each insurer was on the risk during the period in which
defense obligations are triggered,74 such as holding each insurer liable for its pro-rata
share of defense costs based on number of years on the risk.
66
The Minnesota Supreme Court applied a "pro-rata by time on the risk" allocation
method to determine the respective liability of insurers under consecutively issued
policies. The court also held that, in calculating the insured's own liability, the insured
should generally be required to pay one self-insured retention limit for each policy
triggered.
A fourth approach for allocating defense costs among primary insurers was
adopted by a trial court (subsequently reversed on appeal) where the trial court utilized a
seriatim (operating in a series) apportionment of defense costs, i.e., the insurer which
issued the policy effective at the beginning of the trigger period must defend the insured
until the applicable limit of that policy is exhausted. Thereafter, upon exhaustion, the
next-in-time insurer must defend until its limit is exhausted.
Allocation Between Primary Insurer and Self-Insured
Although insurers may be required to make an equitable contribution to defense
costs among themselves, that is all. An insured is not required to make such a
contribution together with insurers. Equitable contribution applies only between insurers,
and only in the absence of contract. It therefore has no place between an insurer and an
insured, which have contracted the one with the other. Neither does it have any place
between an insurer and an uninsured or "self-insured" party.
EXCESS INSURER'S DUTY TO DEFEND
A frequent source of conflict among primary and excess insurers involves the
extent to which excess insurers must contribute to the defense of claims which have the
potential to involve excess indemnity limits, which typically arises when the primary
insurer is notified of a claim involving substantial defense costs that could very likely
obliterate the indemnity limits of the primary policy.
Definitions–Primary, Excess and Umbrella Insurance
Primary insurance is coverage that attaches immediately upon the happening of an
occurrence that is covered under the terms of the policy and primary insurance generally
carries with it the primary defense obligation.
Excess or secondary insurance is coverage that attaches only after a
predetermined amount of primary coverage has been exhausted and it is common to have
several layers of secondary insurance. When secondary insurance is written "excess of
identified policies," it is said to be "specific excess."
"General" or "umbrella/catastrophe" excess may provide broader coverage than
scheduled underlying insurance policies. The broader coverage may include a duty to
defend lawsuits not covered by the underlying coverage.
The First Circuit Court described "umbrella" policies as follows:
"Umbrella policies differ from standard excess insurance policies in that they are
designed to fill gaps in coverage both vertically (by providing excess coverage) and
horizontally (by providing primary coverage). Moreover, this interpretation is consonant
with the broader function served by umbrella policies-extending coverage even to
unanticipated "gaps."
67
As explained by the Tenth Circuit, "umbrella" policies can provide both primary
and excess coverage:
"Umbrella insurance generally provides two types of coverage. First, it provides
standard excess coverage that attaches after a predetermined amount of primary coverage
has been exhausted. An excess policy covering the same risks that are covered by the
underlying policy is known as a "following form" policy. Second, an umbrella policy
may provide broader coverage than the underlying policy in which case the umbrella
policy will "drop down" and become primary. An umbrella policy will generally impose
a duty to defend on the insurer when it "drops down" or when the limits of the underlying
policy have been exhausted. An umbrella policy has been characterized as a "hybrid
policy, combining aspects of both a primary policy and a following form excess policy."
Conventional View
The traditional view is that an excess insurer is not required to contribute to the
defense of the insured so long as the primary insurer is required to defend. Some courts
have ruled that there is no justification for burdening an excess insurer with extracontractual duty to defend where excess insurance contract does not require it.
However, several courts have held that regardless of the extent of the primary
insurer's duty to defend, an excess insurer must provide defense coverage in cases in
which the primary indemnity limits have been exhausted and the primary insurer has
refused to continue the defense.
The excess insurer's duty to defend is not triggered until primary insurance is
exhausted, even where the excess insurer had increased the amount of defense costs by
prolonging investigation of the underlying claim.
The guiding principle is that the insured, having purchased both
primary and excess coverage, cannot be abandoned by its insurers.
However, where a primary insurer tenders its policy limits after an adverse
judgment and refuses its insured's request to appeal the judgment, an excess insurer that
prosecutes the appeal may recover its attorneys' fees from the primary insurer.
Type of Allocation Primary vs. Excess Insurer (Minority View)
A limited number of courts apply a pro-rata or other "equitable" division of
defense costs between primary and excess insurers. Equitable allocation has found
support because, prorating defense costs among primary and excess insurers, based upon
their exposure, "provides no obstacle to an effective defense and leads to a more
equitable distribution of the cost of litigation among the insurers."
Where two "primary policies exist—one excess to the other by reason of
competing `other insurance' provisions—and where an excess carrier has voluntarily
assumed and marshaled the insured's defense, an allocation of defense costs based on
primary policy limits is appropriate." Where the primary policy limits are identical,
courts have ruled that there must be a 50-50 split. An excess insurer is obliged under
most situations, to take over the legal representation from the primary insurer when it is
apparent that the liability would exceed the limit of the primary policy.
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Courts have recognized that, in appropriate circumstances, excess insurers may
owe a duty to participate in the insured's defense. In one Texas case, the court found that
since both primary and excess insurers had obligations to defend insured (which neither
honored), litigation costs incurred by the insured in defending the suit divided equally
among primary and excess insurers monetary limits set by the underlying insurer, the
excess insurer's duty to defend is usually activated, even if the underlying insurer
undertakes the defense as well. The insured may call upon either primary insurer or
excess insurer, or both, to defend, but where defense costs "could run into the hundreds
of thousands of dollars, equity will not permit." Another court ruled "There may come a
point at which the potential liability of the insured is so great that the excess carrier is
required to participate in the defense despite any contractual provision disclaiming
coverage of expenses covered by other policies."
California has many court citations involving the primary and excess insurer, and
a Kansas court analyzed California laws thusly:
1. Where the same risk is covered by both primary and secondary insurance, the primary
insurer has the primary duty to defend.
2. Where the claim made is within the limits of the primary policy, and the primary
insurer undertakes the defense, the secondary insurer is not required to defend.
3. Where the claim is over the limits of the primary policy and only one insurer
undertakes the defense, the primary insurer and the excess insurer will each be liable
for a pro-rata share of the costs of defense in proportion to the amount of the claim
each is required to pay.
This result does not absolve any carrier from a duty to defend, but places the
primary burden on the carrier which has issued primary insurance. It also recognizes the
equitable subrogation rights of an insurer which has, by fulfilling its own duty to defend,
also fulfilled an obligation owed by another.
Multiple Policy Periods
There is a split in authority as to whether an excess insurer is required to defend
when the primary coverage for the time period covered by the excess insurer is exhausted
and there is other primary insurance available covering other policy periods. In one case
the court held that an excess insurer's duty to contribute to the defense and indemnity of
progressive injury claims attaches when the primary insurance for the policy year covered
by the excess policy is exhausted. This court applied Minnesota's "closest-to-the-risk"
analysis and held that the policies are triggered vertically for indemnification. In
adopting an "exhaustion by years" approach, the court rejected the excess insurer's
contention that an "other insurance" clause in the excess policy required the exhaustion of
all potentially available primary insurance.
On the other hand, in an asbestos insurance case, the court held that for the
purpose of triggering excess coverage, primary insurance must be exhausted by layers. A
similar result was reached in a North Dakota case, where the court found that all available
primary coverage had to be exhausted before excess coverage attaches. The practical
effect of the "exhaustion by layers" approach is to maximize coverage because primary
policies typically do not apply defense costs to reduce the aggregate amount of indemnity
coverage while excess policies typically do.
69
In a condominium defect case involving a continuing loss over several policy
periods, the court adopted the horizontal exhaustion rule and held that an excess insurer
has no duty to "drop down" and provide a defense to a common insured before the
liability limits of all primary insurers have been exhausted. "Absent a provision in the
excess policy specifically describing and limiting the underlying insurance, a horizontal
exhaustion rule should be applied in continuous loss cases. . . The court, noted that a
secondary policy, by its own terms, does not apply to cover a loss until the underlying
primary insurance has been exhausted. This principle holds true even where there is more
underlying primary insurance than contemplated by the terms of the secondary policy."
Excess Insurer's Right To Associate
Excess insurance policies typically provide that the excess insurer has the right to
"associate" in the defense of lawsuits pending against the insured. The right to associate
provision is intended to allow the excess insurer, if it chooses, to become involved in
actively defending lawsuits that could involve its layer of coverage. The option to
defend, for example, may be exercised by excess insurers in situations where there is
significant exposure in excess of the underlying limits and neither the insured nor the
underlying insurer has the requisite financial interest to vigorously defend the action.
A majority of courts have held that an excess insurer with the right to associate
does not have any duty to defend the insured until primary coverage is exhausted.
DUTY TO DEFEND OF INSURER EXCESS TO A SELF-INSURED
RETENTION
An insurer that is excess to a self-insured retention has no duty to defend until the
self-insured retention is exhausted by the payment of judgments or settlements. In one
case, for example, the insured had a $50,000 self insured retention, and its excess
insurance policy contained an "other insurance" clause making it excess over "other
insurance or self insurance." The insured attempted to circumvent this clause by arguing
that it was uninsured and that the excess insurance policy should therefore be considered
primary insurance with a duty to defend.
The court rejected the argument that the insured was "uninsured" for the first
$50,000, and held that the excess insurer had no duty to defend:
"Many legal scholars insist that the court was erroneous in its decision as the
insured was not uninsured; it was self-insured. The insured cannot seriously claim it had
a reasonable expectation of general coverage under the primary or base policy. It made a
risk management decision not to buy coverage for the first $50,000. To rewrite the
policy to require it to defend under these circumstances would only create a serendipitous
windfall for the insured."
On the other hand, in another case, the Third Circuit ruled that an insured with a
self-insured retention successfully obtained a declaration that the insurer excess to its
self-insured retention had to defend a complaint seeking damages in excess of the selfinsured retention:
"It is clear enough that if the judgment sought against the insured is one that the
carrier would be required to pay then the duty to defend exists. Application of that
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rationale leads to the conclusion that [the excess insurer's] obligation arose when it was
confronted with the demand which put its coverage at stake."
STUDY QUESTIONS - CHAPTER FIVE
1. Absent an agreement amongst pro-rata insurers with respect to adjusting and
apportioning a loss,
A. no right of contribution exists in favor of any of them.
B. each must contribute according to the length of insurance.
C. each must contribute a share based on the financial strength of the insurers.
D. all policies must be declared void.
2. The "majority rule" is that defense costs are allocated among coinsurers
A. on a pro-rata basis, depending upon premium.
B. with no credit given to the amount of benefits with the policy.
C. on a pro-rata basis in proportion to policy limits.
D. depending upon the financial strengths of the insurance companies.
3. Although insurers may be required to make an equitable contribution to defense costs
among themselves,
A. this also means that insurers and third parties must also contribute.
B. such contribution must be matched by interested third parties.
C. such contributions must be matched by the insured(s).
D. that is all (cannot affect insurers & insured, or insureds and other parties).
4. Primary insurance is coverage that attaches immediately upon the happening of an
occurrence
A. that is covered under the terms of the policy.
B. and is extra-contractual.
C. such occurrence may be a claim made under another policy for the same event.
D. on a temporary basis, often considered just a binder.
5. The guiding principle is that the insured, having purchased both primary and excess
coverage,
A. is factually pitting one insurer against another, so only one policy may prevail.
B. may have accomplished what it did not intent—loss of any coverage.
C. cannot be abandoned by its insurers.
D. must accept the lesser amount of compensation from each company.
6. In the defense of lawsuits pending against the insured, excess insurance policies
typically provide that the excess insurer
A. has the right to "associate" in the defense of lawsuits pending against the insured.
B. has no rights of any kind in respect to the lawsuits.
C. must pay for half of all legal costs.
D. may assume the role of the primary insurer if it wishes.
ANSWERS TO STUDY QUESTIONS
1A
2C
3D
4A
5C
6A
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CHAPTER SIX - GENERAL LIABILITY INSURANCE
(I)
INTRODUCTION
The comprehensive general liability ("CGL") policy provides coverage for
"bodily injury" and "property damage." Thus, the cover or declarations page of a CGL
policy typically states:
The Company will pay on behalf of the insured all sums which the insured shall
become legally obligated to pay as damages because of:
A. bodily injury, or
B. property damage to which this insurance applies caused by an occurrence . . .
The phrase "to which this insurance applies" limits coverage to losses that arise
out of specified perils. In addition, the CGL policy often contains an endorsement
providing coverage for "personal injury" and for "advertising injury."
The phrase "legally obligated to pay as damages" or "liability imposed by law"
refers to the liability of the insured arising from the breach of a duty that exists
independent of any contractual relationship between the insured and the injured party.
"The purpose of a commercial general liability policy . . . is to provide coverage
for tort liability for physical damage to others and not for contractual liability of the
insured for economic loss because the product or completed work is not what the
damaged person bargained for."
SPECIFIC INSURED HAZARDS
CGL policies typically contain provisions affording coverage for
"premises/operations," "completed operations," and "products" hazards. These provisions
establish separate categories of coverage for speck types of bodily injury or property
damage.
Premises/Operations Provision
The "premises/operations" provision sets forth the scope of coverage for the
insured's liability to third parties for bodily injury and property damage arising out of the
insured's operations or occurring on an insured premises. Thus, a typical premises and
operations provision states:
"The Company will pay on behalf of the insured all sums which the insured shall
become legally obligated to pay as damages because of bodily injury or property damage
to which this insurance applies, caused by an occurrence and arising out of the
ownership, maintenance or use of the insured premises and all operations necessary or
incidental thereto . . .."
When the insured owns multiple properties, the policy may restrict coverage to
scheduled locations. When coverage is restricted to scheduled locations, there is no
premises/operations coverage for claims arising out of occurrences on unscheduled
properties.
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The standard CGL policy also typically excludes coverage for bodily injury or
property damage that occurs after the insured has alienated (to transfer property rights to
another) the premises.
In general, (according to a Florida District Court ruling):
Premises-operations coverage includes liability incurred by an
insured while an activity is in progress, and prior to the completion thereof .
Stated differently, premises-operations insurance is "Liability insurance
protection for a manufacturer arising out of the process of producing or manufacturing
goods," and protection for service providers who perform a service on another's
premises.75 Thus, "once a product has been completed and distributed in the market,
'premises-operations' coverage is not the appropriate coverage and the individual . . . now
needs `products liability' coverage."
Completed Operations
The "completed operations hazard" is defined in the standard post 1966 CGL
policy as follows:
"Completed operations hazard" includes bodily injury and property damage
arising out of operations or reliance upon a representation or warranty made at any time
with respect thereto, but only if the bodily injury or property damage occurs after such
operations have been completed or abandoned and occurs away from premises owned by
or rented to the named insured. "Operations" include materials, parts or equipment
furnished in connection therewith.

The "completed operations hazard" provision limits an insurer's
liability for bodily injury or property damage to losses that occur away from the
insured's premises and that arise from the insured's operations after those
operations have been completed.
Many CGL policies also limit coverage under the completed operations and/or
products hazard provisions by providing for an "aggregate" limit of liability that is
applicable only to claims falling within the completed operations and products hazards.
It is well established that the language of the standard completed operations
provision is unambiguous, according to a Florida District Court. Prior to 1966, the
standard CGL policy did not separately define the completed operations hazard and
products hazard. While some courts found the combined completed operations and
products hazard provision in the pre-1966 standard CGL policy to be unclear, 76 courts
have consistently found the post-1966 completed operations provisions to be
unambiguous.77
Off-Premises Requirement
The completed operations provision explicitly provides that it is the injury, not the
operation, that must occur off the insured's premises; the hazard includes bodily injury or
property damage arising from operations or representations made with respect to such
operations, but only, according to the standard post-1966 CGL policy, "if the bodily
injury or property damage occurs . . . away from premises owned by or rented to the
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named insured." Courts thus have recognized a completed operations hazard when the
injury occurred off premises, regardless of where the operations occurred. Court rulings
in this respect include where a camper's heater bought and installed on premises–decided
to be injury occurred off premises; work performed on mobile home on premises–injury
occurred off premises; bicycle bought and assembled on premises–injury occurred off
premises; battery installed on premises–injury occurred off premises. Not all courts have
concurred, as other courts have insisted that completed operations hazard "is intended to
cover businesses that perform contracts at premises other than their own," completed
operations provision applies to work performed on other's premises, such as construction
or maintenance work and completed operations provision relates to "companies in the
business of providing services or performing contracts at premises other than their own ."
Completed Operations
The completed operations provision in standard CGL policies explicitly defines
when operations are completed. The provision states that:
Operations shall be deemed completed at the earliest of the following times:
(1) when all operations to be performed by or on behalf of the named insured under
the contract have been completed,
(2) when all operations to be performed by or on behalf of the named insured at the
site of the operations have been completed, or
(3) when the portion of the work out of which the injury or damage arises has been
put to its intended use by any person or organization other than another contractor
or subcontractor engaged in performing operations for a principal as a part of the
same project.
If any of these events has occurred, operations have been completed.
In addition, the provision includes a "deemer clause," which deems operations to
be completed even when problems with the operations mandate further action on the part
of the insured:
"Operations which may require further service or maintenance work, or
correction, repair or replacement because of any defect or deficiency, but which are
otherwise complete, shall be deemed completed."
In determining whether operations are "completed" at the time of injury, courts
have read the "intended use" clause of the standard completed operations provision
broadly, such as where as a camper's heater put to intended use when lit, even though no
one occupied camper; installation of defective beam deemed completed when supporting
jack removed; part of unfinished building put to intended use when occupied, etc. With
the "intended use" and "deemer" clauses, courts have determined that the completed
operations provision expressly applies "to work which is complete and capable of being
put to its intended use if it were not for defects which require correction, such as a door
put to intended use when installed without latch regardless of its intended use as a barrier;
repairs made to boiler door deemed completed operation despite need for further repair;
installation of alarm system not rendered incomplete by subsequent servicing of system,
or malfunction as result of failure to test operating room equipment fell under completed
operations provision because equipment was put to its intended use.
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The term "operations" in the context of the completed operations provision can
include the insured's services, and completed operations coverage is a service company's
equivalent of product hazard coverage.
Although many of the cases involving the completed operations provision arise in
the construction context, the language of the provision clearly indicates that it applies to
all services, and not just to construction contracts.

An injury that results from operations performed under a continuing
service contract between the insured and the injured party may not be covered
under the completed operations provision because of the continuing nature of the
relationship.
The completed operations provision expressly includes not only injuries arising
from operations themselves, but also injuries arising out of "reliance upon a
representation or warranty made at any time with respect thereto," such as improper
installation of dryer and failure to warn; covered bodily injury or property damage arising
from representations and warranties made with regard to defective battery; and completed
operations exclusion does not absolve insurer of duty to defend where alleged cause of
injury is failure to warn about the danger of manipulating a conveyor belt during
operation.
Professional Services Exclusion
Errors and omissions ("E & O") coverage is "intended to insure a member of a
designated calling against liability arising out of the mistakes inherent in the practice of
that particular profession or business," therefore:

Completed operations coverage is not designed to provide coverage
for liability resulting from the conduct of professional services.
Thus, in addition to the completed operations hazard provision, many CGL
policies contain a "professional services" exclusion, which generally excludes coverage
for "property damage or personal injury arising out of the rendering of or the failure to
render any professional services."
In interpreting the scope of "professional services" for purposes of such
exclusions, courts have looked to the definition articulated by the Nebraska Supreme
Court:
"Something more than an act flowing from mere employment or vocation is
essential. The act or service must be such as exacts the use or application of special
learning or attainments of some kind.' The term 'professional' . . . means something
more than mere proficiency in the performance of a task and implies intellectual skill as
contrasted with that used in an occupation for production or sale of commodities. A
'professional' act or service is one arising out of a vocation, calling, occupation, or
employment involving specialized knowledge, labor, or skill, and the labor or skill
involved is predominantly mental or intellectual, rather than physical or manual."
Examples of the application of this decision are many, including excluding
coverage for allegations of wrongdoing arising out of massive savings and loan
management scheme; excluding coverage for liability based on actions of pipeline
75
surveyor's employees in directing dive vessel to designated anchor locations; declining to
exclude coverage for representative of oil and gas well supervision company who
proceeded with cement squeeze in violation of company orders; excluding coverage for
damage arising from a patient's exposure to a doctor's act of sexual perversion; declining
to exclude coverage for claim of ordinary negligence arising from insured's management
or control of wastewater treatment plant; excluding coverage for damage arising from
ear-piercing procedure; excluding coverage for injuries arising from improper placement
of sideboards on patient's bed.

The term "professional services," when it appears in a provision
excluding coverage, must be interpreted to mean only those services for which
professional training is a prerequisite to performance.
The Texas Supreme Court addressed the applicability of a professional services
exclusion in a 2004 case: "The underlying complaint alleged both professional and nonprofessional negligence claims. The high court ruled that the insurer had a duty to defend
the mixed complaint. The duty to indemnify, the court held, would turn on a factual
determination of whether the injuries at issue were, in fact, caused by professional
negligence."
Completed Operations Provision re. Toxic Waste Cases
Toxic waste disposal typically does not implicate the completed operations hazard
because disposing of waste in the ordinary course of business involves neither a service
operation nor a product of the insured. Further, many modern policies containing
completed operations hazard provisions attempt to exclude liability in waste disposal
cases through "pollution exclusion" clauses.
Abandoned Property" Exception
If the alleged injury arises out of the existence of tools, the "abandoned property"
exception to the completed operations hazard exclusion may bring an otherwise
"completed operation" outside the scope of the exclusion.
In 1997, a court found that the exception to the completed operations hazard
exclusion was inapplicable. It was alleged that the injury, caused by a collapsing deck,
occurred because of uninstalled equipment that the insured failed to install when constructing the deck. The court found that the "uninstalled equipment" exception did not
apply because the injury arose out of an absence of materials and not out of "the
existence of uninstalled equipment at the job site. " The court held that: "The exclusion
refers only to tools, equipment and materials which on completion of an operation should
have been removed by the assured [sic] from the premises where the operation occurred
but which, instead, were abandoned there by the insured and later were instrumental in
causing an accident.”
Products Hazard
The "products hazard" definition in the standard post-1966 CGL policy states:
"'Products hazard' includes bodily injury and property damage arising out of the
named insured's products or reliance upon a representation or warranty made at any time
with respect thereto, but only if the bodily injury or property damage occurs away from
76
premises owned by or rented to the named insured and after physical possession of such
products has been relinquished to others."
Both the products hazard coverage and the products hazard exclusion are defined
by this same "products hazard" definition. "Products hazard" provisions, whether
defining the scope of coverage or an exclusion from coverage, thus describe an insurer's
liability for bodily injury or property damage that arises from the insured's products and
that occurs away from the insured's premises after the insured has relinquished
possession of its products.
Products hazard provisions apply "when a product is the cause in fact of damages
or injury to a third person." A products hazard exclusion applies when there is "a causal
connection between the damage sustained and the product sold."
Unambiguous Products Hazard Provision
Courts have generally found the products hazard provision to be unambiguous
and have declared that there is no ambiguity or conflict between "products-completed
operations hazard" provision and "your property" exclusion.
Broad "Products" Definition/Application
The term "product" maybe defined more broadly in products hazard provisions
than in other context. Historically, courts have defined the products hazard exclusion in
terms of product liability law. Courts have stated "practitioners and jurists should
generally feel secure in adhering to the view that products hazard coverage is products
liability coverage, such that when a policyholder is insured for the products hazard, he or
she has secured full protection from products liability claims in whatever guise, whereas
if the products hazard is excluded, coverage for such claims is completely barred."
Because the products hazard exclusion tracks product liability law, claims arising out of
the insured's failure to warn, for example, constitute claims for product defect, as long as
such claims are based on conduct or situations that relate to a defect in the product itself.

Authorities generally agree that the products hazard exclusion applies
only to claims for negligent failure to warn of the dangers of a product that is
dangerous by its very nature.
Also, products hazard coverage includes all claims that arise out of the use of a
product, regardless of the theories of liability or causation alleged in the underlying
lawsuits. "The exclusion also applies irrespective of the theory of liability by which [the
plaintiff] seeks redress for his injury, as the policy exclusion is not concerned with
theories of liability."
"Insured Contract"
As a general rule, products hazard coverage will include coverage for a liability
that is assumed by the insured in a contract or agreement that is an `insured contract'
provided the bodily injury or property damage occurs after the execution of the
contract/agreement. The definition of an "insured contract" normally includes that part of
any other contract or agreement pertaining to the covered business, under which the
insured assumes the tort liability of another party to pay for "bodily injury" or "property
77
damage" to a third person or organization. "Tort liability means a liability imposed by
law in the absence of any contract or agreement."

For coverage to be triggered under an "insured contract," the contract or agreement must be one under which the insured agrees to indemnify
another for tort liability to a third-party.
Also, the existence of a contract or agreement that did not correspond to the
definition of an "insured contract" would not necessarily eliminate coverage, as long as
the insured's liability would exist "in the absence of the contract or agreement."
Sistership Exclusion
The "sistership" exclusion typically excludes coverage for: "Damages claimed
for any loss, cost or expense incurred by you or others for the loss of use, withdrawal,
recall, inspection, repair, replacement, adjustment, removal or disposal of: (1) 'Your
product'; (2) 'Your work'; or (3) 'Impaired property,' if such product, work, or property
is withdrawn or recalled from the market or from use by any person or organization
because of a known or suspected defect, deficiency, inadequacy or dangerous condition
in it."
The "sistership" exclusion excludes coverage "in cases where, because of the
actual failure of the insured's product, similar products are withdrawn from use to prevent
the failure of these other products, which have not yet failed but are suspected of
containing the same defect." The exclusion was created in response to groundings of
"sister" aircraft when one plane was found to have a defect. The groundings were ordered
not by the insured manufacturer, but by the Civil Aeronautics Board.
The exclusion applies to the costs associated with the withdrawal, repair or
replacement of the "sister" products which have not yet failed. It does not apply,
however, to the product that has failed and already caused damage to the property of a
third-party. In a 1992 case, the "sistership" exclusion was held inapplicable to asbestos
property damage claims. The court ruled that the exclusion could not apply where the
insured had not withdrawn a product and where the underlying claims alleged damage to
property other than the insured's product.
"PRODUCTS-COMPLETED OPERATIONS" & "PREMISES
OPERATIONS"
Products-completed operations policies usually have aggregate limits on
coverage, while premises-operations policies normally provide unlimited coverage,
therefore questions often arise over which provision is applicable to the underlying
claims. With all of the litigation involving asbestos, this argument arises quite often.
Since aggregate limits apply to the "products" and "completed operations" hazards have
been nearly exhausted with the result that over the past twenty years, insureds have
inquired with increasing intensity as how to obtain additional coverage under "nonproducts/premises operations" clauses.
A federal court (the first federal appellate court to examine this issue) found that
post-installation asbestos injury is properly classified as a completed operations claim.
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The court concluded that all injury, except that portion shown to have occurred during the
insured's actual installation operation, fell within the completed operations hazard.
It is still accepted that an asbestos-related injury can occur at any time from
exposure onward and that it is not possible to determine when or to what extent it actually
occurs. It does not make any difference as to whether an injury is viewed as occurring
both upon initial exposure before operations are completed as well as thereafter, the
portion of the injury extending beyond completion would still, by definition, occur postoperations and thus remain subject to the completed operations hazard aggregate limit.
Further, the determination of whether a claim is a products-completed operations
claim or a non-products operations claim turns in large part on the applicable trigger
theory of coverage. Where the injury that triggers coverage occurs subsequent to
exposure to an operation, then according to recent holdings, the claim is subject to the
products-completed operations limits.
In a similar case, the court held that asbestos-related bodily injury claims fell
within the products hazard coverage and not within the premises-operations provision.
The court explained that injuries sustained "while an activity is in progress are covered
by the premises-operations coverage—it is well to recognize that products liability is a
coverage that takes over where premises-operations leaves off."
When facts do not exactly conform to these situations, courts that will struggle
with distinguishing between premises-operations coverage and products-completed
operations coverage with respect to the "arising out of the requirement, can likely find
themselves simultaneously grappling with the issue of identifying when the alleged claim
or injury arose—had the insured relinquished the product and did the accident occur
away from the insured's premise? If the claim arose while on the premises of the insured,
or while the insured performed services or operations, the claim will fall under the
premises-operations coverage. Conversely, if the claim arose once the insured's product
was relinquished into the stream of commerce, its operations are deemed completed and,
therefore, the products-completed operations hazard applies.
For example, in, a case involving liability to the insured resulting from a gasoline
spill, the court indicated that whether the completed operations provision applied turned
on whether the spill occurred upon delivery, or later, when the fuel expanded.
THE NATURE OF DAMAGE COVERED
BODILY INJURY LIABILITY
Since 1966, the ISO standard-form CGL policy has typically defined "bodily
injury" as follows:
"'Bodily injury' means bodily injury, sickness or disease sustained by any person
which occurs during the policy period, including death at any time resulting therefrom."
There is, to say the least, a split among the courts regarding whether the term
"bodily injury" is ambiguous as it applies to emotional injury. The courts generally hold
that "in the context of purely emotional injuries, without physical manifestations, the
phrase `bodily injury' is not ambiguous. Its ordinary meaning connotes a physical
problem." And the New York Court of Appeals concluded that the term "bodily injury"
is ambiguous regardless of the presence or absence of physical manifestations.
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Most courts interpret the phrase "bodily injury" to include claims for physical
injury and to exclude claims for purely nonphysical or emotional harm
As a consequence, in a wide variety of contexts, courts have concluded that
emotional distress, in the absence of physical harm, does not constitute bodily injury.
Courts have taken this stance in many ways: emotional distress, even when accompanied
by alleged migraine headaches, does not constitute bodily injury; embarrassment and
mental pain and anguish caused by sexual misconduct do not constitute bodily injury. In
Florida, the court found that emotional distress from witnessing a car accident was not
bodily injury as defined in uninsured motorist provision.78 Other rulings from various
courts: emotional distress caused by wrongful job termination was not bodily injury;
emotional suffering caused by violation of First Amendment rights did not constitute
bodily injury; embarrassment, humiliation and emotional distress caused by unlawful
seizure of mobile home and automobile did not constitute bodily injury; no duty to
defend distributor of herbal phen-fen because claims lacked allegations of bodily injury
(thrust of complaint was that distributor misrepresented safety and effectiveness of
products); emotional distress caused by economic loss from fraudulent conversion of
jointly owned property did not constitute bodily injury; emotional distress, injury to
reputation, and mental pain and anguish did not constitute bodily injury; bodily injury
requires physical manifestations of alleged mental injuries; humiliation and mental
anguish suffered as a result of false arrest are not bodily injury; and even loss of
consortium was not within definition of bodily injury.
However, some courts have held that purely nonphysical harm constitutes bodily
injury. And, a significant number of courts have determined that emotional distress that
results in physical symptoms should be construed as bodily injury within the meaning of
the CGL policy
The "bodily injury" requirement has been examined in a novel context: claims
related to the use of wireless handheld telephones. In such a case, the Court of Appeals
for the Ninth Circuit ruled that an insurer must provide a defense for a complaint alleging
"biological injury or harm" caused by radio frequency radiation as a result of cell phone
usage. The trial court had held that such allegations did not rise to the level of "bodily
injury," and thus that the insurers were not obligated to provide a defense to the insured.
However, the Ninth Circuit reversed, finding that the complaint was ambiguous as to
whether it alleged that the radiation caused actual injury or only the risk of future harm.
Construing this ambiguity in favor of the insured, the court ruled that the complaint
alleged a present injury in the form of "adverse cellular reaction and/or cellular
dysfunction." Really!
There have been others worrying about cell-phone claims, such as in 2003, a
federal appeals court ruled that underlying claims asserting the emission of radio
frequency radiation by cell phones triggers a duty to defend. The underlying complaint
alleged that the radiation caused "an adverse cellular reaction and/or cellular dysfunction
through its adverse health effect[s] on the body." According to the court, such allegations
qualify as "bodily injury. Another court ruled that claims alleging radio frequency
radiation as a result of cell phone usage fall within policy definition of "bodily injury";
and still another court ruled that allegations of cellular damage caused by exposure to
trichloroethylene satisfy bodily injury requirement.
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EMOTIONAL DISTRESS
According to the majority view, whether emotional distress constitutes bodily
injury under the standard CGL policy depends upon whether physical injury accompanies
the emotional distress.
Emotional Distress per se
The majority rule is that there is no bodily injury when emotional
distress is unaccompanied by a physical manifestation of harm.
However, courts such as the New York Court of Appeals held that emotional
distress, without an accompanying physical injury, constitutes bodily injury. The case
involved tenants who were present, but physically untouched, when the ceiling in their
apartment collapsed during renovation of the premises. While the tenants claimed that
they suffered emotional distress, they alleged no resulting physical injury. The property
owners' CGL policy defined "bodily injury" as "bodily injury, sickness or disease." The
court determined that the average reader of such a policy might reasonably conclude that
the definition included mental as well as physical sickness or disease, noting that
"emotional trauma may be as disabling as physical injury, and that whether a person
suffers one form of injury or the other may be a fortuity determined solely by the
particular vulnerability of an individual. The court thus concluded that the ambiguous (?)
policy language covered purely mental injuries, which involved neither physical injury
nor physical contact. Another court ruled: "We hold that negligent infliction of
emotional trauma is a bodily injury for which damages may be recovered under a
standard policy of insurance." But another court ruled that "there is no coverage for
"emotional distress injuries not caused by an accident." Just when things started to make
sense, another court ruled that the insurer was obligated to defend against claims of pain,
suffering and mental anguish because the policy provided for defense of even frivolous
suits.
Emotional Distress when Accompanied by Physical Injury
When emotional distress results in physical manifestations, most courts have held
that that distress satisfies the bodily injury requirement contained in the CGL policy.
Many courts have, and will in all likelihood continue to, address the problem of
emotional distress. In Florida, "a plaintiff's mental anguish which results in physical
manifestations may constitute bodily injury." Other court decisions include "the
allegation of high blood pressure [in addition to emotional distress] is deemed by this
court to be an allegation of physical harm"; headaches, stomach pains, nausea,
depression, and body pains resulted from emotional distress; the insurer had a duty to
defend when plaintiff alleged physical harm in addition to mental distress.
In another Florida case80, an individual alleging false imprisonment suffered
mental distress, headaches, and muscle spasms. Other courts have also ruled where
"plaintiff here alleges physical effects of her humiliation and mental anguish to be rash,
falling hair, weight loss, and symptoms of Stroke;" "plaintiff's humiliation brought
physical manifestations, such as tears and hysteria;" mother of child hit by an automobile
"suffered severe fright, shock, and emotional distress, and resulting physical injuries."
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But in another case, the court ruled that "there is no bodily injury even when physical
manifestations accompany emotional distress".
Additionally, some courts, finding it impossible to distinguish between physical
and emotional injuries, have concluded that both types of injuries should be construed as
bodily injuries. A 4th District Court ruled in 1985, "We are unable to separate a person's
nerves and tensions from his body." On the other hand, another court advised a case-bycase analysis to determine whether the alleged injuries are sufficiently akin to physical
injuries, and held on the facts before it that "sleeplessness" was an emotional, rather than
a physical, condition.
A number of courts have found that a bodily injury occurred because a physical
contact caused the emotional distress. In a Florida case, the ruling was that,"80 the sexual
abuse . . . entailed physical contact . . . which resulted in the emotional injury because of
the abuse. The resulting emotional injuries can be traced to the sexual abuse, which was
the result of physical contact. We hold that the term `bodily injury,' as used in the policy,
includes the emotional and psychological sequelae allegedly resulting from the
unauthorized invasion of the complainant's person (mental and emotional suffering
caused by sexual abuse constituted bodily injury."
Emotional Distress Resulting from "Uncovered Economic Loss"
Emotional and physical distress induced by an uncovered economic loss is not
within the coverage parameters of CGL policies. The Ninth Circuit had held that because
a CGL policy provides coverage for "bodily injury" arising out of an "occurrence," such
occurrence being "emotional and physical distress due to financial losses from
investments, the insurer had a duty to defend claims against its insureds. However this
was overturned and it was ruled that the alleged injuries suffered by the investors all
arose from economic loss and that economic loss does not constitute damage or injury to
tangible property that is covered by a CGL policy. Overturning the oft-overturned Ninth
Circuit Court, in this matter, the court determined that the insureds had no reasonable
expectation that these policies insured them against claims arising from bad investment
advice.
To determine the various states approach to whether emotional distress without
physical manifestation constitutes "bodily injury," please refer to the survey shown in
Exhibit One.
PROPERTY DAMAGE LIABILITY
Policy Definition
Since 1966, the ISO standard-form CGL policy provides coverage for all sums for
which the insured shall become legally obligated to pay as damages because of property
damage to which the [policy] applies, caused by an occurrence.
The ISO standard-form CGL policy defines property damage as "injury to or
destruction of tangible property." However, the 1973 revision of the standard-form
policy redefined property damage as:
"(1) the physical injury to or destruction of tangible property which occurs during
the policy period, including the loss of use thereof at any time resulting therefrom, or (2)
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loss of use of tangible property which has not been physically injured or destroyed
provided such loss of use is caused by an occurrence during the policy period."
Injury to Tangible Property
The standard CGL policy language limits coverage for property damage to
"tangible property."

Courts have construed "tangible property" to mean property that is
"capable of being handled or touched."
Property assignment and fees are not capable of being touched and, therefore, are
not tangible property. Trade secrets are not tangible property because they cannot be
"touched, seen, and smelled, as does computer data because it does not have physical
form. In real property context, easements are not tangible property so an insurer has no
duty to defend. Sexual discrimination and harassment claims are claims of purely
economic loss and therefore are not tangible property under this policy form. The 1973
addition of the word "physical" to the definition of property damage further underscored
the requirement that the property be tangible.
Defective Components
Whether defective components constitute property damage in and of themselves
has been frequently litigated, with the result that courts have concluded:
 the diminished value of defective components does not constitute
property damage.
For example, a court held that there is no recovery for replacement value of
tubing, but recovery may be allowed for the cost of installing new tubing.
Coverage for damage resulting from the defective component itself is typically
excluded by the CGL policy. Also, there is no recovery where the defective product was
the only damaged property. Moreover, courts have held that the mere inclusion of
defective components in a product without further damage does not constitute property
damage.
For example, if an automobile crash results from the failure of its defective tire,
the defective component can be said to have caused "property damage" to the finished
product. If however, some of the tires purchased by the automobile manufacturer are
found to be defective and the manufacturer therefore withdraws its car from the market,
there has not been "injury to or destruction of tangible property." This reasoning is very
often followed.
In the same vein, a court held that an umbrella liability insurer had no defense
obligation, absent covered "physical injury," for a computer component manufacturer
facing liability for defective disk drives. The court relied in part upon a Ninth Circuit
case holding that "incorporation of a defect into the property of another cannot constitute
physical damage to tangible property." The court applied the rule that "the risk of
replacing or repairing a defective product is considered a commercial risk which is not
passed on to a liability insurer," explaining that this principle "is designed to prevent
liability insurance from serving as a warranty or guarantee of an insured's product." The
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court concluded that in cases of product installation, for coverage to attach, there must be
"physical harm to the whole—no physical injury to property and, thus no coverage.
Other courts have ruled that inferior materials alone do not constitute property damage;
poor workmanship alone does not constitute property damage; presence of defective
automobile gasket alone does not constitute property damage; unpublished opinions; and
absent damage to third-party property, cost of replacing a faulty component of the
insured's property is not covered, etc.
The owners of homes into which certain systems had been installed, suffers no
"physical injury to tangible property" if their systems have not leaked. However, if
installation of the system caused a diminution in a home's value greater than the value of
the system, then that would constitute injury to tangible property.
Other courts have held that when "a component is so intertwined with the entire
mechanism that the defect necessarily results in damage to the completed product the
component will be deemed to have caused property damage." The incorporation of
defective parts in a municipal water system which resulted in contamination of water
supply constitutes property damage. Under Iowa law, contamination of a product sold
for use in carbonated beverages is an "occurrence" that caused "property damage"
because the flawed product was incorporated into a separate end product. Defective
installation of circuit boards have been determined to constitute property damage if it
caused the lost use of scanners. Other examples of court rulings in this respect: defective
plumbing systems installed into homes constitute "property damage" to the homes; ship's
defective hatch gaskets constitute property damage; defective soft drink concentrate
constitutes "property damage" to the soft drink; damage from installation of faulty 0-rings
into a pipe system constitutes property damage; defective pipe and gaskets that were
integrated into a water system constitute property damage; and lastly, contaminated
macaroni noodles destroyed soup, therefore there is property damage involved.
Also, some courts have recognized property damage when an integrated product
or system is damaged by the replacement or repair of a defective component, such as the
removal of a non-defective concrete floor in order to replace defective tubing has been
held to be property damage; as had coverage for damage to roof in replacing defective
roofing material; coverage recognized for damage to submarine in replacing faulty
wiring; coverage for damage to gaskets in third-party's engines in replacing defective
pins; and labor costs in repairing the damage to the engine were recoverable.
Intangible Property
Courts have almost uniformly held that damage to intangible property is not
"property damage" covered by the standard CGL policy. Therefore, the courts have been
busy determining what is intangible property and what is not. For example, courts have
held that easements are not tangible property; property damage provision does not protect
against intangible property rights; investments, anticipated profits, and financial interests
in business ventures are not tangible property; loss of unborn calves does not constitute
injury to tangible property, but illness of live calves does (?); employee's claim for
insured's failure to provide medical insurance is not injury to tangible property;
copyrights are not tangible property; payment of money on forged checks does not
constitute injury to or destruction of tangible property.
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Similarly, intangible rights such as good will and reputation do not constitute
tangible property and has denied recovery for damage to business reputation. The
California Supreme Court has stated "any breach of contract may harm the business of
the injured party, and if sufficiently serious, may affect his goodwill. Such damages,
however, are not commonly thought of as injuries to or destruction of property within the
meaning of a public liability insurance policy."
Computer data has been held not to be tangible property. While computer data
"can be transmitted and stored in a variety of ways none of them renders the data capable
of being touched." Alone, computer data cannot be touched, held, or sensed by the
human mind; it has no physical substance, ergo, it is not tangible property."
Pure Economic Loss
A Circuit Court noted that "economic loss" has [been] defined as " damages for
inadequate value, costs of repair and replacement of the defective product, or consequent
loss of profits-without any claim of personal injury or damage to other property . . . as
well as `the diminution in the value of the product because it is inferior in quality and
does not work for the general purposes for which it was manufactured and sold.'"
For over 40 years, courts have considered economic interests not to fall within the
definition of tangible property. Courts have held that a security interest in land, in
contrast to a possessory interest, is not tangible property; overhead costs are not
considered tangible property; loss of storage charges are not considered tangible property.
Also, the usual and normal meaning of property damages does not include business
losses. Diminished property value does not constitute "property damage" in a CGL
policy. In such situations, there is no duty to defend or indemnify because the underlying
complaint alleges only economic loss, rather than actual property damage; business losses
are not injury to or loss of tangible property. The CGL policy was never intended to
provide contractual indemnification for economic loss to a contracting party because the
work product contracted for is defectively produced and further, loss of productivity is
economic loss and not property damage.
For the same reasons, lost profits are not recoverable as physical damage to
tangible property, nor are additional construction expenses, lost profits, or diminution in
value of property caused by the insured's defective product. The vast majority of courts
have held that purely economic losses, such as lost profits, are generally not recoverable
under insurance provisions providing coverage for the loss of use of tangible property,
nor are (future profits on land sales as they are not considered tangible property—
economic losses such as loss of profits or anticipated benefits of a bargain are not
tangible property. Other cases have held that economic losses due to defective candy
products are not tangible property; lost profits due to antitrust violation are not tangible
property; insurers are responsible only for portion of underlying settlement allocated to
repairing or replacing damaged parts, not lost income, which constitutes an uncovered
economic loss.

Losses on business investments are not considered tangible property,
such as investments in a bankrupt enterprise, injury to condominium investments,
or injury to investment and loss of anticipated profits—not tangible property.
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One court has held that when damage to physical property has been alleged,
overhead costs may be recoverable as an appropriate measure of damages but the
decision has been limited to cases in which overhead was an appropriate measure of
physical damage to the property. Thus, the court stated that economic loss is recoverable
only when it is "a measure of damages to physical property which is within the policy's
coverage."
The Court of Appeals for the Eighth Circuit ruled that damage to a tomato crop
arising out of the insured's defective soil product constituted "property damage" under a
CGL policy and a circuit court affirmed an indemnity award for lost profits caused by the
crop failure. Similarly, the Montana Supreme Court permitted recovery for lost profits
incurred from the sale of the wrong type of seasonal wheat seed. Later courts have
restricted this to cases where actual physical injury to the land occurred. This has led to
the proposition that loss of profits may be recoverable as consequential damages when
direct physical damage has been proven.
Economic Losses as Consequential Damages
The standard post-1973 CGL policy, which covers "damages because of . . .
property damage," defines "property damage" as:
"(1) the physical injury to or destruction of tangible property which occurs during
the policy period including the loss of use thereof at any time resulting there from, or (2)
loss of use of tangible property which has not been physically injured or destroyed
provided such loss of use is caused by an occurrence during the policy period."
A court opined that “The most sensible reading of the . . . phrase, `damages
because of . . . property damage,' requires the insurer to pay all damages which are
causally related to an item of `property damage' which satisfies either of the policy's
definitions."
Thus, courts must initially determine whether consequential damages follow
either a direct physical injury to tangible property, or a loss of use of tangible property. If
neither definition is satisfied, consequential damages do not constitute property damage.
Conversely, if either of the two requirements of the "property damage" definition
have been satisfied, consequential damages may constitute property damage. For
instance, courts have found that consequential damages were causally related to the
railroad company's loss of use of its rail cars; lost profits stemming from loss of use of a
shredder resulting from property damage inflicted by acts of the insured were covered by
CGL policy; damages which are causally related to covered "property damage" should
also be covered under the language of the policy.
Under excess liability policies, "property damage" can include the costs of
repairing a mine and the loss of use after a landslide. Courts have determined that the
loss of use of a grain elevator resulted in consequential damages, and also found that
stress to trees constituted property damage and the resulting consequential damages were
covered by the insured's CGL policy.

A loss arising from "property damage" is recoverable, whether or not
the loss itself is tangible.
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For instance, lost profits resulting from crop failure are recoverable. Intangible
economic injuries may result from physical injury to tangible property and such injuries
are recoverable if they flow directly from the property damage. Lost profits resulting
from defective motors incorporated into zone valves an lost profits resulting from
negligently repaired scrap metal shredder are likewise covered
Coverage is available when an occurrence causes the loss of use of tangible
property, and the loss of use, in turn, then causes economic losses such as lost profits,
additional overhead and labor costs following fire in a tunnel under construction; or lost
profits resulting from defective crop seed.
Diminution in Value of Property
Depending upon the specific policy definition of "property damage," courts have
reached different conclusions as to whether or not a diminution in the value of property
constitutes property damage. In the 1966 revision, "property damage" was defined as
"injury to or destruction of tangible property," and in 1973 the term "property damage"
was refined to include either the physical injury to or destruction of tangible property, or
the loss of use of tangible property.
In interpreting the 1966 policy revision, the majority of courts have held that
diminution in value is included within the definition of "property damage." A majority
position holds that `property damage' includes tangible property which has been
diminished in value or made useless irrespective of any actual physical injury to the
tangible property
However, courts that have interpreted the 1973 revision, which specifies that there
must be either physical injury to or destruction of tangible property, or loss of use of
tangible property, have concluded that diminution in value should not be construed as
property damage. A Circuit court found that proof of diminished value would not be
sufficient to establish property damage because the policy requires physical injury as
opposed to injury.
Generally, courts have determined that "diminution in the fair market value of
property is excluded from coverage since the definition of `property damage' contained in
the CGL policy, `physical injury to tangible property' or `loss of use of tangible property'
plainly does not encompass that type of intangible economic loss. Courts have stated that
they believe the requirement of `physical injury to or destruction of tangible property' is
clear and unambiguous, and have concluded that intangible damages, such as diminution
in value, do not constitute physical injury to or destruction of tangible property; also the
word "physical" negated any possibility that depreciation in value was covered as property damage. "We conclude that `diminution in value' is not `property damage' when
defined as either `physical injury to . . . tangible property' or as `loss of use of tangible
property.' " Courts also agree that diminution in value caused by incorporation of a
defective product does not constitute `property damage' under post-1973 policies unless it
is the result of `physical injury' or `loss of use.'
The failure of property to increase in value constitutes a loss of intangible
property in the form of speculative profits and, as such, would not be property damage
subject to coverage.
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Some courts have held that the proper measure of damages for a defective part
integrated into a larger mechanism is the difference between the reduction in value of the
whole and the value of the defective component. By permitting recovery only when the
diminution in value exceeds the value of the defective component, courts properly assure
that there is no recovery for the value of the defective component, which is not covered.

To claim coverage for diminution in property value, the insured must
allege an actual decrease in market value.
Loss of Use of Tangible Property
Although the ISO standard-form CGL policy generally does not cover loss of
intangible property or purely economic loss, it does cover loss of use of tangible property.
The policy sets forth the following two requirements for property damage:
(1) the physical injury to or destruction of tangible property which occurs during
the policy period including the loss of use thereof at any time resulting therefrom, or
(2) loss of use of tangible property which has not been physically injured or
destroyed provided such loss of use is caused by an occurrence during the policy period.
The first requirement covers the loss of use of tangible property that has been
physically injured or destroyed. The second requirement covers loss of use of tangible
property not injured or destroyed provided the loss of use arises from an "occurrence"
during the policy period. Keep in mind that if the loss of use is not caused by an
occurrence, the point is moot as there is no coverage anyway. In one court case, the loss
of use of a building was not considered as constituting an accident where the loss was
caused by temperature controls within the building.
Simply put: the definition of property damage includes the availability of
coverage for loss of use of tangible property even when that tangible property has not
been physically injured or destroyed. The majority of courts construed the 1966
definition of property damage broadly to include coverage for loss of use of property that
had not been physically injured or destroyed.
While there need not be physical injury or destruction for coverage for loss of use
under the definition of property damage, the damage must nonetheless be to tangible
property. The loss of use need not be total.
Purely economic damage arising from loss of use of tangible property is not
covered. Future profit and reputational damage are purely economic losses and are
beyond the coverage of the policy. Pure economic loss arising from an insured's alleged
violation of state or federal antitrust laws is not covered as property damage, and claims
for recovery of economic losses under state and federal antitrust laws not covered.
Other courts may distinguish between economic loss as property damage, which
is not recoverable, and economic loss as a measure of damage for loss of use of tangible
property, such as where a court determined that lost profits as a measure of damages for
loss of use of damaged sample books is "potentially within the bounds of the policy."
Therefore, some courts have held that diminution in value is a proper measure of
damages for loss of use of tangible property, recognizing that "an intangible economic
loss, such as the diminution in value of fixed assets due to loss of use, may be covered if
it provides a measure of damage to tangible property."
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Diminution in value in and of itself, however, does not constitute loss of use and
allegation by plaintiffs that "the home they purchased has less value than they anticipated
does not constitute allegations of a `loss of use' of a tangible property." Also, damage to
the value of a product line does not constitute loss of use.

While loss of use of tangible property does include tangible property
which has been diminished in value, it does not include mere economic damage in
the nature of loss of investments, anticipated profits, and financial interests.
PERSONAL INJURY AND ADVERTISING INJURY COVERAGE
It is well established that CGL coverage for personal injury and advertising injury
depends on whether the injury for which coverage is sought actually arises from the
commission of the offenses as specified in the various policy definitions of "personal
injury" and "advertising injury." Personal injury and advertising liability coverage is
available only for unintended damage flowing from the commission of these very specific
offenses.
Personal Injury Coverage
The personal injury endorsement provides coverage for damages occurring during
the policy period arising out of certain enumerated offenses. (As one court put it) the
Policy builds from the ground up: It affords coverage only for defined risks. "The parties
to the insurance contract intended the policy to cover personal injury arising out of any of
the five enumerated offenses."
The enumerated offenses typically include false arrest, detention or imprisonment;
malicious prosecution; publication or utterance (a) of a libel or slander or of other
defamatory or disparaging material or (b) in violation of an individual's right of privacy;
and wrongful entry or eviction, or other invasion of the right of private occupancy. The
term " entry' into, or eviction of a person from, a room, dwelling or premises that the
person occupies involve a claim by one person over another to the occupancy of
property." A wrongful eviction takes place when a tenant is dispossessed by his or her
landlord. A wrongful entry takes place when someone other than the landlord claims a
possessory interest in the room, dwelling or premises.
A court held that "other invasion of the right of private occupancy" covered a
claim by tenants against a landlord for breach of the implied warranty of habitability.
The court expressly declined to limit "other invasion of the right of private occupancy" to
offenses in the nature of "wrongful entry or eviction," and found that this policy
provision covers a broad range of claims against landlords.
The "right of private occupancy" has been found to be ambiguous by the Third
Circuit court primarily because they did a survey of the conflicting decisions construing
the phrase "right of private occupancy" in the CGL policy's definition of personal injury.
Viewing the phrase as ambiguous, the majority held that there was coverage for claims
arising out of the County's permitting and zoning decision, which did not involve a
physical invasion. The court declared:
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Most courts have recognized that to find coverage for pollution events
under "Personal Injury" would "render the pollution exclusion meaningless," and
have refused to reach such an "anomalous result."
Racial Discrimination
Several cases have addressed the issue of whether racial discrimination against
potential tenants in an apartment building is an "invasion of the right of private
occupancy." Courts have reached different results on this question depending on whether
the court reads the policy definition to require the plaintiff to have a possessory right.

Policy language that does not include racial discrimination provides
coverage only if there is a landlord-tenant relationship or if plaintiff has a vested
property right.
In another case, the court ruled that personal injury definition does not include
racial discrimination while another court ruled that the "vague" "personal injury"
language includes race discrimination against potential tenants.
To further confuse the issue, in one New Hampshire case, the ruling was that
personal injury endorsement had also been held to provide coverage against a … claim
that a town deprived a property owner of the ability to develop property. But two years
later, another New Hampshire court ruled that there was no coverage (with same policy
language as the previous case) because the insurer established that the town knew it had
not purchased civil rights violations coverage. (Guess you would have to be there to
understand this one…)
An area of increasing litigation involves attempts to extend coverage for "other
invasion of the right of private occupancy" to environmental pollution claims.
INSURABILITY OF DISCRIMINATION OR SEXUAL HARASSMENT
BY STATE
In 1986, the Supreme Court held that sexual harassment creating a hostile or
abusive work environment is a violation of Title VII of the Civil Rights Act of 1964.
Addressing employers' liability for sexual harassment by their supervisors, the Court
declined to issue a definitive rule on employer 1010 liability, stating:
"We do agree with the EEOC that Congress wanted courts to look to agency
principles for guidance in this area. While such common-law principles may not be
transferable in all their particulars to Title VII, Congress' decision to define 'employer' to
include any 'agent' of an employer, 42 U.S.C. § 2000e(b), surely evinces an intent to
place some limits on the acts of employees for which employers under Title VII are to be
held responsible."
Each state has developed its own vicarious liability standards, and claims seeking
to impose vicarious liability upon employers for sexual harassment must be analyzed
under the governing state law. The chart in Exhibit II (in back of text) shows the
jurisdictions in which courts have considered the insurability of claims of sexual
harassment or discrimination."
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STUDY QUESTIONS - CHAPTER SIX
1. Premises-operations coverage includes liability incurred by an insured while an
activity is in progress, and
A. prior to the completion thereof.
B. when the activity has been completed according to the contract.
C. prior to the time that the activity started.
D. six months prior to the activity and six months after completion of the activity.
2. An injury that results from operations performed under a continuing service contract
between the insured and the injured party may not be covered under the completed
operations provision
A. unless a court or the Department of Insurance agrees to the coverage.
B. because of the continuing nature of the relationship.
C. unless there is a penalty paid to the insurer.
D. since there is no continuation of the relationship.
3. Completed operations coverage is not designed to provide coverage for liability
A. but to provide for bodily injury medical expenses.
B. except when there have been professional services involved.
C. for construction and construction-related projects.
D. resulting from the conduct of professional services.
4. Authorities generally agree that the products hazard exclusion applies only to claims
for negligent failure to warn of the dangers of a product
A. that is not considered as dangerous in any respect.
B. that may or may not be dangerous by the average user.
C. that is dangerous by its very nature.
D. used for environmental purposes only.
5. The majority rule is that there is no bodily injury when emotional distress is
A. unaccompanied by a physical manifestation of harm.
B. accompanied by a physical manifestation of harm.
C. involved in any way.
D. unrelated to the bodily injury.
6. Courts have construed "tangible property" to mean property that is
A. of value of more than one dollar.
B. capable of being handled or touched.
C. ethereal.
D. not liquid.
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7. Losses on business investments such as investments in a bankrupt enterprise, injury to
condominium investments, or injury to investment and loss of anticipated profits are
A. not considered as tangible property.
B. considered as tangible property for insurance purposes.
C. uninsurable under any type of insurance except for property insurance.
D. insurable.
8. A loss arising from "property damage" is recoverable,
A. but only if the loss is intangible.
B. but only if the loss is tangible.
C. whether or not the loss itself is tangible.
D. but never to full value.
9. To claim coverage for diminution in property value, the insured must
A. show that it will decrease in the future according to some legitimate forecast.
B. allege an actual decrease in market value.
C. first sell the property to a willing and responsible buyer.
D. decrease the size of the mortgage.
10. Policy language that does not include racial discrimination provides coverage
A. regardless of the situation.
B. only where all parties are of different race or heritage.
C. only if there is some financial loss because of the discrimination.
D. only if there is a landlord-tenant relationship or if plaintiff has a vested property
right.
ANSWERS TO STUDY QUESTIONS
1A
2B
3D
4C
5A
6B
7A
8C
9B
10D
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CHAPTER SEVEN - GENERAL LIABILITY
INSURANCE (II)
ADVERTISING INJURY COVERAGE
Advertising injury is typically defined to include injury occurring in the course of
the insured's advertising activities and arising out of specific enumerated offenses. Prior
to 1986, the standard CGL coverage included as enumerated offenses libel, slander,
defamation, violation of the right of privacy, piracy, unfair competition, or infringement
of copyright, title, or slogan. In 1986, ISO amended its CGL policy form to include
advertising injury and listed as enumerated offenses the following: oral or written
publication of material that slanders or libels a person or organization or disparages a
person's or organization's goods, products or services; oral or written publication of
material that violates a person's right to privacy; misappropriation of advertising ideas or
style of doing business; or infringement of copyrights, title or slogan.
Subject to other policy terms, conditions and exclusions, the advertising injury
provision provides coverage for damages that occur in the course of the insured's
advertising activities, arise out of one of the offenses enumerated in the policy, and occur
during the policy period.
ADVERTISING ACTIVITIES
Coverage under the advertising liability endorsement requires a threshold
showing that the alleged offense occurred in the course of the insured's advertising
activities.
In determining whether an activity constitutes advertising, many courts have
defined "advertising" to refer to the widespread distribution of promotional materials to
the public at large.

Advertising is the widespread dissemination of promotional
materials to the public at large, and does not include one-to-one solicitations.
Advertising activity contemplates widely distributed announcements to the
public so one-on-one public sales discussions do not qualify. Advertising means "widespread distribution or announcements to the public" and thus individual, one-on-one
solicitations, even if widespread, are usually not considered as advertising.
Other courts have examined the extent to which an activity reaches the entirety
of a client or customer base, with the result that some courts have determined that the
size of the audience is immaterial, and have even held that the use of allegedly
infringing trademark on merchandise tags, in catalogues and on display stands
constituted advertising because these acts occurred in an attempt to sell goods to public.
Other courts have not required the widespread distribution to the public at large
or to an entire client base, but rather found advertising to be based on limited activities.
A court found a duty to defend based upon three letters and one demonstration to a
potential customer, observing that the dictionary definition of "advertise" encompasses
any form of solicitation. Similarly, unauthorized construction and marketing of a copy
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of home alleges advertising activity, as does (advertising includes calling to public
attention by any means whatsoever, even one-on-one representation.
This still is heavily contested, and an intermediate appellate court in California
has stated that even a one-on-one representation would constitute advertising. In 2003,
however, the California Supreme Court subsequently addressed the scope of coverage
under the advertising injury provision in another case. In this case, the insured was
accused of misappropriating trade secrets by utilizing his former employer's customer
and price lists in order to solicit customers for his new business. The central issue
before the court was whether such offenses occurred in the course of the insured's
"advertising" of his new business. The court concluded that the term "advertising," as
used in a CGL policy, means "widespread promotional activities usually directed to the
public at large." Accordingly, the insured's conduct-making telephone calls and sending
mailers to the former employer's customers, advising them of the insured's new business
and lower prices-constituted "solicitation," rather than "advertising." The court rejected
the insured's contention that when viewed as a small start-up community business, the
aforementioned conduct is the functional equivalent of widespread promotional activities.
Warning against such case-specific analysis of a generic policy term, the court stated:
"Giving identical policy language different meanings for different insureds would
eliminate the clarity and certainty that is essential to the insurance industry."
As one court has acknowledged: Although there is no easy and widespread
definition for "advertising activity," we can safely conclude that it does not encompass
mere product labelling . . . . [Such a] construction of "advertising activity" would produce
unreasonable results because it would transform any effort to sell a product into open-ended coverage. And a ruling (that really makes sense!)—"An insurance policy shall not
be construed so as to produce an unreasonable or absurd result."

The offense itself must arise out of the advertising activity or, to put it
another way, "advertising injury" must have causal connection with "advertising
activities."
Other than that, any further mention of court decisions is beyond the purview of
this text, as there are numerous decisions, often contradictory in nature, but requiring a
casual connection with advertising activities creating the offense is mandatory—there
must some causal connection running from the offense through the advertising to the
injury.
UNFAIR COMPETITION
Prior to 1986, the standard CGL policy included coverage for "unfair
competition," generally held to be the common law tort of unfair competition or "palming
off," the taking of a competitor's name or symbols or the substitution of goods so as to
deceive the public. A recent (1989) court has concluded that: "The policy is designed to
cover two types of injury which might occur in the course of advertising: . . . dignitary
injuries . . . and . . . various kinds of misappropriation and passing off which might occur
in the text, words, or form of an advertisement."
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The courts that apply this common law meaning to "unfair competition' have held
that advertising liability coverage is available only for claims brought by competitors,
except in Illinois where, by law, noncompetitors can bring suit for unfair competition.
The New York Court of Appeals held that the "unfair competition" for which
coverage is provided involves injury to a competitor through unfair means—

"The primary concern in unfair competition is the protection of a
business from another's misappropriation of the business' organization or its
expenditure of labor, skill, and money."
Courts in many other states have also restricted the policy meaning of "unfair
competition" to its narrow common law definition and have refused to apply the broader
statutory definition of "unfair methods of competition" in consumer protection legislation
to the advertising liability endorsement. In practice, the phrase "unfair competition" does
not encompass claims arising under statutory unfair trade or business practices law.
Where an insured sought coverage for a suit alleging fraud, misrepresentation and
breach of contract in connection with soliciting and promoting private offerings of
limited partnership interests, the court found "that there is no way to read the complaint
so as to bring [the insureds'] actions complained of within the scope of `unfair
competition' and that there therefore was neither coverage nor a duty to defend with
respect to the advertising injury coverage."
The Ninth Circuit limited the advertising injury provision coverage for "unfair
competition" and held there was no coverage for a negligent misrepresentation claim:
["T]o include claims of negligent misrepresentation within the scope of unfair
competition coverage would be to expand that coverage to include the insured's business
activities in general. Such a result does not comport with the context of the CGL policy
and does not support an objectively reasonable expectation of coverage."
Courts rejecting this coverage-extending analysis have concluded that the
common law definition of unfair competition is appropriate because the term appears
"alongside a list of readily identified common law torts." These courts reason that the
common law definition of "unfair competition" fits within the context of the other
offenses enumerated in the definition of advertising liability, without swallowing the
other enumerated offenses.
SECURITIES FRAUD CLAIMS
Courts have not afforded coverage for security fraud suits under the advertising
liability provision because coverage for such cases would normally be obtained from a
professional liability policy or a Directors and Officers Liability policy.
To purchase a professional liability policy to protect them from charges resulting
from the performance of professional services, the premium would, in most cases, be
considerably higher than for general liability insurance because E&O policies insure
against a much different risk. Courts have also recognized that insurers would not
reasonably expect that a business liability policy would cover claims for securities fraud.
In one case the court ruled that there was no advertising injury coverage for a suit
alleging injury caused by alleged misrepresentations contained in investment prospectus.
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The most accepted view of the courts is that they have taken the
position that as a matter of public policy people should not be allowed to insure
themselves against acts prohibited by law such as securities fraud.
PATENT INFRINGEMENT CLAIMS
Insureds have also sought coverage under the advertising injury definition for
patent infringement claims. However, the majority of courts in numerous jurisdictions
have found no advertising injury coverage for patent infringement claims.
Patent infringement is not a specified offense and therefore, most
courts have held that none of the enumerated offenses encompass patent
infringement claims.
The 9th Circuit Court in 1994 stated:
"In the context of policies written to protect against claims of advertising injury,
'piracy' means misappropriation or plagiarism found in the elements of the advertisement
itself-in its text form, logo, or pictures-rather than in the product being advertised. [The
insured's] claim of piracy arising out of advertising has no basis because [the underlying]
claim was based on [the insured's] infringement of [the] patent for the intraocular lens
itself rather than on an element of [the insured's] advertising of the lens."
However a Washington appellate court reached a contrary conclusion involving
Amazon.com. The underlying complaint in this case alleged patent infringement of a
"music preview" software program by the insured, Amazon. The court held that such
allegations constitute a claim for "advertising injury" because Amazon purportedly
engaged in the wrongful taking of the "music preview" advertising. In addition, the court
concluded that this injury occurred "in the course of advertising" because Amazon had
used the patented software in order to solicit the sale of its own music products.
Insureds have also asserted that coverage for patent infringement claims exists
because patent infringement is unfair competition within the meaning of the advertising
injury definition. This argument was rejected in another court where the court stated that
the manufacture, importation and sale of infringing products is not "unfair competition."
"Even assuming that patent infringement were encompassed within an
enumerated offense, a finding of coverage would require the patent infringement claim to
arise out of the insured's advertising activities." It is well settled that:

The mere advertising of a patented device is not itself an
infringement, the act of patent infringement was the making, using or selling of a
patented invention, not the mere advertising of the invention.
Another court rejected the insured's argument that the injury need only be related
to the advertising, not caused by the advertising:
"Taken to its extreme, this argument would lead to the conclusion that any
harmful act, if it were advertised in some way, would fall under the grant of coverage
merely because it was advertised. Therefore, even if piracy is construed to encompass
patent infringement, patent infringement does not occur in the course of advertising, and
96
is not covered as a type of advertising injury. There are many other decisions upholding
this view."
TRADEMARK, TRADE SECRET CLAIMS
Claims of coverage for infringement of trademark, trade dress and trade secrets
are also brought under the advertising injury provision and the offenses of
"misappropriation of advertising ideas or style of doing business" and "infringement of
copyrights, title or slogan." Courts have provided mixed messages in deciding whether
there is coverage under the advertising injury provision for trademark and trade dress
infringement claims.
The first thing that the courts look at is the meaning of "misappropriation of
advertising ideas or style of doing business." In one case, the court, looking to case law
and dictionary definitions, found no ambiguity in the terms and concluded that there was
no coverage under the advertising injury provision for trade dress infringement claims.
The Sixth Circuit recently agreed that the clause was unambiguous and ruled that
it referred "to a category of actionable conduct separate from trademark and trade dress
infringement." The court concluded that the misappropriation refers to "the unauthorized
taking or use of interests other than those which are eligible for protection under statutory
or common-law trademark law."
In respect to trade secret claims, various courts have found that such claims fall
within an enumerated offense. They have also found that claims of misappropriation of
trade secrets, including customer lists, marketing techniques, and other confidential information, constitutes "misappropriation of advertising ideas"
DUTY TO DEFEND ONLY FOR DAMAGE CLAIMS
The duty to defend and indemnify under the advertising injury portions of the
CGL policy is only for "sums which the insured shall become legally obligated to pay as
damages." A suit for purely equitable relief does not give rise to a duty to defend
because it is not a lawsuit seeking damages.
The California Supreme Court has held (quite properly, and followed in other
states) that ["O]ne may not insure against the risk of being ordered to return money or
property that has been wrongfully acquired. Such orders do not award 'damages' as that
term is used in insurance policies." "When the law requires a wrongdoer to disgorge
money or property acquired through a violation of the law, to permit the wrongdoer
to transfer the cost of disgorgement to an insurer would eliminate the incentive for
obeying the law. Otherwise, the wrongdoer would retain the proceeds of his illegal
acts, merely shifting his loss to an insurer."
FEDERAL STATUTE VIOLATIONS
The New Jersey Supreme Court in 2004 affirmed that a "reverse passing off'
claim under the federal Lanham Act does not fall within the scope of "advertising injury"
under a CGL policy. The court noted that Lanham Act claims were not specifically
mentioned by name or description in the advertising injury provision. Additionally, the
court determined that the Lanham Act claim did not constitute a "misappropriation of
97
advertising ideas" because the underlying complaint alleged that the insured used its own
advertising ideas and instead misappropriated the underlying plaintiff's product.
Telephone Solicitation
A number of courts have addressed application of the "advertising injury"
provision to claims arising from alleged violations of the Telephone Consumer Protection
Act of 1991 ("TCPA"), a federal statute which created a private cause of action for any
party who receives unsolicited advertising facsimiles. Several courts faced with coverage
disputes arising out of alleged TCPA violations have ruled that the improper distribution
of facsimile advertisements constitutes an "invasion of privacy" within the meaning of
the "advertising injury" provision.
The Seventh Circuit, however, reached a contrary conclusion. In finding that
TCPA violations did not constitute an "advertising injury" in a CGL policy, the circuit
court focused on a literal interpretation of the term "privacy." The court reasoned that for
purposes of the advertising injury provision, the term "privacy" connotes a sense of
"secrecy," relating to the protection of information or content. Conversely, the court
maintained,
the term "privacy" as it relates to TCPA, pertains to a sense of
"seclusion," in terms of freedom from unwanted intrusions, regardless of
information or content.
Basing their decision on this conclusion, the court stated that the "insurance
policy's privacy interest was not the same as the TCPA's privacy interest. Therefore, the
alleged TCPA violations fall outside the scope of the advertising injury provision, and
defense or indemnity obligations are not implicated."
EXCLUSION FOR PRIOR PUBLICATION
Most CGL policies contain an exclusion for advertising injury "arising out of oral
or written publication of material whose first publication took place before the beginning
of the policy period." Courts have denied coverage on the basis of this exclusion. .
PUBLICATION WITH KNOWLEDGE OF FALSITY
Many CGL policies also contain an exclusion for advertising injury "[a]rising out
of oral or written publication of material, if done by or at the direction of the Insured with
knowledge of its falsity." The "knowledge of falsity" exclusion is typically applied to bar
coverage for advertising offenses where the truth of the disseminated information is at
issue and many courts have found that there was no duty to defend because falsity
exclusion barred coverage for claims of slander, libel and product disparagement. At
least one court has interpreted the "falsity" exclusion as a general bar to coverage for
"intentional" conduct. The court stated that a claim based on conduct that was
"knowing, willful, and intentional" would fall within the ambit of the "falsity" exclusion.
CONTRACTUAL LIABILITY COVERAGE
A general liability policy normally excludes from coverage the insured's
contractually assumed liability. A typical policy provides:
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"This insurance does not apply: to liability assumed by the insured under any
contract or agreement except an incidental contract."

The purpose of this exclusion is not to make the insurer underwrite its
insureds' contracts, but to limit coverage to the insured's tort liability.
Therefore, courts have consistently interpreted the phrase "liability assumed by
the insured under any contract" to apply only to indemnification and hold-harmless
agreements, whereby the insured agrees to "assume" the tort liability of another. This
phrase does not refer to the insured's breaches of its own contracts. Typically, the
exclusion covers liability of third persons adopted by the bank through an agreement to
indemnify or hold harmless.
Even though contractual liability is normally not covered in a general liability
policy, an insured may purchase such coverage. A typical endorsement provides:
"The company will pay on behalf of the insured all sums which the insured, by
reason of contractual liability assumed by him under a contract . . . shall become legally
obligated to pay as damages because of bodily injury or property damage to which this
insurance applies, caused by an occurrence . . .."
Such an endorsement does not provide coverage for an insured's breach of a
contract with another party. Such as with the exclusion, the language refers only to
situations in which an insured has assumed the tort liability of another party by means of
an indemnification or hold harmless agreement.
VENDOR'S ENDORSEMENT
Comprehensive general liability policies often contain a vendor's endorsement
which entitles certain third parties to claim coverage under the policy. The vendor's
endorsement typically extends a limited coverage to wholesalers and retailers who
distribute or sell a named products in the regular course of their business. A vendor's
endorsement usually provides in words or substance:
Each of the following is an insured under this insurance to the extent set forth
below:
"Any person or organization (herein referred to as "Vendor") but only with respect to
bodily injury or property damage arising out of the named insured's products if such
products are distributed or sold in the course of the vendor's business, but the insurance
with respect to such vendor does not apply to:
a) Any express warranty or any distribution or sale for a purpose unauthorized by the
named insured;
b) Bodily injury or property damage arising out of:
i) Any act of the vendor which changes the condition of the products,
ii) Any failure to maintain the products in merchantable condition,
iii) Any failure to make inspections, adjustments, test or servicing as the vendor
has agreed to make or normally undertakes to make in the usual course of
business, in connection with the distribution or sale of the products, or
99
iv) Products which after distribution or sale by the named insured have been
labeled or relabeled or used as a container, part or ingredient of any other
thing or substance by or for the vendor."
Although not an uncommon provision, there has been relatively little litigation
concerning the meaning and scope of vendor's endorsements.
The "natural role" and "specific purpose" of the vendor's endorsement is to protect a vendor who is strictly liable for a design or manufacturing
defect in a product it sells despite having no creative role in the design or
manufacturing of a product.
The vendor's broad form coverage is an outgrowth of modern products liability
law, which not only makes a manufacturer strictly liable for injuries caused by defects in
its products, but extends strict liability as well to the distributor or retailer of the
manufacturer's product. In that way, the endorsement encourages vendors to purchase
and sell the products of the party securing the insurance.
Some vendor's endorsements explicitly limit the scope of coverage to that
provided by the policy's products hazard coverage. Others cover claims "arising out of
the named insured's products." The latter language has been interpreted more broadly in
some instances to include, not just product liability actions, but negligent sale actions as
well. For instance, negligently selling named insured's product to a minor "arises out of
the product and is covered under the vendor's endorsement."
Very often the vendors of the named insured's products are identified in the
policy. However, the vendor's endorsement may generically describe a class of persons
or entities without naming any specific people or entities as vendors. Whether explicitly
named or not, a vendor may have received a certificate of insurance from the insurer
documenting the availability of vendor's coverage.
Although "vendor" is undefined in most vendor's endorsements, there has been
very little litigation concerning who or what a "vendor" is, perhaps because vendors are
so often explicitly identified in the endorsement. Where the issue has arisen, a few cases
have framed the question in terms of whether the party asserting coverage under the
vendor's endorsement sold the named insured's product in the regular course of its
business.
Where a party asserting coverage is not named in the endorsement the court may
refer to extrinsic evidence in determining whether the party is a "vendor." Most of the
existing case law concerns the applicability of one or more exclusions to vendor's
coverage that are typically contained within the vendor's endorsement itself. One typical
exclusion relates to the "relabeling" of the named insured's product. Another common
exclusion relates to vendors that have changed the form of the named insured's product,
as to which a number of courts have required a nexus between the change in form and the
injury incurred.
There are disagreements among courts where an exclusion excludes coverage and
the named insured's product is used as a "part" or an "ingredient" of another thing by the
vendor, and some courts have held that the exclusion does not apply where the named
insured's product is intended to be a part of a larger product. Other courts have held that
the exclusion applies irrespective of whether such a use was intended.
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More recently, one court held that in order for the exclusion to apply, a "nexus" or
"causal connection" must exist between the component supplied by the named insured
and the event sought to be covered.
DIRECT ACTION STATUTES
Direct action statutes permit the victim of tortious conduct to sue the insurer of
the tortfeasor directly, without having first obtained a judgment against the insured. This
unusual procedural device has attracted national attention with the advent of mass tort
claims and large punitive damage awards. Direct action statutes are based on the premise
that a third-party beneficiary may sue to enforce the insurance contract. Because direct
action statutes are imbued with public policy, they are available to tort victims
notwithstanding policy provisions that specifically prohibit direct actions. Only two
states-Louisiana and Wisconsin - and two United States territories-Guam and Puerto
Rico-have statutes that provide for a direct cause of action by an injured party against an
insurer.
Certain states allow for direct actions against insurers in limited circumstances.

A Florida court permitted direct action against insurer of any entity
responsible for discharge of petroleum that threatens the state's waters.81
Other states, such as Georgia, recognize a direct action for certain types of claims,
(Ga. Code § 46-7-12(c)) such as authorizing direct actions involving motor carriers.
These direct action statutes are not to be confused with statutes in some states that
permit a suit directly against an insurer after a judgment has been secured against the
insured. Nor should they be confused with statutes that have been construed to permit
third parties to seek declaratory relief against insurers regarding the scope or existence of
coverage. Rather, a true direct action statute is one that permits the insurer to be joined
as a defendant in the tort victim's suit against the alleged tortfeasor, or against the insurer
alone in the event the tortfeasor is deceased or bankrupt.
An insured may also settle for what is characterized as its "uninsured portion" of
liability (e.g., where an uninsured intentional tort claim is asserted) and the third-party
claimant can proceed against the insurer alone on a covered negligence claim without the
insurer receiving any credit for the portion paid by the insured. This partial settlement
approach substantially increases the potential recovery for the tort victim. On the other
hand,

an insurer cannot settle with a third-party claimant without also
obtaining a release for its insured as the settlement will not otherwise release the
insurer from its contract with the insured.
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STUDY QUESTIONS - CHAPTER SEVEN
1. Advertising is the widespread dissemination of promotional materials to the public at
large
A. limited by form, format or number or method of solicitation.
B. and does not include one-to-one solicitations.
C. and applies only to widespread promotion to solicitations of more than 1,000.
D. and includes one-to-one solicitations.
2. The primary concern is the protection of a business from another's misappropriation of
the business' "organization [or its] expenditure of labor, skill, and money
A. in theft insurance.
B. so as to protect all patent infringement rights.
C. in unfair competition
D. as none of those situations are insurable.
3. The most accepted view of the courts is that they have taken the position that as a
matter of public policy people should not be allowed to insure themselves
A. against acts prohibited by law such as securities fraud.
B. against forces of nature, such as hurricanes.
C. against racial discrimination or sexual harassment.
D. from nebulous and rarely-occurring hazards.
4. The act of patent infringement is the making, using or selling of a patented invention,
A. or marketing of such invention.
B. and is not an insurable issue.
C. and is a crime and as such, there is no protection by insurance.
D. not the mere advertising of the invention
5. The term "privacy" as it relates to the Telephone Consumer Privacy Act pertains to a
sense of "seclusion," in terms of freedom from unwanted intrusions,
A. except for a long list of information that is not covered under the Act.
B. regardless of information or content.
C. but the terms have been both considered as unconstitutional.
D. except through mechanical devices.
6. The "natural role" and "specific purpose" of the vendor's endorsement is to protect a
vendor who is strictly liable for a design or manufacturing defect in a product it sells
A. and who has a substantial role in the design of the product.
B. and who has played a prominent role in the manufacturing of the product.
C. and manufactures.
D. despite having no creative role in the design or manufacturing of a product.
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7. A Florida court permitted direct action against the insurer of any entity responsible for
A. racial discrimination.
B. discharge of petroleum that threatens the state's waters.
C. child molestation or child pornography.
D. selling hurricane shutters.
8. An insurer cannot settle with a third-party claimant
A. without also obtaining a release for its insured.
B. unless so ordered by the court.
C. for any amount different than what is the maximum under the policy.
D. who is not a US citizen.
9. Very often the vendors of the named insured's products are identified in the policy.
However, the vendor's endorsement
A. must specifically name persons and/or entities by name and location.
B. does not even have to refer to anyone except "vendors."
C. may generically describe a class of persons or entities without naming any
specific
people or entities as vendors.
D. excludes persons and entities only.
10. A general liability policy normally excludes from coverage the insured's contractually
assumed liability. A typical policy provides: "This insurance does not apply to liability
assumed by the insured under any contract or agreement
A. under any circumstances."
B. unless such contract/agreement has been in force for a period of 6 months."
C. except an incidental contract."
D. except for contracts considered illegal under the laws of the jurisdiction."
ANSWERS TO STUDY QUESTIONS
1B
2C
3A
4D
5B
6D
7B
8A
9C
10C
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CHAPTER EIGHT - OCCURRENCE BASED
COVERAGE
The number of unresolved bodily injury cases involving cumulative injury toxins,
and property damage cases involving environmental contamination has given impetus to
extensive litigation concerning the scope of coverage available to insureds in cases
involving damage that takes place over an extended period of time. The hub of these
disputes is often the question as to the extent to which losses arise from fortuitous events.
CGL POLICIES COVER ONLY ACCIDENTAL OR FORTUITOUS DAMAGE
Insurance involves the transfer from the policyholder to the insurer of the risk of
possible losses.
Thus, by definition, insurance is not available for losses that the
policyholder knows of, planned, intended, or is aware are substantially certain to
occur.
Courts have held that insurance is a wager against the occurrence or nonoccurrence of a specified event; therefore, the carrier insures a risk, not a certainty. And
"Insurance only covers risks. If there is no element of fortuity, there is no insurance."
Further, "The fortuity doctrine arises from the basic concept that insurance covers risks,
rather than losses that were planned, intended or anticipated by the insured. The burden
is on the insured to prove the loss was fortuitous."
So as to alleviate any confusion, the Restatement of Contracts uses the following
definition:
"[A] fortuitous event . . . is an event which, so far as the parties to the contract are
aware, is dependent on chance. It may be beyond the power of any human being to bring
the event to pass; it may be within the control of third persons; it may even be a past
event. . . provided that the fact is unknown to the parties. "The thrust of the definition is
that the occurrence be unplanned and unintentional in nature."
"A fortuitous event is an event `occurring by chance without evident causal need
or relation or without deliberate intention."' "A fortuitous event is one `which so far as the
parties to the contract are aware, is dependent on chance.'" Other holdings: a fortuitous
loss is one "which could not reasonably be foreseen by the parties at the time the policy
was issued" and "[a] fortuitous event is one that, at the time the contract was made, could
not have been reasonably foreseen."
The determination of whether an injury is the result of an accident should be
judged by an objective standard. "Pursuant to the common sense definition, `accident' is
not a subjective term. However, a number of courts view the determination of fortuity as
a subjective inquiry. The "subjective approach to the determination of fortuity does not
negate the requirement that fortuitous losses result from chance."
A fortuity requirement is inherent in the nature of insurance.
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As former Harvard Professor (now federal district judge) Keeton stated in an early
edition of his treatise, there is an implicit requirement read into every liability insurance
policy that coverage will be provided only for fortuitous losses:
"A requirement that loss be accidental in some sense in order to qualify as the
occasion for liability of an insurer is implicit, when not expressed, because of the very
nature of insurance. "The basic purpose of nearly all insurance [is] the provision of
protection against harm that is fortuitous [accidental] rather than caused intentionally by
the insured."
The overwhelming majority of courts, including the Supreme Court of the United
States, have adopted the fortuity doctrine and have limited insurance coverage, regardless
of the language of a particular policy, to fortuitous or accidental events.
A Texas court held that "it is contrary to public policy for an insurance company,
the business of which is affected with a public interest, knowingly to assume the burden
of a loss that occurred prior to making the contract. Further, it is against public policy to
insure against liability for intentional acts."

A fortuitous loss is a necessary element of accident-based coverage.
ACCIDENT
Prior to 1966, the standard-form CGL policy provided coverage on an "accident"
basis. That is, pre-1966 CGL policies provide coverage for personal injury or property
damage caused by an accident. While the present CGL Form does not provide for loss by
accident per se, "Bodily Injury" can create an injury that is covered under the policy.
The term "accident" means unexpected and unintended. "Accident" is thus
synonymous with the term "fortuitous." Black's Law Dictionary defines "fortuitous" as:
"Happening by chance or accident. Occurring unexpectedly, or without known cause.
Accidental; undersigned; adventitious. Resulting from unavoidable physical causes."
When deciding whether a loss is the result of an accident, most courts will
consider whether the loss was "unexpected, unusual and unforeseen" from the point of
view of the insured.82 Another court held that if the term "accident" is not defined in the
policy (which it is not under present CGL Form), whether there has been an accident will
be viewed from the standpoint of the injured party. Under an automobile liability policy,
"accident" is defined from viewpoint of person suffering harm or injury. Under a
homeowner policy, "accident" is defined from the viewpoint of the victim.
Thus, in cases in which losses are not fortuitous, courts find no coverage under
accident-based policies. The requirement of a fortuitous loss is a necessary element of
insurance policies based on either an `accident' or `occurrence.'

The fortuity requirement precludes coverage for known losses.
Under the fortuity requirement, there can be no liability insurance coverage for
property damage that the insured knows about when the policy is issued. A New Jersey
Court observed:
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"Insurance provides financial protection against risks that may someday occur.
Once a risk becomes a certainty, it is no longer insurable. Any insurance acquired
subsequent to the act, the harm, and the notice thereof, is not valid as to those acts and
that harm."
The Illinois Supreme Court observed that: "The known loss doctrine may be
invoked if the insurers demonstrate that [the insured] knew or had reason to know, at the
time it purchased the CGL policy, that there was a substantial probability that loss or
liability would ensue due to the . . . contamination for which it is seeking coverage. The
question is not whether [the insured] knew it was discharging a pollutant into the
environment . . . . Rather, the relevant question is whether [the insured] knew or had
reason to know that a probable loss or liability would occur due to the . . . contamination
alleged in the underlying complaints."
The Indiana Supreme Court found that in order to deny coverage under the known
loss doctrine, the insurer must prove that the insured knew the loss was "substantially
certain." The Court noted that "a party may not intentionally turn a blind eye in order to
avoid application of the known loss doctrine."
In short, the known loss doctrine embraces the fortuity requirement by precluding
coverage for a loss known to be certain to create a liability at the time the policy is
issued.
The most restrictive interpretation of the known loss doctrine is found in a
California District Court—there, the court held that:
"When a loss is "known or apparent" before a policy of insurance is issued, there
is no coverage . . . But all that is required is that there be some contingency and, however
inevitable an event might be, an "inevitable" event is still a contingency or risk. We think
the better rule . . . is that the known loss doctrine will bar coverage only when the legal
liability of the insured is a certainty. Thus, we adopt the rule set forth by the Supreme
Court of California that the known loss doctrine "will not defeat coverage for a claimed
loss where it had yet to be established, at the time the insurer entered into the contract of
insurance with the policyholder, that the insured had a legal obligation to pay damages to
a third-party in connection with a loss."
A Pennsylvania court in 1995 stated: "The occurrence of the event . . . does not
destroy the requisite element of statistical uncertainty in the third-party liability context,
as the relevant events remain to be determined, including: is there any harm to off-site
locations; will claims be filed at all; what number of claims will be filed; what sums of
money will the claims demand?"
However, the Supreme Court of Pennsylvania adopted a broad interpretation of
the known loss doctrine, concluding that the appropriate standard for the known loss
defense is "whether the evidence shows that the insured was charged with knowledge
which reasonably shows that it was, or should be, aware of a likely exposure to losses
which would reach the level of coverage." The lower court noted that knowledge of
certainty of damages and liability was not necessary for the doctrine to apply, as such a
requirement would be tantamount to the standard for criminal fraud.
In another case, the known loss doctrine barred the insured's claims where the
insured acquired a CGL policy after receiving a demand letter warning of potential
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liability and did not disclose the demand letter or underlying activities to the insurer
before purchasing insurance.
The "Loss in Progress" Rule
A corollary of the "known loss" rule is the so-called "loss in progress" rule,
which has been interpreted to preclude coverage under policies issued after initial
manifestation of a loss. "In conformity with the loss-in progress rule, insurers whose
policy terms commence after initial manifestation of the loss are not responsible for any
potential claim relating to the previously discovered and manifested loss."
The loss in progress rule "is a commonly accepted premise of insurance law
throughout the United States."

Simply put, one cannot insure against a loss that is already in
progress.
The loss in progress doctrine applies whenever the insured is or should be aware
of an ongoing progressive loss at the time a policy is purchased.
The loss in progress rule is a logical extension of the fortuity requirement which
is inherent in the nature of insurance, which has been described as: One party
undertakes to indemnify another against loss arising from certain specified
contingencies or perils. Fundamentally and shortly, it is contractual security against
possible anticipated loss. Risk is essential and, equally so, a shifting of its incidence
from one to another."

The loss in progress rule precludes coverage for losses that were
known before the policy period, even if the damage progresses during the policy
period.
A progressive loss is "known" if the insured "knew or should have known at the
time it obtained insurance coverage" that damage was threatened. Further, the rule
precludes coverage for losses that have not yet occurred but which are imminent. The
"loss in progress" doctrine applies when insured is aware of a threat of immediate loss
and it precludes insurance coverage where the insured is subjectively aware of a threat
of loss so immediate that it might fairly be said that the loss was in progress and that
the insured knew it at the time the policy was issued or applied for."
Although the rule "has its roots in the prevention of fraud," in certain instances
it might bar coverage even when the insured purchases insurance without realizing that
the damage which has already occurred will progress during the policy period. A court
refused to bar coverage for progressive damage resulting from a "slowly creeping"
landslide, yet acknowledging that:

"where some quick process of destruction is under way at the
moment, even insurance innocently bought and issued should not cover".
"The point at which a threat of loss is so immediate that it may fairly be said
that the loss was in progress and the insured knew of it at the time the policy was
applied for or issued is generally a question of fact."
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OCCURRENCE-BASED COVERAGE
"OCCURRENCE" POLICY LANGUAGE
Since 1966, the ISO standard-form CGL policy has provided coverage for "all
sums which the insured shall become legally obligated to pay as damages because of
bodily injury or property damage." "Occurrence means an accident, including continuous
or repeated exposure to substantially the same general harmful condition." An occurrence
policy provides coverage for any "occurrence" which takes place during the policy
period. Under this type of policy, it is irrelevant whether the resulting claim is brought
against the insured during or after the policy period, as long as the injury-causing event
happens during the policy period.
The distinguishing feature of an occurrence policy is that it results in socalled "tail" coverage, which refers to the lapse of time between the occurrence and
the date a claim is made.83
In most pre-1986 CGL policies, an "occurrence" is defined as an accident,
including a continuous or repeated exposure to conditions, which results, during the
policy period, in bodily injury or property damage neither expected nor intended from the
standpoint of the insured.
In 1986, the standard-form CGL policy definition of "occurrence" was changed to
"an accident, including continuous or repeated exposure to substantially the same general
harmful conditions." A new exclusion was added which provides in relevant part:
"This insurance does not apply to: (a) 'Bodily injury' or 'property damage'
expected or intended from the standpoint of the insured."
The phrase "expected or intended from the standpoint of the insured" was
removed from the definition of occurrence (the 1966/73 CGL definition of occurrence)
and was put in a brand new exclusion to further clarify the fortuity principle and nature of
liability insurance. In other words, an insured's intentionally caused harm (bodily injury
and property damage), as well as an insured's expected harm to third-party claimants,
cannot be covered because such harm is specifically excluded from coverage by
Exclusion "a".
The New Hampshire Supreme Court adopted the following definition of
"accident": "an undesigned contingency, . . a happening by chance, something out of the
usual course of things, unusual, fortuitous, not anticipated, and not naturally to be
expected." In a subsequent case, the court, applying this definition, found that a
manufactured gas plant's discharge of hazardous wastes into the environment during 100
years of operation was not an accident:
"Although the [insured's] acts may well have been lawful and socially acceptable
at the time they were taken, they were not accidents as our cases have defined that term,
and that term is the one on which coverage hinges."
The New York Court of Appeals noted that "[t]he term `accident' is broadly
defined in our jurisprudence, utilizing an average person standard" and that "in deciding
whether a loss is the result of an accident, it must be determined, from the point of view
of the insured, whether the loss was unexpected, unusual and unforeseen." Applying
these principles, the court found that the murder of a tenant by an unknown assailant who
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had entered the insured landlord's building constituted an accident for purposes of
determining the insurer's obligations.
The purpose of amending the standard CGL form from an "accident" based policy
to an "occurrence" based policy was to confirm that the insured event was not limited to
sudden events, but also included "personal injuries and property damage sustained as a
result of gradual processes, or as the result of repeated exposures to the same or similar
conditions.

For the purpose of determining whether an event is accidental or
fortuitous, "courts have repeatedly stressed that they do not distinguish between the
words "accident" and "occurrence."
Recent litigation has been at issue as to whether faulty workmanship and/or
negligent advice constitute an "occurrence" within the meaning of a CGL policy. The
majority of courts have ruled that where faulty workmanship does not result in property
damage other than the faulty work itself, there is no "occurrence." These courts have also
reasoned, (among other things) that substandard workmanship is not an "accident," but
rather akin to a breach of contract.
Defective workmanship that results in damages only to the work product itself is
not an occurrence under a CGL policy. There usually is a ruling that there is no
"occurrence" where the underlying complaint alleged that faulty workmanship caused
damage to the insured's own property—faulty workmanship is not an "occurrence" where
it did not result in damage to other covered property aside from the faulty workmanship
itself.
However, property damage resulting from reliance on professional consulting
services does not constitute an occurrence because the act of performing consultation
services is intentional and deliberate, even if the advice was negligently provided. Faulty
installation of waterproof material which eventually leaked is not an occurrence because
negligent workmanship is not an accident and the leaks were foreseeable in light of the
faulty workmanship.
Several of these cases involved shoddy construction, including a 2005 Florida
84
case that decided that defective workmanship is not an occurrence under a CGL policy.
Similar court decisions were: construction of substandard home constitutes a breach of
contract, not a covered "occurrence; no coverage for costs to restore defectively built
retaining wall; no "occurrence" where no damage to property other than the faulty work
itself; "occurrence involves a degree of fortuity not present when the insured's defective
performance of a contract causes injury to the insured's own work;" "commercial liability
insurance policies . . . do not cover claims for defective or deficient workmanship"; costs
of repairing defective work without damage to property other than the defective work
itself is not an occurrence; no duty to defend underlying claims of defective construction
of home; and allegations of "loss for repair and replacement caused solely by defects in
the design and construction of [a] home" do not constitute an occurrence.
However, where faulty workmanship results in damage to other property, courts
have found an "occurrence." Several courts have ruled that faulty workmanship that
caused damage to property other than the insured's work product constitutes an
"occurrence;" faulty installation of windows and doors, which resulted in water damage
109
to the interior of the building, constitutes an "occurrence; although insured is not entitled
to recover costs of repairing defectively built roof, coverage may be due for "any
resulting property damage . . . such as water stained ceiling tiles;" property damage
caused by negligent construction and design falls within definition of "occurrence."
On the flip side, a number of courts, ignoring the reasoning of the majority of
cases on point, have held that because faulty workmanship is unintentional and/or
unexpected, it constitutes an "occurrence" regardless of whether it resulted in property
damage separate from the faulty work itself.
Courts taking this position have ruled property damage to a building due to
negligent advice and corresponding inadequate soil preparation was caused by an
"occurrence; defective performance and faulty workmanship constitute "occurrences" because they are unexpected and unintended; negligent soil analysis, which resulted in
property damage to home constitutes an "occurrence"; contractor's negligence in building
home satisfies "occurrence" requirement; coverage for damage caused by faulty work is
covered under CGL policy's broad definition of "occurrence"; definition of "occurrence"
under CGL policy encompasses negligence claim against contractor for faulty
construction ; allegations of negligence relating to faulty workmanship constitute an
"occurrence," etc.
Expected or Intended Damage is Not Occurrence
Insurance coverage disputes involving CGL policies frequently turn on the issue
of whether the injury or damage for which an insured seeks coverage was expected or
intended by the insured. Damage which is expected or intended from the standpoint of
the insured is not fortuitous and therefore not an occurrence.
For example, a Pennsylvania court in 1987 found no occurrence under policies in
effect from 1971 to 1977. Neville, the insured, owned, operated and maintained a
chemical manufacturing facility. At least as early as 1964, Neville dumped chemicals
and other hazardous industrial waste materials into a disposal pit or "lagoon" located on
its property. In 1971, the State of Pennsylvania filed a complaint against Neville alleging
that Neville's method of disposing of chemicals violated the Pennsylvania Clean Streams
Law and "constitute[d] an imminent danger of pollution to the waters of the Commonwealth . . .." Thereafter, a local municipality commenced two actions against Neville
alleging that Neville contaminated water wells. The court denied coverage, holding that:
"The allegations of [the municipalities'] complaints in the state court set forth
claims for recurrences, not occurrences."

The general rule is that coverage exists for the unintended results of
an intentional act, but not for the damages assessed because of injury which was
intended to be inflicted.
One court found that damage caused by industrial emissions constituted a nuisance, but was nevertheless "accidentally caused" and within the coverage afforded by a
CGL policy. The court held that: "While it cannot be gainsaid that Atlantic intended to
operate its cement plant at Ravena, that does not mean that they thereby "intended" to
cause damage to the property of the surrounding landowners, nor on this record can it be
110
said that it was substantially certain that such damage would result from the operation of
this plant."
Along similar lines, the Sixth Circuit held that property damage caused by
unauthorized dumping of waste was a covered "occurrence" because although the act
itself was intentional, the fact that it was done without permission was not intended by
the insured.
Expectation And Intention Standard Is That Of A "Reasonable Person."
If an insured knew or should have known that there was a "substantial
probability" that certain results would follow from his acts or omissions, there is no
"occurrence" within the meaning of a CGL policy.
For instance, a decision stated that damage caused by a polluter "whose conduct
over a period of years produced a result so expectable as to justify an award of punitive
damages" is not an occurrence. Further, another court held that "personal injuries or
property damage are expected if the actor knew or should have known there was a
substantial probability that a certain result would take place."

Simply put, "Expected" means "more likely than not to occur."
In the widely cited decision (above), the court defined a "substantial probability"
as being strong enough to alert a reasonably prudent man not only to the possibility of the
results occurring but the indications also must be sufficient to forewarn him that the
results are highly likely to occur.
The rationale of one case addressing a situation where the insured had knowledge
of what could happen, following the previously stated decision, has been followed in
other cases. "Injury is `expected' where the damages are not accomplished by design or
plan, i.e., not `intended,' but are `of such a nature that they should have been reasonably
anticipated (expected) by the insured."'
Numerous courts have ruled that to prevail on an "expected or intended" defense,
the insurer need not demonstrate actual knowledge in the possession of the insured.
Rather, the insured's knowledge can be inferred from its actions, the conditions and the
circumstances surrounding those actions and the resultant damage. When "the denial of
an intent to injure `flies in the face of all reason, common sense and experience' . . . the
intent to injure may be presumed."
When Injury or Damage Is Not an Occurrence
The trend of the case law is that coverage will be barred whenever it is proven
that the insured expected or intended some injury or damage to occur. "As long as some
harm is intended, it is immaterial that harm of a different magnitude from that
contemplated actually resulted—It is immaterial that [the insured] subjectively did not
expect or intend to cause the extent of damage which actually occurred."
The rationale for this rule was stated in this court's decision: "We also reject the
view that intent means specific intent to cause the precise injury which did occur. Such
an approach would reward wrong-doers by affording them insurance coverage just
because their plans went slightly awry. A gunman who intends to shoot a victim in the
111
foot should not be awarded insurance coverage because his aim was faulty and he shot
the victim in the heart. The gunman's intention never deviated from its wrongful path."
The decision has been reached by a court that declared that coverage is excluded .
. . "if the insured `acted even though he was substantially certain that an injury generally
similar to the harm which occurred would result.' " Further, "liability insurance will not
extend to deliberately harmful acts even if the resulting injury is somewhat different than
what the insured intended."
Burden of Proof to Determine Damage as Expected or Intended
Courts have split on the issue of whether the insured or the insurer has the
burden of proving that damage was expected or intended from the standpoint of the
insured within the meaning of the "occurrence" definition. The result generally
depends on whether the court views the "expected or intended" requirement as a part of
the coverage definition or an exclusion from coverage.
In 2002, the New York Court of Appeals issued what is considered as a
landmark decision holding that the insured, not the insurer, bears the initial burden of
proving that damage was caused by an "accident" or "occurrence." This case arose out
of environmental damage to a manufactured gas plant in Tarrytown, New York. Con
Edison commenced a declaratory judgment action against 24 insurers that had issued
liability policies between 1936 and 1986, seeking indemnification for its clean-up costs.
Ruling in favor of the insurers, the Court of Appeals found that "the requirement of a
fortuitous loss is a necessary element of insurance policies based on either an `accident'
or an `occurrence,' " and, thus, the insured has the initial burden of proving it.

A general rule is that an insured must demonstrate that a claimed
loss is within a policy's coverage provisions, but an insurer must prove that any
policy exclusions apply.
Since the insured bore the burden of proving the loss was caused by an
"occurrence," the court required the insured to prove that it neither expected nor
intended environmental damage to result from its operation of a landfill.
Other courts have treated the expected or intended requirement as an exclusion
from coverage for which the insurer bears the burden of proof. The Second Circuit held
in a case involving an asbestos claim, that the insurer has the burden of proving that
damages are expected or intended, regardless of whether the words "expected or
intended" appear in the coverage grant or in an exclusion because "under New York
law, the exclusionary effect of policy language, not its placement, controls allocation of
the burden of proof." The insured bears the initial burden of proof that the damage was
the result of an "accident" or "occurrence."
The New Jersey Supreme Court held that "the `unexpectedly and
unintentionally' language of the occurrence definition should be treated as an exclusion
for purposes of assigning the burden of proof in environmental coverage cases." The
court "emphasize[d] that whether inserted in the form of a specific exclusion or
packaged within the definition of an `occurrence,' the effect of this language is
ultimately the same: it denies coverage for damage expected or intended from the
standpoint of the insured."
112

Injury or damage which is caused by inherently harmful or illegal
acts is generally held to be expected or intended.
In cases where damage is caused by inherently harmful or illegal acts, a majority
of courts infer intent regardless of subjective intent. Thus, most courts infer an intent to
injure as a matter of law whenever the insured's volitional actions are "particularly
reprehensible," "wrongful," "inherently harmful," "substantially certain to result in
injury," or violative of a criminal or other statute that evinces a legislative
determination that the act in question invariably results in harm.
Where the court rejected insured's contention that his action was reckless, not
intentional; public policy precludes insurance coverage for domestic violence claim
under state statute. Further, an act cannot be accidental when it is so inherently
injurious that "it cannot be performed without a certainty that some injury will result
[this test] should be conducted from the perspective of a reasonable person in the
position of the insured."
A minority of courts appear willing to infer intent more readily, whenever it is
"foreseeable" that the insured's conduct will lead to injury or damage. Example would
be where there is a sexual assault of an adult and inferring intent because injury results
from the "natural and probable consequences" of the insured's act of physically striking
he victim; or the inference of intent to harm from sexual molestation of children.
Inherently Harmful Acts
Nearly all courts that deduce an intent to harm from inherently harmful acts will
hold that a lack of unverifiable intent to harm on the part of the insured is irrelevant.
For instance, courts have decided that: "The intent to harm may be inferred from
insured's acts of child molestation and "the subjective intent of the insured is not
relevant to the determination of whether coverage is precluded."

When the alleged harm is an inherent result of the act, intent to injure
will be inferred and the courts will not inquire into the perpetrator's subjective
intent to cause the injury.
Courts will agree that regardless of the actor's subjective intent, an intent to
inflict injury can be inferred as a matter of law in cases of sexual abuse. "The fact that
[the insured child molester] did not subjectively intend the specific injuries that
defendant sustained-or any injuries-does not matter, because an injurious intent is
necessarily inferred from this type of intentional misconduct." A defendant may assert
the rock was accidentally released or was not aimed at the victim, but he will not be
heard to say he intended to throw the rock softly. They all seem to agree that in sexual
abuse cases there is an intent to injure.

Child molestation is so harmful that the intent to commit the act and
the intent to harm are one and the same. The act is the harm.
"Child molestation and the injury caused by it are so closely tied as to be
virtually inseparable," courts have said. "In the exceptional case of an act of child
molestation, cause and effect cannot be separated, so that to do the act is necessarily to
do the harm which is the consequence of the intended act." Accidental or negligent
113
touching of child's anal or genital area would not be an inherently harmful act barring
insurance coverage as a matter of law.
Similarly, courts agree that an intent to harm may be inferred as a matter of law
from rape and sexual molestation of adults. An intent to harm will be inferred as a
matter of law when a person sexually assaults, harasses, or otherwise engages in sexual
misconduct towards an adult. Courts have not formed a consensus, however, on
whether consensual sex with a minor is inherently harmful conduct. One court has
ruled that statutory rape is inherently harmful, and another court ruled that statutory
rape is not inherently harmful (?).
Courts have also held that conduct intertwined with sexual molestation becomes
inherently harmful due to its proximity to and association with the molestation.
Because insured teacher/child molester's negligent "public embarrassment" of his
student victim in school might stand, independent of the molestation, his conduct
cannot be viewed as "inherently harmful and intent to harm as a matter of law."
Similarly, most courts agree that an intent to harm may be inferred as a matter
of law from the intentional shooting of an individual, whether it be with a BB gun,
high-powered rifles loaded with armor-piercing bullets; a minor insured's act of
shooting a BB gun from an automobile, striking a child in the eye and leading to his
loss of sight, not inherently harmful conduct; or insured's act of pointing a gun at the
victim and pulling the trigger was not inherently harmful since "the gun could have
been empty."
Courts have inferred an intent to harm from the intentional dumping of
hazardous wastes into the environment.
Courts have also inferred intent to harm where an insured drove at an excessive
speed and swerved into oncoming traffic; administered a controlled substance to a
friend; committed antitrust violations; signed two separate purchase and sale
agreements for the same residential property; trespassed on another's property;
misrepresented to his sexual partner that he did not have AIDS while continuing to
engage in high-risk unprotected activity; kidnapped someone; committed arson;
engaged in frivolous, bad-faith litigation tactics for which judicial sanctions were
issued; made a false accusation of rape; engaged in acts of racial harassment, etc., etc.
The majority view for inferring intent as a matter of law regardless of subjective
intent has two additional, interrelated rationale: 1) it is inconceivable that insureds
could reasonably have expected coverage for willful torts and crimes; and 2) public
policy prohibits coverage for such acts.
Courts are divided on the issue of whether negligence claims against an
employer are barred. Where intent would be inferred from an employee's inherently
harmful act: the West Virginia Supreme Court held that since intent will be inferred in
sexual harassment cases, negligence claims relating to the sexual harassment are
similarly excluded from coverage.
Illegal Acts
There are well established rules/regulations which prevents insurance coverage
for willful torts or illegal acts. As an example, a Pennsylvania court ruled that there was
no coverage for a suit based on criminal bribery by the insured. This state has a public
114
policy preventing insurance coverage for damages that arise out of criminal acts
involving a Schedule I controlled substance. Similar rulings: "We have accepted the
general principle that an insurer may not contract to indemnify an insured against the
civil consequences of his own willful criminal act;" "clearly the reason for the exclusion
from coverage of an assault committed by or at the direction of the assured is that it
would not be in accord with public policy to indemnify a person for losses incurred as a
consequence of his criminal acts."
Many courts have held that public policy considerations do not mandate coverage
for injuries arising out of criminal acts where the parties to the contract have agreed to
exclude such conduct from coverage, such as: a criminal activity exclusion of
homeowner's policy did not violate public policy; public policy does not require coverage
for negligent criminal acts where homeowner's policy language excluded coverage;
illegal acts exclusion of liability policy was not void on public policy grounds; coverage
was precluded for victim's negligence claim against insured based on rape by employee
of insured.
Where an insurance policy specifically provided coverage for intentional acts,
coverage for punitive damages imposed in a malicious prosecution suit was not precluded
on public policy grounds.
Notably, the Court also ruled that Section 1668 of the California Civil Code,
which provides that any contract that exempts anyone from responsibility for his own
fraud, willful injury, or violation of law (whether willful or negligent) is against public
policy, does not apply to indemnity contracts such as insurance policies.
"Willful Acts" (California Insurance Code)
Section 533 of the California Insurance Code is an expression of California's
public policy to discourage intentional wrongdoing. This provision of the Insurance
Code states that "an insurer is not liable for a loss caused by the willful act of the
insured." While this sounds simple enough on its face, as with most legal situations and
rulings, it can be rather complex. If one does business in California, it would be
advisable to do further research into the application of this Code. To further discuss this
rather complex rule is beyond the purpose of this text.
Corporate Knowledge Needed for "Expected or Intended" Coverage Defense
In determining whether a corporate insured "expected or intended" injury or
damage, the intent of its officers, directors or senior level, management employees will
often be considered as the expectation or intention of the corporation. A New York Court
held that under New York law, the expectation or intent of a insured is determined by the
" `intent or expectation' of an official of the insured in a management position."
"The Court finds that it would not be appropriate for defendant insurer's to show
"intent or expectation" of a "low-level" employee to be the "intent or expectation" of the
corporation. The Court thus holds that it must be the "intent or expectation" of an official
of the insured in a management position. This is in accord with New York law that the
knowledge of the lower employees may be imputed to the corporation. However, their
intent or expectations are not imputed to the corporation. . .. The question of who
constitutes an appropriate "official in a management position" is an issue of fact for trial."
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An Ohio court held that the knowledge of the corporate insured's Director/Product
Manager as well as twelve other corporate executives was relevant with respect to the
"expected or intended" defense. The court reasoned as follows:
"At the time the . . . testing was being done, [the Director] was both head of
Owens-Illinois' Kaylo Division and Director of OCF. Correspondence between [the]
laboratories and [the Director] indicates that [the Director] was aware of both the testing
and the findings of the . . . studies. Because [the Director] was Director of OCF during
the time the . . . studies were being conducted, his knowledge of the studies was imputed
to the corporation."
Also, (for purposes of deciding whether the insured "expected or intended"
environmental harm, "the state of mind [need only] be that of a responsible officer of the
corporation," not necessarily a member of its "senior management."
STUDY QUESTIONS - CHAPTER EIGHT
1. Insurance is not available for losses that the policyholder knows of, planned, intended,
A. or has never considered.
B. and agreed that might possibly occur according to outside sources, such as
horoscopes.
C. or is aware are substantially certain to occur.
D. and has listed on his application—everything else would be covered.
2. A fortuitous loss is a necessary element of
A. accident-based coverage.
B. medical insurance.
C. any indemnity insurance.
D. known peril protection plans.
3. The fortuity requirement
A. ignores losses by accidental means.
B. only covers losses that are known.
C. separates property from liability insurance.
D. precludes coverage for known losses
4. The loss in progress rule precludes coverage for losses that were known before the
policy period,
A. unless the damage progresses during the policy period.
B. even if the damage progresses during the policy period.
C. regardless of how damage progresses or does not progress during the policy
period.
D. provided the agent instructed the applicant not to mention the losses.
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5. The distinguishing feature of an occurrence policy is that it results in coverage which
is the lapse of time between the occurrence and the date a claim is made, is called
A. "dormant" coverage.
B. "tail" coverage.
C. "latent" coverage.
D. 'inexplicable' coverage.
6. The general rule is that coverage exists for the unintended results of an intentional act,
A. or the intended results of an intentional act.
B. including any injury anticipated when the act was committed.
C. but not for the damages assessed because of injury which was intended to be
inflicted.
D. including the damages assessed because of injury intended to be inflicted.
7. "Expected" means
A. unlikely to happen.
B. unknown and surprising event.
C. inexplicable.
D. more likely than not to occur.
8. A general rule is that an insured must demonstrate that a claimed loss is within a
policy's coverage provisions, but an insurer
A. must agree with the insured's demonstration.
B. must prove that the insured lied on the application to avoid coverage.
C. must prove that any policy exclusions apply.
D. has nothing to prove.
9. Injury or damage which is caused by inherently harmful or illegal acts is
A. generally held to be expected or intended.
B. always uninsurable.
C. always criminal in nature.
D. usually unexpected and rarely intended.
10. Child molestation is so harmful that the intent to commit the act and the intent to
harm are one and the same, therefore,
A. the consequences of the act are immaterial.
B. there can be no act without the intent.
C. the act is the harm.
D. the intent is of primary importance.
ANSWER TO STUDY QUESTIONS
1C
2A
3D
4B
5B
6C
7D
8C
9A
10C
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CHAPTER NINE - TRIGGER AND SCOPE OF
OCCURRENCE-BASED COVERAGE
Since the standard CGL policy provides coverage for bodily injury and property
damage that occurs during the policy period, subject to policy terms and conditions, a
CGL insurer's duty to indemnify is "triggered" by a determination that fortuitous bodily
injury or property damage took place during the policy period.
The factual determinations which are made as to the timing and number of
occurrences often determine which insurers must defend and indemnify the underlying
claims, and whether multiple sets of policy limits and deductibles apply.
SINGLE VS. MULTIPLE OCCURRENCES
Determining the "number of occurrences" giving rise to the bodily injury or
property damage for which the insured is liable, can have a significant impact on the
amount of coverage available to respond to the claim or claims.86 If all applicable policy
terms and conditions are satisfied, there is one set of per-occurrence policy limits
available for damages during a policy year arising out of each occurrence plus one
deductible for each occurrence. In order to determine whether bodily injury or property
damage is the result of one occurrence or multiple occurrences, the majority of courts
have looked to "the cause or causes of the [bodily] injury" or property damage rather than
to the number of claims resulting therefrom.
Under the cause-oriented analysis, there is only one occurrence where there was
but one proximate, uninterrupted, and continuing cause which resulted in all of the
injuries and damage, even though several discrete items of damage resulted. Under the
"cause of loss" test, multiple injuries arising out of exposure to asbestos (for instance)
constitute a single occurrence-namely, the manufacture and sale of asbestos-containing
products. Also, under the cause theory, a plane crash and all subsequent events as a
result of the crash, constitute a single occurrence under terms of the policy.
In a malpractice case, the court stated that the insured physician's repeated failure
to diagnose cancer, based on initial pathology report, was one occurrence under
malpractice policy.
In an older line of cases still followed in a minority of jurisdictions, courts use an
effects-oriented approach, which generally results in a finding that multiple sets of peroccurrence policy limits are implicated by the underlying claims.
CAUSE-ORIENTED/SINGLE OCCURRENCE CASES
Considered as the leading case sponsoring the cause-oriented approach, this case
involved the insured's automobile colliding with an oncoming car and causing the
oncoming car to hit a third car. The insured's automobile liability policy limited coverage
to $1000 "per accident" for property damage (this was a 1926 case). The California
Court of Appeal concluded that the two collisions constituted a single accident. It
defined "accident" as:
"[A]n occurrence which produces hurt or injury. It also will be noticed that
under this quite generally approved definition of the word, as used in some classes of
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cases, it denotes the cause of the hurt or loss; in other classes of cases it denotes the
event, i.e., the unintended and unexpected loss or hurt apart from its cause. . . But as
commonly used in liability insurance policies, the word accident is predicated on
an occurrence which is the cause of the injury. That is to say, as used in liability
insurance contracts, the word "accident" is employed to denote the cause, rather
than the effect."
Much later, 2002, the Third Circuit Court of Appeals interpreted the term "occurrence" in an employee dishonesty policy to mean "all loss caused by a single act or
related events." The case arose out of a claim by a pharmaceutical company seeking
coverage for losses sustained when the company's nurses failed to follow the protocol for
four clinical trials, rendering the four studies worthless to the company. The policyholder
contended that it was entitled to coverage on the basis of four separate occurrences. The
Third Circuit rejected this contention, finding that the nurses did not distinguish between
the four studies and that their conduct caused a single loss. The Court held: "[T]he
accepted purpose of defining `an occurrence or event' is to limit liability, and in the
insurance industry `occurrence' is commonly understood to mean all loss caused by a
single act or related events."
These two cases are the most often cited for the proposition that

one uninterrupted proximate cause which results almost immediately
in more than one impact or event, constitutes one "accident" or "occurrence."
Where one event causes damage to several persons or properties, courts also find
one accident or occurrence. In the widely publicized case arising from the September 11,
2001 terrorist attack on the World Trade Center, a federal judge ruled that the incident–
the destruction of two buildings by two hijacked airplanes–constituted only one
"occurrence" under one of the relevant insurance policy forms.
The definition of "occurrence" in the form-the specific form of insurance that
governed the dispute as to certain insurers–was "all losses or damages that are
attributable directly or indirectly to one cause or to one series of similar causes."
Furthermore, the policy held that "all such losses will be added together and the total
amount of such losses will be treated as one occurrence irrespective of the period of time
or area over which such losses occur."

The only reasonable reading of the policy language (the court held)
was that the destruction of the World Trade Center by two airplanes in a sixteen
minute period constituted one occurrence.
This definition has been used where there was manufacture and sale of asbestoscontaining products, which resulted in multiple injuries; such is one occurrence. But
under a causation analysis, 40 acts of forgery by one employee is one "occurrence."
"Occurrence" does not refer to the flooding damages sustained by each individual
property, since that interpretation improperly focuses on the effects of the events leading
to liability, rather than on the cause of those events." Courts have determined that fire
damage to contents of different apartments is one occurrence, and in another case, the
collision that caused damage to sixteen railroad cars is one occurrence.
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However, the court denied a similar summary judgment motion brought by other
insurers based on different policy language. In these particular policies, known as the
"Travelers form" policies, the term "occurrence" was left undefined. While the court
acknowledged that the position that the terrorist attack constituted only one occurrence
was a reasonable one, it held that other interpretations were also possible. Ultimately, a
jury determined that under the language of the Travelers form policy, the September 11
attack constituted two occurrences.
Where a contractor damaged several different condominiums while applying
sealant to each roof, this constituted a single occurrence in Florida.86
Some of the court decisions where it is determined that the loss constituted one
occurrence are: a hotel fire that caused fire and theft losses to several guests; tractortrailer collision with four vehicles; property damage caused by leakage from sewage
system; three-car collision is single occurrence; production of defective medium for
growing antibiotics ( is a single occurrence) despite separate sales of defective product
affecting numerous "batches;" death and injury of several persons caused by tanker
collision; fire which spread and burned several buildings.
Courts have often rejected argument that the term "occurrence" is ambiguous, and
find single occurrence under "cause" analysis. More single occurrences: manufacture
and sale of product containing asbestos is a single occurrence; where policy defined
"occurrence" as continued or "repeated exposure to substantially the same general
harmful conditions;" jury finding that acts of vandalism and theft over three month period
by the same person were part of a common scheme and constituted a single occurrence
was not clearly erroneous; defective carpet cleaning process that damaged carpets in
numerous apartments; water damage to many apartments resulting from an open faucet is
one occurrence; etc.

Courts have also held that a single pattern of company decision
making that has caused injury to multiple parties constitutes one occurrence.
For example, the insured sold a compound used in the manufacture of paint, floor
tile, shoes and floor mats. The compound generated a noxious odor in the finished
product, precipitating damage claims by manufacturers, wholesalers, retailers and
consumers over a several year period. The court found that all of the claims arose from a
single "occurrence":
"A single 'accident' occurred under the language of the [primary] policy, at the
time when [the insured] made its decision to allow the [compound] to remain in the
[product] stream at [one plant], on or about May 31, 1963. This decision, plus a failure to
warn, is the established proximate cause of all the subsequent damages suffered, by a
great variety of firms and individuals at various stages in the subsequent stream of distribution."
In finding a single "accident," the court emphasized that "it is reasonably
foreseeable that any defect in the product or negligence in its manufacture would affect a
large number of diverse persons in the chain of distribution."
In an important case, Liberty (defendant) sought to recover from its insurer,
Appalachian, the $5.5 million that Liberty paid to settle a case arising out of alleged sex
discrimination in Liberty's employment practices over a seven-year period. The court
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sustained Appalachian's disclaimer of coverage because the injuries all resulted from one
common "occurrence" which predated Appalachian's coverage. The Third Circuit
adopted the cause-oriented approach and held that the company's adoption in 1965 of a
discriminatory policy constituted a single occurrence:
"The fact that there were multiple injuries and that they were of different
magnitudes and that the injuries extended over a period of time does not alter our
conclusion that there was a single occurrence. . .. Indeed, the definition of the term
"occurrence" . . . contemplates that one occurrence may have multiple and disparate
impacts on individuals and that the injuries may extend over a period of time. . ."
Following the reasoning set forth in the above case, the Third Circuit ruled that
under the "cause of loss" test, multiple injuries caused by asbestos-containing products
should be treated as a single occurrence-namely, the manufacture and sale of those
products by the insured. In reaching this conclusion, the court rejected decisions from
other jurisdictions in which courts have ruled that each individual claimant's exposure to
asbestos constituted a separate occurrence. In a similar case where the insured was not a
seller or manufacturer of an asbestos containing product, but rather was engaged in
construction activities involving asbestos at various sites during different time periods,
each construction site was determined to be a separate occurrence.
The number of cases that have rendered a decision in respect to "single
occurrence" constitute enough situations to fill a large book. It is not possible to list them
all, so for these purposes, if the problem comes up, it would be wise to bring in legal
counsel.
Effects-Oriented/Multiple Occurrence Cases
Where several injuries result from one causative agent, some courts have ruled
that each injury or incident of damage is a separate accident or occurrence arising out of
one "motivating force." Injuries arising from exposure to asbestos are considered by
many courts as multiple occurrences. A court that considered several losses ruled that
there was no basis for treating several losses occurring on separate occasions as one
occurrence merely because one scheme brought them about.
When a cause of damage is interrupted, either by an independent cause, or by an
actor regaining control over the causative factor, courts often find that there is more than
one "occurrence." When the problem arose in an automobile accident case where there
were two "accidents," the court noted that there were two impacts separated "by both
time and space," and that the insured "had control of his vehicle after the initial
collision." Also, where a defective forklift damaged several appliances over a ninemonth period; each incident was a separate "occurrence."
It can be difficult at times (to say the least) to determine the course that a court
may take in determining the numbers of "occurrences." For instance, the District Court
determined that there was only one occurrence where the plaintiff imported canary seed
in 110-pound bags from Argentina. The seed was resold in its original bags to eight
different feed and grain retailers in Texas and Oklahoma. The seed was contaminated,
resulting in claims against each of the retailers and, thereafter, claims against the
importer. The District held that the original act of contamination was the only
"occurrence." The Fifth Circuit reversed, stating:
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"We think that the occurrence to which the policy must refer is the occurrence of
the events or incidents for which Pincoffs (the insured plaintiff) is liable. It was the sale
of the contaminated seed for which Pincoffs is liable . . .. [F]or each of the eight sales
made by Pincoffs, there was a new exposure, and another occurrence.
In an E&O case, multiple loan transactions pursuant to an aggressive loan policy
constitute multiple occurrences under directors' and officers' liability policy, each loan
involved separate and different collateral, occurred at a different time and made for a
different purpose; as a Savings & Loan failure does not require finding only one loss.
However, each of 16 deposits at a landfill is a separate occurrence.
A District Court rejected the insurer's argument that the underlying cause of
numerous HIV-contaminated blood claims was the American Red Cross' "general,
negligent practice in handling HIV-contaminated blood." Although adopting the "cause"
test, the court "decline[d] to resort to the level of generality urged by [the insurer] in
applying the cause test." Instead, it found "each act of distribution of contaminated blood
constitutes an `occurrence' for purposes of applying the $1 million per occurrence limit."
Asbestos claims are numerous and courts decisions vary as to how many acts
become how many occurrences. The Second Circuit Court held that each construction or
renovation of a building involving the installation of the insured's asbestos containing
materials (ACMs) is a separate occurrence requiring the insured to pay a separate
deductible. "The `accident' resulting in property damage is most reasonably understood
not as [the defendant's] general decision to manufacture asbestos but rather as the
installation of the ACMs. . . . [F]or each installation, there was a new exposure and
another occurrence."
Similarly, in a case involving personal injury claims caused by exposure to
asbestos, the court ruled that each construction site at which the insured engaged in
asbestos-related activity constituted a separate occurrence. Distinguishing this case from
cases in which multiple asbestos-related injuries maybe considered one single
occurrence, the court held:
"Plaintiff's activities which triggered the underlying claims did not arise from a
single, negligent practice that could be considered one cause, such as distributing a
uniformly defective product from a single manufacturer or selling a product containing
asbestos from one location. Instead the exposure to asbestos arose from the construction
of furnaces at different sites, at different times and for varying lengths of time. Consequently, the claimants that were exposed to asbestos at the same location and at the same
time were exposed to 'substantially the same general condition.' Accordingly, the claims
for each site should be considered one occurrence."
On the other hand, the Supreme Court of Connecticut held that each employee's
exposure to asbestos was an occurrence, and there were, therefore, multiple occurrences.
The court rejected the argument that there was one occurrence–the failure to warn of the
dangers of asbestos exposure. The court noted that, since the claimants' injuries in the
case arose from exposures to asbestos at "several locations, at different times, and for
varying lengths of time," there could not be only one occurrence.
It would appear that if a claim involved several persons, there is a good chance
that the court will (or has) consider numerous locations or persons as each being a
separate occurrence.
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This does not only apply to asbestos claims. In 1994, the Fifth Circuit court held
that where 31 children were molested by two priests over a seven-year period, the court
held that the molestation of each child is a separate "occurrence."
The Florida Supreme Court adopted the causation theory in a certified question
from the Eleventh Circuit Court of Appeals. In that case, an armed intruder entered the
insured's restaurant, and the underlying claimants were each injured by a single bullet.
The Court held:
"If Travelers intended for the multiple shootings to constitute one occurrence, it
could have drafted clear policy language to accomplish that result. . .. The recent case of
SR International Business Insurance Co. v. World Trade Center Properties LLC,
illustrates the type of language Travelers could have used to unambiguously indicate that
several shootings related in time and place should be considered one occurrence."87
By contrast, the Court noted that a federal court in New York ruled that a
coordinated terrorist attack that destroyed two buildings with two separate planes
constituted one occurrence where the policy defined occurrence as:
"All losses or damages that are attributable directly or indirectly to one cause or to
one series of similar causes—All such losses will be added together and the total amount
of such losses will be treated as one occurrence irrespective of the period of time or area
over which such losses occur."
Courts have also ruled that because "claimants who were exposed to asbestos at
the same location, at roughly the same time, were exposed to `substantially the same
general condition,' such claimants should be considered one `occurrence.'
The Batch Clause
It is not uncommon for CGL policies to contain a "batch clause" which provides:
(Addressing products liability),…"all damages arising out of one lot of goods or products
prepared or acquired by the named insured or by another trading under his name shall be
considered as arising out of one occurrence or accident."
The main purpose of the batch clause is to reduce the number of occurrences
whenever the same product (identified by a certain manufacturer's code, number, run,
line, or other method of categorizing the production of identical products) causes multiple
bodily injuries or property damage. Depending on the particular facts of the case,
grouping multiple claims into a single occurrence in this way may benefit either the
insured (who may wish to limit the number of per-occurrence deductibles) or the insurer
(who may wish to exhaust its per-occurrence limits more quickly).

"Batch clauses "address specifically the question of multiple products
liability claims generated by a single faulty manufacturing process, i.e., many
defective products–all produced in the same `batch.'
Where it is a manufacturing defect that has caused injuries, treating each "lot of
goods" that has been incorrectly manufactured as a single "occurrence" reflects the reality
of large-scale manufacturing processes, in which a single production error (and thus a
single faulty "lot") can result in numerous separate injuries. It is logical to group all
injuries that stem from a single "lot" of faulty goods together into one "occurrence"
because the single production error that corrupted the lot is the event that leads to the
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injuries. In a manufacturing defect context, the batch clause isolates the lots affected by
the error and treats them differently from unaffected lots.
In 1993, a court interpreted a batch clause with respect to design defect claims,
holding that the batch clause is limited to manufacturing defect claims. The court first
observed that "the policy language, on its face, contains no such limitation," but
nonetheless agreed with the lower court's determination that "this provision was intended
to apply only to manufacturing defects, and not to design errors—the equation of `lots'
and `occurrences' is consistent with the idea that the clause is designed to prevent the
stacking of deductibles where manufacturing errors have taken place." Ultimately, the
court was "convinced that the clause should be applied only where the product
manufactured is nonconforming, not where the product is consistent with a faulty
design."
DATE OF OCCURRENCE
Date of Injury Triggers Coverage
The coverage trigger is a term of convenience used to describe that which, under
the specific terms of an insurance policy, must happen in the policy period in order for
the potential of coverage to arise. The issue is largely one of time-what must take place
within the policy's effective dates for the potential of coverage to be 'triggered'?"
In construing CGL "occurrence" policies,

courts have uniformly held that coverage is "triggered" under a
policy only when "bodily injury" or "property damage" takes place during the
policy period.
As a general rule, 'bodily injury" must occur "during the policy period." The most
basic demand of the policy language is that to establish [coverage]—the insured must
prove that an 'occurrence' injury, sickness, or disease, arose during the policy period. A
court also ruled that `occurrence during the policy period' means no more than that injury
must result during the policy period. If there are multiple insurers, a court must ascertain
when a bodily injury occurred in order to determine which insurance company had
assumed the risk."
Since a CGL insurer will respond only to bodily injury or property damage that
occurs during the term of the policy, the determination of the date of occurrence is of
paramount significance. Courts have applied different methods of analysis and arrived at
different results. At least four different approaches have been used by the courts in
approaching the "trigger" of coverage issue: (1) the injurious exposure rule; (2) the
manifestation rule; (3) hybrid rules, including the "double trigger" or triple-trigger" rules,
and (4) "injury-in-fact" rule.
When Injury Occurs
The courts recognize that bodily injury cases arising from exposure to toxins or
from drug ingestion "where injury is immediate, cumulative and exacerbated by repeated
exposure" are fundamentally different from progressive property damage cases. Thus,
the trigger-of-coverage precedents with respect to bodily injury claims are often
inapplicable to property damage cases.
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A threshold issue in many insurance coverage disputes is whether the CGL policy
definition of "bodily injury," i.e., "bodily injury, sickness or disease," is ambiguous as
applied in the context of latent and/ or cumulative disease. Some courts have concluded
that the terms "bodily injury," "sickness" and "disease," standing alone, "simply lack the
precision necessary to identify a point in the development of a disease at which coverage
is triggered." Some courts find that the terms "bodily injury" and "occurrence" are
"inherently ambiguous." A finding of such ambiguity may lead to application of
doctrines of strict construction against the insurer, and may even result in coverage
beyond that which the insured originally sought and purchased.
Other courts have found the terms "bodily injury," "sickness," and "disease"
susceptible to analysis in accordance with their "plain meanings." These courts have
determined the presence of bodily injury, sickness, and disease on the basis of medical
evidence or have required that further proof be cited in order to pass on the question.
In the property damage context, courts have also debated the type of injury
covered by the CGL definition of "property damage" and when the damage can be said to
occur.
Exposure Rule Decisions
A case now known as "Forty-Eight Insulations"88 (the name of the defendant
being sued by an insurer), was the first federal appellate court decision to address
insurance coverage issues in the context of asbestos-related disease. "Forty-Eight
Insulations" was a declaratory judgment action brought by one of Forty-Eight Insulations'
insurers to determine which of several insurers were obligated to defend and indemnify
Forty-Eight Insulations for asbestos-related health claims-made against Forty-Eight
Insulations, and to what extent. The Sixth Circuit affirmed the district court's holding
that all policies in effect while the underlying claimant was "exposed" to asbestos dust
were triggered. The Sixth Circuit also held that Forty-Eight Insulations was liable for its
pro-rata share of losses and defense costs for uninsured or self-insured years during the
exposure period.
The Ninth Circuit ruled that under California law the exposure theory should be
applied to determine when bodily injury occurs. The court noted that, although there was
no controlling California authority on point, the exposure theory should be applied since
"it is probable that the California Supreme Court would find the reasoning and the results
of the Sixth Circuit in Forty-Eight Insulations to be correct."
The Court of Appeals for the Second Circuit in 2004 affirmed that an insured's
policies are triggered by the last date of each claimant's exposure to harmful chemicals.
The court also ruled that a prior settlement agreement between the underlying plaintiffs
and the insured which limited potential recovery to injuries suffered during a specific
time frame "did not affect the policies' trigger mechanism, or the factual determination
upon which its operation is predicated.
Manifestation Rule Decisions
The only federal appellate court decision adopting the pure manifestation rule in
an asbestos bodily injury insurance coverage dispute, the First Circuit Court, in a case
where Eagle-Picher, a manufacturer facing numerous asbestos claims, commenced a
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declaratory judgment action against its liability insurers. Since Eagle-Picher was
uninsured during most of the periods that it manufactured asbestos products, it sponsored
the manifestation rule. In applying "the usual rule of construction against an insurer," the
First Circuit held:
"In our view the medical testimony and the plain meaning of the policy language
strongly support the manifestation approach, [and] any remaining doubts about
interpretation of the policies are properly resolved in favor of the insured, in order to
effectuate the policies' purpose of providing coverage."
In the asbestos bodily injury context, manifestation is the time at which the
disease is reasonably capable of medical diagnosis. Thereafter, the date an asbestosrelated disease becomes diagnosable or manifest (and therefore coverage is triggered) is
six years prior to actual diagnosis unless the insurer proves otherwise through medical
evidence. The court expressly rejected the "injury-in-fact" rule as unrealistic. However,
the court held that the "six-year rollback" for determining the date of diagnosability was
presumptive only and could be overcome by clear and convincing evidence offered by an
insurer that the illness was manifest outside its policy period.
The Fourth Circuit addressed the issue of when a CGL policy is triggered in the
context of a claim arising out of contamination of property by hazardous wastes. After
noting that "determining exactly when damage begins can be difficult, if not impossible,"
the court held that:
"In such cases we believe that the better rule is that the occurrence is deemed to
take place when the injuries first manifest themselves . . . Therefore, we hold that in
hazardous waste burial cases such as this one, the occurrence is judged by the time at
which the leakage and damage are first discovered."
However, the Maryland Court of Appeals refused to follow the above case. The
court held that:
"Manifestation is not the sole trigger of coverage in environmental pollution
cases. Rather, we conclude that coverage under the policies may be triggered during the
policy period at a time earlier than the discovery or manifestation of damage."
A Third Circuit Court held that the manifestation theory applies in hazardous
waste cases. The court stated that, in the context of damage to property caused by
contamination from hazardous waste, the "first discovery" principle is the most
appropriate standard to apply to determine when an 'occurrence' has happened.

The general rule is that property damage occurs when damage becomes
manifest.
A NY Superior Court in 1978 held that the effective date of coverage for DESrelated injuries is the date of discovery. In the underlying product liability action, three
claimants (whose mothers had ingested DES during pregnancy) asserted claims for
damages against Squibb for cervical cancer discovered 14 to 18 years after their birth.
The court felt that "a reading of the policy language would appear to indicate that
coverage is predicated not on the act which might give rise to ultimate liability, but upon
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the result. According to New York law, the manifestation rule may apply to insidious
disease lawsuits.
In New Jersey, 1984, the court adopted the manifestation rule, holding that neither
the dispensing of a drug nor its administration triggered coverage. The court noted that
the asbestos cases following the exposure rule are based upon medical evidence that
bodily injury occurs with each inhalation of asbestos fibers.
In a Second District Court, the insured manufacturer was the subject of a suit
arising out of the crumbling of its bricks on a building during the policy periods of three
different insurers. The court held "that the insurance company providing products
liability coverage at the time the spalling [Note: chipping, breaking off] first becomes
apparent is responsible for all damage or loss to the structure." In determining when
"property damage" occurred, the court adopted the manifestation rule:
"But what is damage to the structure? Is it damage caused by the bricks spalling
in a given policy period, or, is it possible damage to the entire structure as evidenced by
the initial spalling?
If the quantum of damage (excluding the cost of the brick) is limited to the
damage caused by the corresponding number of bricks which have spalled, then there
may be damage arising in several policy periods because the spalling may occur gradually. However, if the initial spalling is notice of possible defectiveness of the entire
structure, all damage will accrue in the policy period when the spalling first becomes
apparent.
Our conclusion must be that "property damage" occurs to the entire structure in
the policy period when the spalling first becomes apparent and is not equated with the
number of bricks which have spalled in a given policy period."
In another construction defects case, the court adopted the manifestation theory,
noting "Under the exposure theory, an insurer would arguably remain a guarantor of its
insured's actions forever. We reject such an inequitable result."
In a workers' compensation case, regarding the liability of an employer and its
insurer for occupational disease, the Second Circuit enunciated the "last employer" rule:
"The employer during the last employment in which the claimant was exposed to
injurious stimuli, prior to the date upon which the claimant became aware of the fact that
he was suffering from an occupational disease arising naturally out of his employment,
should be liable for the full amount of the award."
Under this rule, the Second Circuit held that "the carrier who last insured the
`liable' employer during claimant's tenure of employment" will be held solely
responsible.
The Supreme Court of Minnesota found coverage under a health insurance policy
pursuant to the manifestation rule even though the claimant's medical disability was
partially attributable to a disease that was present but unknown when the policy was
purchased. The court concluded that the claimant could not have known of his condition
prior to the surgical procedure for which he sought coverage. Relying upon the
reasonable expectations of the parties, the court concluded:
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
"A construction making the time of the medical cause of the outbreak
of the disease determinative of liability, irrespective of actual illness, sickness or
disease, as commonly understood, would make health insurance subject to
uncertainty, unattractive to those wanting reasonable health insurance protection,
and less marketable."
To this reasoning, those in health insurance say "Amen."
Defendants in latent-disease cases often argue that the statute of limitations
should run from the date of the plaintiff's initial exposure to an injurious substance, to
which a court responded: "The problem is that such a ruling would bar relief to many
plaintiffs who were unaware that they were being injured until years later when the
disease manifests itself. To avoid such an unfair result, most courts have adopted a
manifestation rule in this context."
Another reasonable decision stated that "inasmuch as the injurious consequences
of the exposure are the product of a period of time rather than a point of time, the
afflicted employee can be held to be `injured' only when the accumulated effects of the
deleterious substance manifest themselves."
In 2002 a federal court granted summary judgment in favor of the insurer,
dismissing coverage claims on the grounds that mold contamination manifested prior to
the policy's inception. The policy at issue was in effect from August 15, 2000 through
January l, 2001. The mold contamination was discovered on July 28, 2000. Although
the insured acknowledged that some of the property damage manifested itself prior to the
August 15 policy period, it argued that the policy provides coverage because other mold
damage was discovered later, during the policy period. The court rejected this
contention, noting that the manifestation theory incorporates the "loss in progress" rule,
which states that an insurer cannot insure against a loss that is known or apparent to the
insured. Accordingly, the policy on the risk at the time the damage is discovered is liable
for the entire loss, even if the damage continues after the policy expires.
Adopting Hybrid Rules Decisions
"Triple Trigger"
The United States Court of Appeals for the District of Columbia held that
coverage for asbestos-related bodily injury is triggered by a claim that a victim was either
(a) exposed to asbestos products, (b) suffered exposure-in-residence, or (c) manifested an
asbestos-related disease during the policy period (i.e., the "continuous or triple trigger"
rule):
"The allocation of rights and obligations established by the insurance policies
would be undermined if either the exposure to asbestos or the manifestation of asbestosrelated disease were the sole trigger of coverage. We conclude, therefore, that inhalation
exposure, exposure in residence, and manifestation all trigger coverage under the
policies. We interpret 'bodily injury' to mean any part of the single injurious process that
asbestos-related diseases entail."
Eli Lilly, an Indiana corporation, sought a judgment in the District of Columbia
declaring, (among other things), that each policy in force from the date of ingestion of
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DES (diethylstibestrol) until the manifestation of an alleged DES-related injury provided
full coverage to Lilly. Applying the choice of law rules of the District of Columbia, the
circuit court sustained the district court's determination that "Indiana had the most
significant contacts with the policies at issue and thus, the `more substantial interest' in
the interpretation and application of these insurance policies." Significantly, however,
the circuit court reversed the district court's holding that Keene (plaintiff) was the trigger
of coverage under Indiana law and referred the case to the Indiana Supreme Court. The
circuit court held:
". . . it has become clear that not all states share the view expressed in Keene or at
least not all federal courts interpreting the laws of state jurisdictions do so. The
interpretation of the "trigger" provision at issue must then be rooted in Indiana law;
Keene is relevant only insofar as we determine that the Indiana courts would adopt it.
We note that Eli Lilly has suggested only one reason for its decision to bring suit
in this forum: the Keene precedent. Since Indiana law controls, however, Keene is
relevant only insofar as it would be persuasive to Indiana courts. In view of the fact that
different jurisdictions have reached differing results on the interpretation of this 'trigger'
provision, we think it appropriate to seek guidance from the Indiana Supreme Court on
this question of first impression in Indiana law."
The Indiana Supreme Court ultimately ruled that under Indiana law the tripletrigger theory of coverage applies to DES claims. The court held that "[i]n order to
achieve the objectives . . . of giving effect to the policies' dominant purpose of indemnity,
we hold that coverage is triggered at any point between ingestion of DES and the
manifestation of a DES-related disease. . .. We therefore adopt the multiple trigger
interpretation of the `injury' occurrence' language in [these] policies.
An action was brought by an apartment contractor against its insurers for failure
to defend an action against the contractor for damages to a building caused by "dry rot."
The dry rot "resulted from dirt having been piled against the box sills of the building by
backfilling during construction." Safeco insured Gruol at the time the dirt was piled
against the box sills. Northwestern Mutual was on the risk when the dry rot was
discovered. In the interim, Insurance Company of North America ("INA") insured the
contractor.
The court held that all of the insurers were liable:—”In a dispute between an
insured who has sustained damages of a continuing nature, and the insurance carriers
providing coverage, the burden of apportionment is on the carriers. The question turns
upon whether the damage is joint or several. Here, the trial court properly found joint
and several liability . . .. The damage, though continuing over a period of time,
constituted a single injury."
The Washington Supreme Court clarified that a continuous trigger was
appropriate in Gruol because "the damage to the structure was a continuous process
which increased with time."
A contrary result was reached in another case where coverage was sought for fire
damage. The court rejected the insured's argument that installation of an allegedly
dangerous product (polyurethane foam) constituted property damage:
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"No actual physical damage to the structure in this case occurred within the policy
period. The most that could be said about installation of the foam is that it increased the
risk of an accident happening at some point in the future."
Even under a strict products liability theory, liability does not arise
until damages occur.
Double Trigger
The Illinois Supreme Court affirmed the appellate court ruling that coverage for
asbestos-related personal injury claims was to be provided if the insurer's CGL policy
was in effect either when the claimant was exposed to the insured's asbestos products or
when the claimant's condition resulting from that exposure manifested itself. The court
ruled that a CGL policy is triggered by "bodily injury," "sickness," or "disease" during
the policy period. The court made clear that the three terms are separate and distinct,
each with a different meaning.
Based upon the medical evidence on the etiology of asbestos related diseases, the
court concluded that "bodily injury" occurs upon exposure to asbestos. The court also
upheld the lower court ruling that "disease" occurs (and coverage is therefore triggered)
when it becomes manifest. The court found that "sickness" takes place when a patient
suffers from a weakened or unsound condition that results prior to the point at which the
condition can be characterized as disease. The court ruled that sickness also triggers
coverage.
The Illinois Appellate Court rejected the "triple-trigger" theory and expressly
found that there is no medical evidence that those who ultimately manifest an asbestosrelated disease necessarily sustain bodily injury between exposure to asbestos and
manifestation of an asbestos-related disease. The Illinois Supreme Court agreed with the
intermediate appellate court that coverage was not triggered under the policies in effect
between the time of exposure and manifestation.
The appellate court thus held that in the context of asbestos-related injury,
coverage is triggered by exposure to asbestos and the manifestation of "disease" and
"sickness." When disease or sickness becomes manifest is a question of fact which must
be decided on a case-by case basis.
A Pennsylvania court decision concerned CGL insurance coverage for a drug
manufacturer held liable for the ingestion by pregnant women of drugs which allegedly
caused birth defects. The mothers' ingestion during pregnancy occurred while plaintiff
Transamerica insured the manufacturer; the birth defects occurred while Bellefonte was
the insurer. The court held:
"The result of this analysis is that the Court finds there were two 'occurrences';
hence, two tortious actions obtain. The first, that of the child, happened when the fetus
suffered deformities while in the womb during the Transamerica policy period. The
second, that of the parents, happened when the child was born during the Bellefonte
policy period. Two separate and independent 'occurrences' resulted from the mothers'
ingestion of Rousell's drugs and each insurer must accept responsibility resulting from
the "occurrence" within its respective policy period."
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Injury-in-Fact Rule
A district court in 1983 rejected as "talismanic" the exposure, manifestation, and
hybrid rules:
"The policies in this case are construed as they are written to require a showing of
actual injury, sickness, or disease during the policy period, based upon the facts proved in
each particular case. Thus . . . "personal injury, sickness or disease" is read to mean any
point in time at which a finder-of-fact determines that the effects of exposure to a drug
resulted in diagnosable and compensable injury. "
There are many cases that takes both sides of this issue and lengthy legal
references have been published just on "triggers" for coverage, but they are also too
numerous for this text.
DEEMER OR TELESCOPIC CLAUSES
Some CGL policies contain a "deemer" or telescope clause. A typical deemer
clause provides that:
"With respect to injury or destruction of property . . . caused by exposure to
injurious conditions over a period of time involving two or more liability policies . . . all
such injury or destruction caused by the same injurious conditions shall be deemed to
occur only on the last day of the last exposure and the applicable limit of liability
contained in the policy in effect on the last day of such exposure shall be the applicable
limit of liability."

The intended purpose of the deemer clause is to telescope into one of a
series of policies coverage which arguably implicates more than one policy and it
"deems" the injury to have occurred in a single day.
In a case involving an employment discrimination class action, the First District
Court in 2000 held that the "deemer" clause ("each `occurrence' shall be deemed to
commence on the first happening of any material damage not within the period of any
previous `occurrence' ") should be interpreted to define "occurrence" as "a circumstance
wherein the discrimination against an individual employee continued over time. The
policy triggered in that instance would be the one in effect when the injury
(discrimination) first occurred, regardless of how long it might continue."
However, in the context of property damage caused by gradual pollution, the
deemer clause has been construed to be both ambiguous and inapplicable.
ALLOCATION OF LIABILITY
When there is a continuous occurrence that results in an injury that triggers coverage under more than one policy, there must be an appropriate method for allocating the
losses among the multiple policies, and the issue of allocation arises most often under the
"exposure" or "triple trigger" coverage theories which have a tendency to involve
multiple policies over a period of time. Conversely, this would not be an issue under the
manifestation trigger as it assigns all loss to the policy in existence when injury becomes
manifest.
"Where there is on-going and progressive injury that spans many years. . . the
question "is whether each [triggered] policy is liable for the entirety of [the liability for
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the injury] or whether each policy is responsible for paying only the portion of the
[liability] somehow attributable to the amount of injury during the policy period."
The choice of trigger theory is related to the method a court will choose to
allocate damages between insurers.
The three primary methods of allocation are: (1) finding each triggered policy to
be jointly and severally liable for the entire loss; (2) allocating the losses to each
triggered policy on a pro-rata basis taking into account a variety of factors, including the
proportion of injuries that occurred during the policy period, the proportion of time the
policy is on the risk, the proportion the policy limit bears to the total policy limits
implicated, and the proportion of premiums paid for the policy in relation to the total
premiums paid; and (3) "stacking" the policies.
The allocation method a court chooses is significant with respect to the
extent to which multiple insurers will be required to contribute to an insured risk.
Also, the designated allocation method is important for determining whether and
to what extent an insured will be held responsible for periods when the insured did not
purchase insurance for the damages at issue (or has lost or destroyed policies). A joint
and several liability approach will protect the insured from liability whereas a pro-rata
ruling will typically make insureds responsible for self-insured periods.
JOINT AND SEVERAL LIABILITY
The joint and several method of allocating liability method allows the
insured to select a single policy from among the other multiple-triggered policies,
one policy from which to seek indemnification.
The originative case that discussed joint and several liability for multiple insurers
whose policies are triggered by an ongoing injury was a Circuit Court in 1981 that held
that once an insurer's policy is triggered, the insurer is required to defend and indemnify a
policyholder to the extent of its entire policy limits, without proration among all insurers,
even though part of the injury may have occurred when the policyholder was self-insured.
The Second Circuit Court has referred to the joint and several approach as "a
process that is `intuitively suspect.'" (in other words, they don't like it). Many courts have
reached the conclusion that where a case involves multiple insurers and/ or periods
during which the insured was self-insured, liability should be allocated among the
insurers as well as the insured, based upon an objective factor, such as the relative
number of years during which each insurer or the insured was responsible for coverage,
or the degree of risk assumed by each.
Moreover, the joint and several allocation method has been criticized because it
fails to distinguish between the concepts governing the insured's liability (e.g., joint and
several liability under tort principles) and the contract principles governing an insurer's
obligations.
The joint and several liability approach has been employed more often in bodily
injury cases than in property damage cases. The Pennsylvania Supreme Court agreed
with the joint and severally liable approach and held that every triggered insurer is jointly
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and severally liable for a policyholder's liability with respect to asbestos-related bodily
injury. Ohio courts later applied the allocation methodology.
Other courts have taken the approach that the joint and several liability approach
is appropriate only "if the medical evidence cannot differentiate between the various
periods of coverage."
The Third Circuit rejected any proration of losses on the grounds that the policies
required the insurers to pay all sums that the insured became legally obligated to pay
because of bodily injury during the policy period. The court reasoned that under the "all
sums" language, it is irrelevant to the insurer's liability that the injury is caused during
another policy period. Courts have ruled that under a continuous trigger theory for
property damage spanning multiple policy periods, they should apply "joint and several"
allocation.
In one important decision, the court acknowledged that under certain
circumstances, the allocation among coverages should be decided after the insured's
losses have been paid, as opposed to the joint and several and pro-rata approaches which
both "allow allocation among policies at some transactional point, i.e., either when the
loss is paid, or when it becomes the subject of contribution among policies and insurers."
PRO-RATA ALLOCATION
Pro-rata allocation refers to the various methods courts use to apportion loss
among multiple policies triggered by an ongoing injury, distinguishable from joint and
several allocation in that each policy is held liable for a portion of the loss, rather than
bearing responsibility for the entirety of the policyholder's damages. Also, using the prorata allocation,

a policyholder is responsible for periods in which there is no
insurance.
Courts have relied on a variety of factors to determine the proportionate share that
should be allocated to a policy. Courts have considered

the time the policy is on the risk in comparison to the overall duration of
the injury (the "time on the risk" method;

the policy limit in relation to the overall policy limits available (the
"policy limits" method;

a combination of these two factors (the "time on the risk times limits"
method);

the premium paid for a policy in comparison to the premiums paid for
other triggered policies;

the proportion of injuries during each policy period; and

the total number of policies or insurers involved.
These factors are not exclusive, and courts sometimes combine them in an
improvised manner. For example, one court used a "maximum loss" allocation:
apportioning loss among each triggered policy in equal shares up to the policy limit of the
policy with the lowest limit; then among the remaining insurers in equal shares until the
policy with the next-to-lowest limit is exhausted; and so on until the loss has been fully
apportioned.
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A fair method of allocation appears to be one that is related to both the time on
the risk and the degree of risk assumed. When periods of no insurance reflect a decision
by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is
not available, to expect the risk-bearer to share in the allocation is reasonable.
Despite differences in methods of allocation, courts in numerous jurisdictions
agree that where an injury triggers multiple policy periods, allocation among all triggered
policies and the insured for self-insured periods is appropriate. Courts have stated that
allocation avoids "saddling one insurer with the full loss" and forces the insured "to
absorb the loss for periods when it self-insured and can prevent it from benefiting from
coverage for injuries that took place when it was paying no premiums." Allocation has
been used in affirming pro-rata distribution of defense costs and allocating defense costs
to insureds for periods with respect to which insured lost or destroyed triggered policies.

However, without exception, they have found policyholders
responsible for any self-insured risk.
Stacking
Stacking policy limits means that when more than one policy is triggered by an
occurrence, each policy can be called upon to respond to the claim up to the full limits of
the policy. Under the concept of stacking–as distinct from the concept of joint and several
liability–the limits of every policy triggered by an "occurrence" are added together to
determine the amount of coverage available for the particular claim, e.g., if an insured
could establish that each of four consecutive $10 million policies were triggered by a
particular claim, the insured could recover $40 million for a single occurrence, rather
than the $10 million available under any single policy.
The concept of stacking is frequently encountered in connection with uninsured
motorist cases where a driver who may qualify as an insured under several different
automobile policies seeks to "stack" the limits of all applicable policies. For example, a
Florida court has held that a "permissive operator" of a vehicle may stack the
insurance coverage under his own policy with that of the owner's policy.89
Stacking is certainly not allowed in many jurisdictions.
"Per Occurrence" Limit in Multi-Year Policies
Where a single occurrence is found to trigger coverage under a multi-year
policy—such as a three-year policy—that is not expressly stated to be comprised of three
consecutive annual periods, even though policyholders have argued that such a policy
implicitly contains a separate per-occurrence limit of liability for each year, or,
alternatively, that the policy is ambiguous with respect to the limit of liability and should
be construed in favor of the insured in a way that will maximize coverage. The courts
that have addressed such claims have generally rejected them.
A Circuit Court stated, very logically, "Clearly, a three-year 'occurrence' policy
provides less coverage than three one-year policies, because an occurrence could last
longer than one year. . .. We see no justification for providing more insurance coverage
than the insured bargained for." Other courts have ruled that "the `per occurrence' limit
applies only once for each occurrence during the multi-year period, and not once per
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year; the fact that premiums were paid in annual installments and other "mechanics" of
the policies did not establish that liability limits were annual; The excess policies
establish a single limit of liability for an occurrence without regard to whether the injury
or injuries attributable to the occurrence take place at the same time, in one year, or over
three years. . .. There is a single occurrence limit for each three year policy period." And
where an insured contended that pollution liability claim arose from continuing
occurrence, the court ruled that only one $1,000,000 per-occurrence limit applied for a
policy with a three-year period.
Pre-Judgment Interest
Insured Against Insurers
There have been a handful of court cases in respect to interest paid by excess
insurers, etc. However, it can be summed up by stating that Michigan and Louisiana are
the only states holding insurers liable for pre-judgment interest in excess of their liability
limits for damages, absent an express provision in the policy requiring such a result.
Insurer Against Co-Insurers
New York courts have required insurers to pay pre-judgment interest on their
respective shares of an insured's costs under the reasoning that an insurer's failure to
contribute to an insured's defense and settlement along with its co-insurers constitutes a
quasi-contractual violation. The "contribution" is "viewed as a type of contract action in
which the successful plaintiff is entitled to pre-decision interest as a matter of right."
In a Pennsylvania case, the court reached the same conclusion about pre-judgment
interest for contribution claims among co-insurers, but perhaps more importantly,
because the pre-judgment interest award was based in equity, the court observed that it
was not limited to the statutory rate of interest, but instead could, in its discretion,
increase or decrease the applicable interest rate.
In another case where the court addressed the issue of whether and how to divide
pre-judgment interest between a primary and an umbrella carrier, the court first determined that pre-judgment interest should be classified as part of the insured's "damages"
rather than its "costs." Following this theory, as part of the insured's damages, prejudgment interest on the insured's settlement payments should be shared pro-rata by the
primary and umbrella carriers, in proportion to their respective payment shares toward
the settlement amount.
A number of jurisdictions permit an award of pre-judgment interest in
contribution proceedings only where the damage amount is readily ascertainable.
Limitations on Award of Pre-Judgment Interest
Some states specifically prohibit awarding pre-judgment interest on punitive
damages.
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STUDY QUESTIONS - CHAPTER NINE
1. Usually, one uninterrupted proximate cause which results almost immediately in more
than one impact or event,
A. can be multiple "occurrences."
B. constitutes one "accident" or "occurrence.
C. is considered as one "accident" but not an "occurrence."
D. is considered as an "occurrence," but not an "accident" unless there is bodily
injury.
2. Courts have also held that a single pattern of company decision-making that has
caused injury to multiple parties
A. constitutes one occurrence.
B. constitutes multiple occurrences.
C. may be either one occurrence or multiple, depending upon the awards.
D. is not an "occurrence" because the cause involved more than one person/party.
3. "Batch clauses "address specifically the question of multiple products liability claims
A. caused by a multiple of manufacturing processes.
B. within unrelated businesses or industries.
C. generated by a single faulty manufacturing process.
D. covered under several liability policies.
4. In occurrence policies, courts have uniformly held that coverage is "triggered" under a
policy only when "bodily injury" or "property damage"
A. is caused by extraneous forces.
B. may be covered under multiple policies.
C. results in minor damage or minor medical costs.
D. takes place during the policy period.
5. A construction of policy terms making the time of the medical cause of the outbreak
of the disease determinative of liability, irrespective of actual illness, sickness or
disease, as commonly understood,
A. could make health insurance more affordable.
B. would make health insurance subject to uncertainty, unattractive to those wanting
reasonable health insurance protection, and less marketable.
C. would make health insurance easy to explain and much more marketable.
D. is the goal of most major medical insurance companies.
6. Even under a strict products liability theory, liability does not arise
A. until the insurer says it arises.
B. until there is a possibility of damages occurring.
C. until damages occur.
D. when the claim is reported and until it has been thoroughly investigated.
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7. The intended purpose of the deemer clause is to telescope into one of a series of
policies coverage which arguably implicates more than one policy and
A. it "deems" the injury to have occurred in a single day.
B. it "deems" the harm to have occurred over a specified period of several days.
C. the insured is "deemed" to be fully covered under all contingencies.
D. the insurer is "deemed" to be fully liable.
8. The joint and several method of allocating liability method allows the
A. insurer to select among other carriers to participate in indemnification.
B. insured to determine the percentage of contribution from several in-force policies.
C. insured to select a single policy from among the other multiple-triggered policies
from which to seek indemnification.
D. Department of Insurance to determine liability among more-than-on participating
insurers.
9. A policyholder is responsible for periods in which there is no insurance
A. if the joint and several method of allocating liability is used.
B. only if there are more than three insurers involved in the same claim.
C. and only one insurer can also be liable under the pro-rata allocation method.
D. using the pro-rata allocation method.
10. Allocation has been used in affirming pro-rata distribution of defense costs and
allocating defense costs to insureds for periods with respect to which insured lost or
destroyed triggered policies,
A. however, without exception, they have found policyholders responsible for any
self-insured risk.
B. which has allowed the policyholder not to be responsible for self-insured risks.
C. however, courts have mostly agreed that there is no coverage until the document
(corpus) can be produced.
D. as this allows the policyholder to share what would be a self-insured amount or
period of time.
ANSWERS TO STUDY QUESTIONS
1B
2A
3C
4D
5B
6C
7A
8C
9D
10A
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CHAPTER TEN - "OTHER INSURANCE" CLAUSES
INTRODUCTION
"Other Insurance" appears rather simple, but that was before the courts delved
into it. For example, a Circuit Court defined it: "The term 'other insurance,' in the special
sense in which it is used in insurance contracts, describes the situation in which two or
more policies of insurance cover the same risk in the name of, or for the benefit of, the
same person.
'Other insurance' is usually 'overlapping coverage for the same risk' and which can
occur either when a claim is covered by concurrent policies or when there are consecutive
policies. Further, it takes a court to determine that [t]he term `other insurance' . . . must be
interpreted to refer only to other insurance within the policy period."
Legally, the rights and obligations of co-insurers primarily depend on
the specific language of the insurance contracts.
"Other insurance" clauses may operate to convert a primary policy into an excess
policy. Regardless, insurance purchased as primary coverage must respond to a specific
covered claim before policies specifically purchased as secondary coverage, regardless of
the presence of "other insurance" clauses in the primary policies.
"Other insurance" clauses can also establish the order in which two or more
insurance policies specifically purchased as secondary coverage must respond to a claim
in excess of the primary layer of insurance.
Coverage for the same risk can be insured and/or covered for the same risk under
coincidental or simultaneous policies, such "duplication" can be because that is what the
policyholder wishes, it is purely coincidental, or through inadvertently purchasing
additional overlapping coverage. An example of co-insurance intentionally purchased by
the insured would be in the case of a general umbrella/catastrophe policy with
specifically scheduled underlying coverage’s, and/or the purchase of multi-layered excess
coverage over specifically scheduled primary or self-insured coverage. A typical
example of coincidental coverage could be when the driver of a non-owned vehicle is
covered as a named insured under his own auto policy as well as under the
comprehensive clause of the owner's policy. An inadvertent overlap may arise where
there has been a switch from "occurrence" coverage to "claims-made" coverage and a
claim is made during the "claims-made" policy period on the basis of damage that
occurred during the "occurrence" policy period. In some other cases, depending on the
language of the policies' "other insurance" clauses, policies can be considered concurrent
for the purposes of "other insurance" when they provide different types of coverage but
trigger overlapping defense obligations.
There is also the situation where there may be overlapping coverage for the same
risk under consecutive policies arising from injury or damage that spans more than one
policy period. A "thumbnail" rule is that consecutive primary insurers must share equally
in costs of defense and indemnity.
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TYPES OF "OTHER INSURANCE" CLAUSES
There are many types of "other insurance" clauses but for the purpose of this
discussion, these clauses can be broadly classified as: (1) pro-rata clauses; (2) excess
clauses; or (3) escape clauses.
PRO-RATA CLAUSES
Pro-rata clauses usually provide that if other insurance exists, the insurer will pay
its pro-rata share of the loss, usually in the proportion that its policy limit bears to the
aggregate limit of all other valid and collectible insurance. Thus, a pro-rata clause
typically states that "if the insured has other insurance against liability or loss covered by
this policy, the company shall not be liable for a greater proportion of such liability or
loss than the applicable limit of liability bears to the total applicable limit of liability of
all collectible insurance against such liability or loss."
EXCESS CLAUSES
Excess clauses usually provide that an insurer's liability is limited to the amount
by which the loss exceeds the coverage provided by all other valid and collectible
insurance, up to the limits of the policy containing the excess clause. The ISO CGL
Form states: "This insurance is excess over any of the other insurance, whether primary,
excess, contingent or on any other basis. . . .. When this insurance is excess, we will have
no duty to defend the insured against any suit if any other insurer has a duty to defend the
insured against that suit. If no other insurer defends, we will undertake to do so, but we
will be entitled to the insured's rights against all those other insurers. When this
insurance is excess over other insurance, we will pay only our share of the amount of the
loss, if any, that exceeds the sum of: (1) The total amount that all such other insurance
would pay for the loss in the absence of this insurance; and (2) The total of all deductible
and self-insured amounts under all the other insurance. We will share the remaining loss,
if any, with any other insurance that is not described in this Excess Insurance Provision
and was not bought specifically to apply in excess of the Limits of Insurance shown in
the Declarations of the Coverage part."
Of course, regardless of how precise a company composes a provision, there will
be court cases involved sooner or later.
ESCAPE CLAUSES

Escape clauses attempt to avoid all liability for a loss covered by other
valid and collectible insurance.
A true escape clause, sometimes referred to as a "super escape clause," provides
that the insurer "invoking it is relieved from any obligation to the insured if other
coverage is available."
A standard escape clause often provides that:
"If any other Assured included in this insurance is covered by valid and
collectible insurance against a claim also covered by this Policy, he shall not be entitled
to protection under this Policy."
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One variation of the standard escape clause is a "contingent escape clause," which
seeks to avoid coverage only to the extent of other available coverage.
OTHER "OTHER INSURANCE" CLAUSES
This is not a simple subject and the solutions therefore, are not simple by any
means. Insurers have created various types of "other insurance" clauses which cannot be
neatly categorized as "pure" pro-rata, excess or escape clauses. It is not unusual for an
"other insurance" clause to be a combination of the three most commonly drafted "other
insurance" clauses. For example, certain policies contain an "excess pro-rata" clause:
"If the Insured has other insurance against a loss covered by this policy the
company shall not be liable under this policy for a greater portion of such loss than the
applicable limit of liability stated in the declaration bears to the total applicable limit of
all valid and collectible insurance against such loss; provided however (as to bodily
injury and property damage liability) the insurance with respect to a temporary substitute
automobile . . . or (a non-owned automobile) shall be excess insurance over any other
valid and collectible insurance."
Another type of combination "other insurance" clause is an "escape-excess"
clause and which has been described by the 9th Circuit Court in 2001, as a hybrid escapeexcess clause is one that permits escape if loss is less than any other insurance and
providing excess insurance if coverage exceeds other insurance, and holding hybrid
escape-excess clause and true excess clause are sufficiently repugnant to require
proration.
Excess insurance policies are generally written to provide indemnification for
"ultimate net loss" defined as:
"The sums paid in settlement of losses for which the Insured is liable after making
deductions for all recoveries, salvages and other insurances (other than recoveries under
the policy/policies of the Primary Insurers), whether recoverable or not and shall exclude
all expenses and 'costs.'"
Such language has been held tantamount to an "other insurance" clause.
NONCUMULATION CLAUSES
Some excess and umbrella contracts contain "non-cumulation" clauses that are
intended to reduce the policy limits available to pay a loss by the amount of coverage
available from other, prior, insurance. "Non-cumulation" clauses differ from "other
insurance" clauses in that the former expressly apply to coverage in effect before the
inception of the policy. A typical "non-cumulation" clause provides:
"If any loss covered hereunder is also covered in whole or in part under any other
excess policy issued to the Insured prior to the inception of this policy, the limits of
liability of this policy shall be reduced by any amounts due the Insured on account of any
loss under such prior insurance."
A federal district court found that a "non-cumulation" clause did not constitute an
escape "other insurance" clause, as it only sought to limit, rather than to preclude, the
insurer's liability for asbestos and other bodily injury claims pending against its insured.
On its face, the non-cumulation clause reduces coverage only by amounts paid under
other primary policies.
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Other courts, however, have held that non-cumulation clauses are unenforceable
in light of pro-rata allocation schemes, which require the spreading of indemnity
obligations among numerous insurers. Courts have stated that the application of
continuous trigger and pro-rata allocation theories renders non-cumulation clause
unenforceable and (in another case) —The application of time-on-the risk apportionment
rendered a non-cumulation clause unenforceable.
RESOLUTION OF CONFLICTS INVOLVING "OTHER INSURANCE"
CLAUSES
When there are two or more insurance policies covering or participating in the
same loss, there may involve a number of possibilities as to how this problem can be
solved. To start, there are three types of "other insurance" provisions, just discussed, and
there are four different types of conflicts affecting the provision. If there are two primary
policies, then there can be

No "other insurance" clause in either of two primary policies;

"Other insurance" clause in one primary policy but not in other primary
policy;

Similar "other insurance" clauses in both primary policies; and

Dissimilar "other insurance" clauses in both policies.
No "Other Insurance" Clause in Either Primary Policies
When neither of the two policies co-insuring the same loss contains an "other
insurance" clause or its equivalent, the majority of the courts have ruled that any loss
should be apportioned among the co-insurers in the proportion that the indemnity limit of
each policy bears to the aggregate limits of all available insurance, up to their respective
limits of liability.
"Other Insurance" Clause in Only One Primary Policy
When only one of two policies co-insuring the same loss contains an "other
insurance" clause, courts generally will give effect to the "other insurance" provision (if it
is not contrary to statute or public policy). Public policy does not prohibit enforcement of
an "other insurance" provision "when there is other full legal coverage.
This rule, while it may seem a little confusing, was made in an effort to show the
intent of the insurers. Courts have stated that "the intent of the insurers should be
ascertained and effectuated whenever possible—perhaps most readily in the case where
only one of the applicable policies contains an `other insurance' clause.
The same rule would apply where there are "Other Insurance" clauses in two
primary policies."
Pro-rata Clause vs. Pro-rata Clause
The traditional method of proportioning claims when two policies contain pro-rata
"other insurance" clauses, is that each insurer is liable for that proportion of the loss
which the face amount of its policy bears to the "total amount of collectible and valid
insurance. A court ruling stated it well: When both policies contain a pro-rata clause,
"each carrier is primarily liable with respect to the vehicle described in its policy . . .
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[and] protection should be afforded . . . in proportion to the maximum coverage afforded
by each of the policies."
Excess Clause vs. Excess Clause
When both policies contain "other insurance" clauses which provide that the
coverage afforded shall be held to be excess insurance if there is other insurance existing
to cover the loss, most courts hold that the excess clauses operate to cancel each other out
and the policies of both insurers must be considered primary insurance. The courts then
apply the majority rule applicable where neither policy contains an "other insurance
clause," and require each insurer to pay a pro-rata share of any settlement, judgment or
expenses.
In respect to the "other insurance" clause which provides for contribution by
equal shares if all other policies so provide, but for contribution pro-rata if not—the court
held that, because both policies contained the identical "contribution by equal shares"
language, both insurers were obligated to defend and indemnify plaintiffs in the
underlying action, and that contributions should "be by equal shares" in accordance with
the policy provisions.
The New York Court of Appeals, in analyzing two similar excess other insurance
clauses, distinguished first-party coverage from third-party coverage. The court ruled
that the third-party homeowner's policy was primary to the first-party property CGL
policy. Therefore, this means that where both policies contain excess "other insurance"
clauses and neither policy expressly states that it is excess to a specifically identified
policy, and the coverage is similar, the clauses cancel each other out.
The insurers are co-insurers, each of which provides primary
coverage and each of which must participate in any settlement, judgment or
expenses.
Escape Clause vs. Escape Clause
When both policies contain identical "other insurance" provisions considered as
escape clauses, the majority rule holds that the insurers are co-insurers with obligations to
provide pro-rata contributions toward any settlement, judgment or expenses.
Dissimilar "Other Insurance" Clauses in Two Primary Policies
Majority Approach
The majority of courts attempt to reconcile dissimilar "other insurance" clauses
(e.g., pro-rata v. excess; excess v. escape; escape v. pro-rata) by trying to determine the
intent of the insurers, and to do so by examining the language so as to determine which of
the insurers was intended to be primary and which intended to be liable only on an excess
basis—if possible. In Washington in 2003, the court held that as long as the enforcement
of other insurance clauses does not compromise coverage for the insured, "other
insurance" clauses may establish the order of coverage between insurers and should be
enforced as written.
The Fifth Circuit Court stated that applying the majority rule to cases where
"other insurance" clauses conflict "analyze the language of the policies in the light of the
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circumstances of each contracting party, to determine the intention of each contract
within the design of a consistent overall insuring scheme."
Pro-rata Clause vs. Excess Clause
As a general rule and by the majority of the courts, the courts have attempted to
reconcile the "pro-rata" clause and the "excess" clause by interpreting the policy
containing the excess clause as providing secondary coverage. The result, under this
view, is that the excess insurer is generally liable for the loss only to the extent that the
insured's claim exceeds the policy limits of the insurance policy containing the pro-rata
clause.
A California District Court in 2003, however, ruled that conflicting "other
insurance" clauses should be disregarded in favor of pro-rata apportionment. Other
courts that have agreed have ruled that the insurer with excess other insurance clause
must contribute pro-rata with three other insurers, all of whose other insurance clauses
provided for pro-rata allocation. When the subject of defense costs was considered, the
court ruled that the insurer with "excess" other insurance clause must share defense costs
on a pro-rata basis with another insurer whose policy contains a "pro-rata" other
insurance clause.
Pro-rata Clause vs. Escape Clause
When conflicts arise between the application of pro-rata and escape "other
insurance" clauses, courts generally hold that the policy which contains the pro-rata
provision is primarily liable under the rationale that the policy containing the escape
clause does not provide other valid and collectible insurance within the terms of the
policy containing the pro-rata provision, whereas the pro-rata clause [policy] is other
insurance that gives effect to the escape clause.
Excess Clause vs. Escape Clause
When one of two applicable policies contains an excess clause and the other
contains an escape clause, the majority of courts hold that the policy containing the
escape clause is primarily liable for the loss and the policy containing the excess clause is
excess insurance. The rationale for this rule is that "the policy constituting excess
insurance only [does] not provide other collectible coverage so far as the no liability
clause of the other policy [is] concerned."
In a Michigan court case, the insured was covered by two policies: one policy
contained an escape clause and the other contained an excess clause. The court compared
the language of the "other insurance" clauses and concluded that the policy containing the
excess clause was not "valid and collectible insurance" within the meaning of the escape
clause since the excess clause policy, by its terms, was excess to other insurance. Thus,
the court held that the insurer which issued the escape clause policy was the primary
insurer.
Where, however, the escape clause provides that "the insurance does not apply to
any loss covered by other specified types of insurance, including the excess insurance
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type, it has been held that the insurer whose policy so provides is absolved from
liability."
There have been various combinations of escape clauses, including one the court
called a "super escape clause" a clause specifying that the policy's coverage would be
contingent on there being no other insurance, "either primary or excess." The court set
forth the following principles of construction:
1. Parties may contract as they please, and their contract will be enforced by the court
as written.
2. Escape clauses and excess insurance clauses are not like provisions that are
indistinguishable from each other so as to require the loss to be prorated between
the carriers.
3. When the parties contract that coverage will be precluded by the existence of other
insurance, the existence of a policy with an excess insurance clause is not such an
event as will set into motion the exclusionary provision in the first policy.
4. However, when the other insurance escape clause is a super escape clause and
expressly provides that coverage is precluded by the existence of excess coverage,
the existence of a policy with an excess insurance clause is an event that sets in
motion the provisions in the first policy.
Conflicting Clauses in "Specific" Secondary Policies
When coverage is written to be in excess of certain identified policies, it is said to
be specific excess insurance, "which implies that the conditions to attachment of liability
may be satisfied only by reference to those specific underlying policies and no others."
Where two "specific" excess policies purport to be excess to all other insurance, such
policies will prorate whatever loss remains after the exhaustion of the primary coverage.
In three separate cases, the excess insurers argued that they should not be required to
prorate with a primary policy which, by virtue of a "non-owned vehicle" or "substitute
vehicle" contingency clause, had been converted into an excess policy. In each case, the
excess insurer invoked the rule that an "other insurance" clause in a primary policy has
relevance only other primary policies and that in no event should an excess insurer be
required to prorate with a co-insuring primary policy.
The argument of the excess insurers, however, fails to recognize the distinction
between, on the one hand, a primary policy which seeks to become excess in the event of
other insurance and, on the other hand, a primary policy which expressly states that, in
the event of a stated contingency such as use of a non-owned or substitute vehicle, the
policy will operate only as excess insurance. In the latter type of policy, the insurer never
intended to act as primary insurer for non-owned or substitute vehicles, and the insurer's
role as an excess insurer for such vehicles was not grounded in an "other insurance"
clause but rather in the basic insuring agreement. Thus, in different cases, Kansas City
Fire, Aetna Casualty and Jefferson all treated the policies at issue as excess policies and
applied the general rule:
"Where multiple excess policies assume the same risk, and each purports to be in
excess of the other, the excess coverage clauses cancel each other out leaving both
policies to be treated as primary insurance. Both insurers are liable in proportion to their
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undertaking, "and both must contribute, pro-rata, toward payment of the cost of
settlement and legal fees, and other expenses of the litigation."
Conflicting Clauses in General or Umbrella/Catastrophe Excess Policies
In 1987, a Second Circuit court ruled in a case where the driver of a vehicle
involved in a serious accident was covered by four different insurance policies: (1) a
$500,000 primary policy issued by Hartford Accident and Indemnity Company; (2) a
$100,000 primary policy issued by American Insurance Company; (3) a $5,000,000
excess liability policy issued by Continental Casualty Company; and (4) a $2,000,000
excess liability policy issued by Aetna Casualty and Surety Company. A suit against the
driver following the accident resulted in a structured settlement for $2,479,319. Hartford
contributed its $500,000 primary policy limit. Pursuant to a partial settlement agreement
involving all parties, American Insurance Company paid $30,000 in full satisfaction of its
potential liability. Continental and Aetna paid the remaining amounts, reserving their
rights to have their respective obligations determined in a declaratory judgment action.
Both the Continental and Aetna excess liability policies contained excess "other
insurance" clauses. The Second Circuit, applying Connecticut law, held that the two
excess clauses were in "conflict with each other." The court therefore prorated liability
between the two excess insurers on the basis of policy limits, noting that, under
Connecticut law, " [w]here two policies contemplate the particular risk equally, liability
will be prorated based on the total policy limits."
If the conflicting secondary policies are fundamentally different (i.e., umbrella vs.
straight excess), the courts do not always apply the general rule canceling out the
conflicting "other insurance" clauses.
It has been held that a general or umbrella/catastrophe policy should properly be
considered as excess to a specific or straight excess policy as well as to a primary policy
that, as a result of a contingency clause, is converted into an excess policy.
Underlying these decisions is the principle that when resolving conflicts between
co-insurers, a functional analysis should be applied to separate lines of insurance, and an
insurance policy should be read in light of the role it is to play.

Where an umbrella policy is involved, umbrella coverages, almost
without dispute, are regarded as true excess over and above any type of primary
coverage, excess provisions arising in any manner, or escape clauses.
An application of this rule is found in a Superior Court of New York ruling in
1978, in which the appellate court affirmed without opinion a decision holding that
Unigard's umbrella policy was excess to a standard primary automobile policy, which, by
its terms, provided excess coverage for rented cars. The trial court stressed that Unigard's
policy was "clearly an umbrella excess policy procured . . . to avoid the impact of a major
catastrophe," whereas Aetna's primary policy was "essentially a primary liability policy."
The trial court stated:
"Neither the risks nor the coverages between Aetna and Unigard are coextensive,
and the policies do not therefore create a mandated apportionment inasmuch as no coinsurance relationship exists between them."
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Similarly, in a decision by the Fifth Circuit Court in 1971, the court differentiated
between a commercial umbrella policy, which "alone assumed only residual loss
coverage in every event," and two primary auto policies which provided excess coverage
for hired autos. The court analyzed the priority issue as follows:
"When insuring claims simply cannot be resolved by word-logic, courts should
determine whether coverage priorities can be allocated in the light of total policy insuring
intent. Since a long-term lease vehicle such as was involved [here] was virtually in the
complete control of the lessees. . .. the exposure is really identical to that of a car owned
by them. The liability carrier of these lessees thus has a better opportunity to secure
adequate risk experience data to determine and collect an adequate rate than does the
carrier who writes the residual protection for the leasing agency."
The New York Court of Appeals resolved conflicting "other insurance" clauses
found in (i) a primary policy converted into an excess policy pursuant to a non-owned
vehicle contingency clause; (ii) a straight excess policy; and (iii) an umbrella/catastrophe
policy. The court held that a $100,000/ $300,000 Allstate primary auto policy, which
provided "excess insurance over any other collectible insurance" for non-owned autos,
had to be exhausted before a purely excess $1 million Allstate "executive" policy was
triggered. This determination was based on the court's conclusion that Allstate's straight
excess policy listed the primary/ excess auto policy in its schedule of underlying policies.
The court also found that the $1 million executive policy had to be exhausted
before coverage would be triggered under the Lumbermens' "catastrophe" policy. As
between the two excess policies, the court stressed that Allstate's executive policy
expressly provided in its "other insurance" clause that coverage was beneath "insurance
applying as excess to Allstate's limit of liability hereunder," whereas Lumbermens'
catastrophe policy provided in its "other insurance" clause that coverage was excess of
"any other valid and collectible insurance.
APPORTIONING LOSSES BETWEEN CO-INSURING POLICIES
If there is no specific policy language detailing how the insurers should apportion
their shares in case there is other insurance covering the same risk,

the majority of the courts require proration in the ratio which the
individual insurer's limits bear to the sum of all available coverage.
Pennsylvania, for instance, recognizes the three methods of proration, but it must
be according to the limits of each policy. California, on the other hand, simply takes into
account factual circumstances and equitable considerations in each case.
Some courts have felt this system of policy-limit was inequitable, basically
because the cost of purchasing insurance does not increase proportionately with the
policy limit. Therefore, some courts try to apportion on the basis of premiums paid to
each insurer.
A minority of jurisdictions apply the equal-share method—holding that loss
should be split equally, in effect excess other insurance clauses cancel each other out;
both contribute equally up to the limits of their policies.
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ALLOCATING THE DUTY TO DEFEND BETWEEN CO-INSURERS
Since "other insurance" clauses generally do not prescribe how defense costs
should be apportioned among insurers, courts have developed general allocation rules.
When One Is Held To Provide Coverage
When the application of an "other insurance" clause results in a determination that
only one insurer provides coverage for a claim, that insurer must bear the entire burden of
defense.
Coverage on a Pro-rata Basis
When "other insurance" clauses operate to require that two insurers provide
coverage on a pro-rata basis, the majority view is that the insurers must share the costs
of defense in the same proportion that the face amount of each policy bears to the total
amount of valid and collectible insurance–referred to as "contribution by equal shares."
A few courts hold that even where insurers have agreed to apportion liability
pro-rata, they must share the costs of defense equally since both insurers assumed the
same obligation to defend the insured.
One Primary Insurer and One Excess Insurer
The traditional view is that an excess insurer is not required to contribute to the
defense of the insured so long as the primary insurer is required to defend.
Intended Insurer Relationship
This discussion so far as dealt with the allocation through the "other insurance"
clauses. However, courts may take a different view on the duty to defend when the
relationship between insurers arises by coincidence.
Therefore, when "'other insurance" clauses makes one insurer the primary insurer
and the other an excess insurer, the primary insurer is generally held to have the burden
of defending. Still, there are situations that have arisen where in certain circumstances
excess insurers may owe a duty to participate in the insured's defense. For instance, one
court held that: "There may come a point at which the potential liability of the insured is
so great that the excess carrier is required to participate in the defense despite any
contractual provision disclaiming coverage of expenses covered by other policies."
The majority of the courts, though, have found that, in the context of applying
"other insurance" clauses to allocate the duty to defend among co-insurers, a primary
insurer must defend an insured until exhaustion of the policy limits; an excess insurer has
the right to participate in the defense to protect its interests; and an excess insurer may be
obligated to participate in the insured's defense in circumstances in which equitable
considerations dictate such participation.
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Overlapping Self-Insurance
In the overlapping coverage situation, most courts hold that self-insurance does
not constitute "other insurance" for the purposes of applying the "other insurance"
clause(s) of one or more insurance contracts to apportion coverage obligations.
STUDY QUESTIONS - CHAPTER TEN
1. Legally, the rights and obligations of co-insurers primarily depend
A. on court directions.
B. on either mutual agreement among the co-insurers, or through arbitration.
C. on the specific language of the insurance contracts.
D. upon the ability of their legal counsel.
2. There are many types of "other insurance" clauses but for the purpose of this
discussion, these clauses can be broadly classified as: (1) pro-rata clauses; (2) excess
clauses; or (3)
A. "super" or "expanded" escape clauses.
B. multiple-sharing of exposure clauses.
C. "non-sharing" clauses.
D. escape clauses
3. Escape clauses attempt to avoid all liability for a loss
A. through arbitration methods.
B. covered by other valid and collectible insurance.
C. by allowing the insurer to simply pay the face amount of the policy to the court.
D. in another jurisdiction or locale.
4. Some excess and umbrella contracts contain "non-cumulation" clauses that are
intended to
A. reduce the policy limits available to pay a loss by the amount of coverage
available from other, prior, insurance.
B. limit the number of participating insurers.
C. freeze the amount of available claim amounts at a certain level.
D. make other insurers pay for the entire claim.
5. Where both policies contain excess "other insurance" clauses and neither policy
expressly states that it is excess to a specifically identified policy, and the coverage is
similar,
A. the policy that has been in force the longest will be responsible totally for the
claim.
B. the clauses cancel each other out.
C. neither insurer will be responsible as the insurer was attempting fraud.
D. both insurers will pay 50% of the claim.
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6. Where an umbrella policy is involved, umbrella coverages, almost without dispute, are
regarded as
A. immaterial and irrelevant.
B. the primary carrier.
C. true excess over and above any type of primary coverage.
D. duplication of coverage.
7. If there is no specific policy language detailing how the insurers should apportion their
shares in case there is other insurance covering the same risk the majority of the
courts require
A. that the primary insurer pay the entire claim and subrogate against the other
insurers.
B. a pooling of maximum benefit amounts of all insurers, then after the claim is paid,
the remainder (if any) reverts back to the policy that has been in force the longest.
C. proration in the ratio which the individual insurer's limits bear to the sum of all
available coverage.
D. the insurers to pay the same amount into a pool that will be distributed by the
court.
8. In Florida, in defending an insured where there are true duplicate coverages,
A. neither the primary or excess insurer may defend.
B. both insurers must defend.
C. only the court or Department of Insurance can specify who will defend.
D. the insured may call upon either the primary insurer or excess insurer, or both, to
defend.
9. Where there is one Primary Insurer and one Excess Insurer, the traditional view is that
an excess insurer is not required to contribute to the defense of the insured
A. under any circumstances.
B. but must post a bond with a court for their later-determined share of the legal
costs.
C. if the primary company is stronger financially than the excess insurer.
D. as long as the primary insurer is required to defend.
10. In the overlapping coverage situation, most courts hold that self-insurance
A. voids any obligation to apportion coverage of any of the insurers.
B. is the same as "other insurance" and is so treated in apportionment of coverage
obligations.
C. does not constitute "other insurance" for the purposes of applying the "other
insurance" clause(s) of one or more insurance contracts to apportion coverage
obligations.
D. voids, in effect, the participation of any company other than the primary
company.
ANSWERS TO STUDY QUESTIONS
1C
2D
3B
4A
5B
6C
7C
8D
9D
10C
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CHAPTER ELEVEN -BAD FAITH AND WRONGFUL
REFUSAL TO SETTLE
INTRODUCTION
In accordance with the terms and provisions and conditions of the policy, insurers
have a contractual duty to defend and indemnify their insureds. Insurers are also
generally held to owe a duty of good faith and fair dealing to their insureds, and in most
states insurers are statutorily prohibited from engaging in "unfair insurance practices."91
A majority of states do not recognize tort actions for an insurer's failure to honor
its obligations. For instance, under District of Columbia law there exists no independent
tort of bad faith refusal to provide insurance coverage. Nevertheless, in many states, an
insured has a variety of tort remedies for breach of the duty of good faith and fair dealing.
Actually, "bad faith conduct. . . is a tort separate and apart from a breach of contract per
se and . . . separate damages may be recovered for the tort and for the contract breach."

The determination of whether an insurer has acted in bad faith
generally requires as a necessary condition a determination that coverage exists for
the loss in question.
The conclusion is thereby reached that, according to the courts, there is no
actionable bad faith without an adjudication that there has been a breach of the insurance
contract.
If it can be shown that the insurer has deliberately withheld a copy of the policy
from the insured, the insured might be entitled to punitive damages for breach of the
covenant of good faith implicit in every contract. One court found an insurer liable for
bad faith for denying coverage on the basis of missing policies in the face of ample
secondary evidence of coverage, and for conducting an inadequate search for policyrelated documentation
Other attempts to impose extra-contractual damages on insurers for bad-faith
pursuit of a lost policy defense have met with little success. In a Pennsylvania court in
1997, for example, a policyholder alleged bad-faith claims handling based on the
insurer's alleged lack of diligence in attempting to locate missing policies and the
insurer's alleged intentional destruction of policies. The court dismissed this claim,
granting summary judgment to the insurer and noting that the facts could not possibly
raise a question as to bad faith.
CALIFORNIA LAW
Just a note about California law in this regard since it is a "bell-weather" state—as
often said: "California acts and other states react." California recognizes an implied
covenant of good faith and fair dealing in every insurance contract. Further, a wrongful
refusal to defend or indemnity is a tort and a breach of contract &/or breach of the
implied covenant of good faith and fair dealing. The tort claim, by itself, may subject an
insurance company defendants to actual and consequential damages, attorney's fees
incurred in an effort to obtain payment under the policy and punitive damages."
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California law is "tough" but it addresses many areas that need to be addressed in
all states. If a person operates or works under any California jurisdiction, it is imperative
that they become familiar with California insurance law.
STATE UNFAIR INSURANCE PRACTICES ACTS
The statutory prohibitions in the various Unfair Insurance Practices Acts are
typically enforced by the State Insurance Commissioners. Nevertheless, there is an issue
as to whether, and to what extent, state Unfair Insurance Practices Acts create a private
right of action.
California Unfair Settlement Practices Act
The California Unfair Settlement Practices Act, Cal. Ins. Code § 790.03, is
closely patterned after the National Association of Insurance Commissioners (NALC)
and which has been adopted in 48 states, provides, inter alia:
The following are hereby defined as unfair methods of competition and unfair
and deceptive acts or practices in the business of insurance.
"Knowingly committing or performing with such frequency as to indicate a
general business practice any of the following unfair claims settlement practices:
(1) Misrepresenting to claimants pertinent facts or insurance policy provisions
relating to any coverages at issue.
(2) Failing to acknowledge and act reasonably promptly upon communications with
respect to claims arising under insurance policies.
(3) Failing to adopt and implement reasonable standards for the prompt investigation
and processing of claims arising under insurance policies.
(4) Failing to affirm or deny coverage of claims within a reasonable time after proof
of loss requirements have been completed and submitted by the insured.
(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements
of claims in which liability has become reasonably clear.
(6) Compelling insureds to institute litigation to recover amounts due under an
insurance policy by offering substantially less than the amounts ultimately
recovered in actions brought by the insureds, when the insureds have made claims
for amounts reasonably similar to the amounts ultimately recovered.
(7) Attempting to settle a claim by an insured for less than the amount to which a
reasonable man would have believed he was entitled by reference to written or
printed advertising material accompanying or made part of an application.
(8) Attempting to settle claims on the basis of an application which was altered
without notice to, or knowledge or consent of, the insured, his or her
representative, agent, or broker.
(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request
by them, of the coverage under which payment has been made.
(10) Making known to insureds or claimants a practice of the insurer of appealing
from arbitration awards in favor of insureds or claimants for the purpose of
compelling them to accept settlements or compromises less than the amount
awarded in arbitration.
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(11) Delaying the investigation or payment of claims by requiring an insured,
claimant, or the physician of either, to submit a preliminary claim report, and then
requiring the subsequent submission of formal proof of loss forms, both of which
submissions contain substantially the same information.
(12) Failing to settle claims promptly, where liability has become apparent, under one
portion of the insurance policy coverage in order to influence settlements under
other portions of the insurance policy coverage.
(13) Failing to provide promptly a reasonable explanation of the basis relied on in the
insurance policy, in relation to the facts or applicable law, for the denial of a
claim or for the offer of a compromise settlement.
(14) Directly advising a claimant not to obtain the services of an attorney.
(15) Misleading a claimant as to the applicable statute of limitations.
States That Do Not Recognize a Private Right of Action
There is one provision in the California statutes that seems to not have survived
the scrutiny of other courts. A majority of the states that have Unfair Insurance Practices
Acts do not recognize a private right of action for breach of these statutes. In Michigan,
for instance, pursuant to section 2006 of the Michigan Unfair Trade Practices Act, the
court held that the plaintiff's allegations with regard to violations of the Unfair Trade
Practices Act failed as a matter of law because the Act provides a comprehensive,
exclusive scheme of administrative enforcement of its rights and duties, and does not
create a private right of action. A Colorado court in 1984: "The General Assembly could
have added the remedy of a private civil action . . .. It did not do so." Iowa court in 1991:
…statute is "essentially regulatory and not grounds for a private cause of action."
States That Recognize a Private Right of Action for Breach of Unfair
Insurance Practices
The legislatures of Montana, New Mexico and Texas have specifically granted to
first- or third-party claimants a private right of action for breach of state Unfair Insurance
Practices Acts
In addition, the courts of two other states have recognized a private right of action
by third-party claimants for breach of state Unfair Insurance Practices Acts (West
Virginia and Kentucky).
Some states that do not recognize a private right of action for third party claimants
have recognized a private right of action for the insured. A federal district court
concluded that a Nevada court would not "grant a third-party claimant a cause of action
directly against an insurer for bad faith refusal to settle a reasonably clear claim, based on
statute, implied contract or common law tort." After the this decision, however, the
Nevada legislature amended the state's Unfair Insurance Practices Act to include a
provision that "an insurer is liable to its insured for any damages sustained by the insured
as a result of the commission of any act set forth in [this statute] as an unfair practice."
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THE INSURER'S DUTY OF GOOD FAITH IN PURSUING
SETTLEMENT
The test for determining whether a settlement should be accepted is "whether a
prudent [insurer] without policy limits would have accepted the demand." The insurer's
duty not activated by settlement demand unless the claim against the insured is within the
scope of coverage, demand is within policy limits, and terms of demand are such that an
ordinarily prudent insurer would accept it. However, it is not bad faith per se for an
insurer to decline a settlement demand.

The duty to attempt to settle in good faith requires the insurer to
negotiate against an opening settlement demand even though the demand may be in
excess of its policy limits.
In many liability policies there is a. provision to the effect that the insurer "may
make such investigation and settlement of any claim or suit as it deems expedient."
Some courts have interpreted that clause to preclude an action for breach of good faith
against an insurer which settles a claim within the policy limits, regardless of whether
the insured agreed to the settlement. Other courts have ruled that the "deems
expedient" clause confers only a conditional right on the insurer, with a corresponding
duty to exercise that right in good faith with due consideration to the intent and
expectations of the parties to the insurance contract. Nevertheless, a Florida court
decided:

"Absent unusual circumstances, courts will not entertain bad-faith
claims against an insurer that settles a claim over the objection of the insured."92
Insurer Insulated from Bad Faith Claim
By undertaking to advance to an insured the insurer's policy limits for use by the
insured to pursue settlement, the insurer is acting in good faith and in furtherance of the
insured's interests.
The fact that the insurer may offer the insured its policy limits subject to a full
reservation of its right to contest coverage should not alter this conclusion. It is well
settled that in cases in which coverage is questionable, a reservation of rights is the
proper procedure for an insurer to follow in order to suspend the operation of waiver and
estoppel.
An insurer is under no absolute duty to settle a claim simply because a possible
judgment against the insured may exceed the amount of insurance coverage and expose
the insured to an excess judgment. Good-faith denials, offers of compromise, or other
honest errors of judgment are not sufficient to establish bad faith.
As the Ninth Circuit court stated in 1983, the insurer "had no absolute duty to
settle the claim merely because [the insured] risked a punitive damage award." And an
Eleventh Circuit court ruled in 1999: "Nor is an insurer under a duty to settle a
compensatory damage award merely to minimize its insured's exposure to punitive
damages."
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
In the settlement context, bad faith is normally demonstrated by
proving that the risk of unfavorable results was out of proportion to the chances of a
favorable outcome.51
However, although bad faith is established only "where the liability is clear and
the potential for recovery far exceeds the insurance coverage" . . . it does not follow that
whenever an injury is severe and the policy limits are significantly lower than a potential
recovery the insurer is obliged to accept a settlement offer. The bad-faith equation must
include consideration of all the facts and circumstances relating to whether the insurer's
investigatory efforts prevented it from making an informed evaluation of the risks of
refusing settlement.
Most states have adopted a middle-of-the-road approach and require an insurer to
give equal consideration to the insured's interest in making decisions concerning the
settlement of a claim. Courts have stated that "an insurance company must give equal
consideration to the interests of the insured in making decisions concerning the litigation
and the settlement of a claim under the policy." However, the insurer is not required to
give paramount consideration to the interest of its insured. (Iowa 1990) Bad faith arises
when the insurer "irresponsibly exposes the insured to unreasonable risk because an offer
was rejected only because of policy limits."
New Jersey has adopted the "refusal to settle at your own risk" approach: the
court held the insurer to be a fiduciary, which "has an affirmative duty to explore
settlement possibilities," and the absence of an initial demand within the policy limits
does not relieve the insurer of its duty to attempt to negotiate a reduction of plaintiff's
demand prior to settlement. The insurer must demonstrate, "by some affirmative
evidence," that there was not only an absence of realistic possibility of settlement within
policy limits, but also that the insured would not have contributed to a settlement once the
policy limits were offered.
DELAYED SETTLEMENT OFFERS
An unreasonably delayed offer of an insurer's policy limits will not protect the
insurer from excess liability. "Unreasonable failure to make a timely settlement, not
simply failure to pay, is the breach of duty which causes injury." A Florida District
Court has ruled that an insurer's delay in delivering a settlement draft may
constitute bad faith.94
ATTEMPTS TO OBTAIN CONTRIBUTION FROM THE INSURED
Asking an insured to contribute to a settlement within policy limits may constitute
bad faith and give rise to the imposition of excess liability, as a Michigan court stated in
1986, "There are several factors which are indicative of bad faith, including:. . . "[A]n
attempt by the insurer to coerce or obtain an involuntary contribution from the insured in
order to settle within the policy limits."
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Where the claim involves third-party coverage, "the insured bears a
disproportionate share of the risk if the insurer fails to accept a reasonable settlement
offer within policy limits." For that reason, the insurer has a concomitant duty "to
communicate to the insured the results of any investigation indicating liability in excess
of policy limits," and "to advise the insured of settlement opportunities and the probable
outcome of a lawsuit and to warn him of the consequences of an excess judgment so that
he might take whatever steps are available for his own protection."
ADVICE OF COUNSEL

The courts have generally agreed, either expressly or by implication,
that reliance on the advice of counsel is but one of the factors to be considered in
determining whether an insurer breached its duty to its insured by refusing to settle
a claim against the insured.
A Florida District Court in 1980 ruled (on appeal) that in an action by an injured
third-party against a tortfeasor's automobile liability insurer, the injured third-party
contended that the insurer acted in bad faith by refusing her frequent settlement overtures.
The court held that there was a jury question with respect to the insurer's bad faith and
that any reliance by the insurer on the advice of its attorneys was but one factor for the
jury to consider.95
DAMAGES RECOVERABLE FOR INSURER BAD FAITH
If an insurer is found to have violated its implied covenant of good faith and fair
dealing, it will be liable for "compensatory damages for all detriment proximately caused
by the breach." Thus, courts have entered bad faith judgments in excess of the insurer's
policy limits.
The rationale for allowing damages in excess of policy limits is that the policy
limits restrict the amount the insurer may have to pay in the performance of the contract,
not the damages that are recoverable for its breach. Therefore, most courts have held that
an insured may recover the entire judgment where the insurer's negligent failure to accept
a settlement offer causes a judgment in excess of policy limits to be entered against the
insured party.
Economic and Compensatory Damages
In some jurisdictions, plaintiffs alleging bad faith are entitled to recover economic
and compensatory damages. Thus, (Kan. 1985), the court held that an insured is entitled
to recover lost profits under Kansas law, provided he can show that "the lost profits arose
in the usual course of things and directly from the defendant's failure to pay on the
policy."
(N.D. 1985)—the court held that the insured, who was the victim of a bad-faith
breach of an insurance contract, could recover compensatory damages, including the cost
of procuring other insurance. And, in another case, the court held that an insurer may be
liable to a policyholder for consequential economic losses where the insurer knows or
recklessly disregards the fact that its conduct is unreasonable, i.e., knows or could
reasonably have foreseen that the insured was "at risk" of economic loss, in addition to
the policy benefits, and that "ascertainable economic damages would ensue" from the
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insurer's conduct. In this case, the insurer, "with an inescapable aura of bureaucratic
indifference," (great use of words!) delayed in processing a valid claim to the point where
the insured's loss of income, attributable to the delay, was "fairly within the
contemplation of [the insurer]."
Attorneys' Fees
Several states recognize the right of an insured to recover as damages the
expenses of litigation arising out of the breach of an insurer's covenant of good faith and
fair dealing.
In 1985, a California court held that when an insurer tortuously withholds
benefits, the insured may recover as damages resulting from such tortious conduct
attorneys' fees reasonably incurred to compel payment of the policy benefits. However,
the insured bears the burden of demonstrating how the fees attributable to both the
insurance contract and the tort claims should be apportioned.
Addressing a matter of first impression, the Florida Supreme Court ruled that an
insured is entitled to recover attorneys' fees spent in the enforcement of a settlement
agreement with its insurer. The court stated, "it would be incongruous to permit fees
incurred in reaching a settlement agreement, but not to allow fees to determine whether
the parties reached a binding settlement in the first place." In reaching its decision, the
court relied on Florida Statute Section 627.428, which provides for a fee award to a
prevailing insured.96
Punitive Damages
In several jurisdictions punitive damages are recoverable from an insurer that has
breached its duty of good faith and fair dealing. Other jurisdictions have raised the
plaintiff's burden of proof to a level that makes a punitive damages recovery extremely
difficult.
As a general matter, a punitive damages claim is not actionable absent an
adjudication that the insurance contract has been breached. Generally speaking, an
insured's motion for summary judgment on a punitive damage claim is premature until
the existence of coverage is determined.
California courts recognize the availability of punitive damages in bad-faith cases.
California Civil Code § 3294 broadly provides:
"In an action for the breach of an obligation not arising from contract, where the
defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the
actual damages, may recover damages for the sake of example and by way of punishing
the defendant.
However, in order for a plaintiff to recover punitive damages, the defendant "must
act with the intent to vex, injure and annoy, or with a conscious disregard of the plaintiff's
rights."
New York permits punitive damages for breach of an insurance contract if the
claim will vindicate a public as opposed to a merely private right. But New York courts
routinely dismiss claims for punitive damages against insurers when there has been no
allegation or showing that the insurer, "in its dealings with the general public, had
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engaged in a fraudulent scheme evincing such a high degree of moral turpitude and . . .
such wanton dishonesty as to imply a criminal indifference to civil obligations."
Thus, in New York, allegations of breach of an insurance contract without more
are insufficient to warrant the imposition of punitive damages.
The Arizona Supreme Court imposed stringent restrictions on the availability of
punitive damages in bad-faith cases. The court held that a jury may award punitive
damages only when the plaintiff presents evidence of the defendant's "evil mind," i. e.,
"an intent to injure the plaintiff, deliberate interference with the plaintiff's rights or
conscious disregard of an unjustifiably substantial risk of significant harm to others."
Additionally, evidence of "aggravated and outrageous" conduct must be demonstrated.
The court also raised the plaintiff's burden of proof to "clear and convincing evidence."
Other courts have ruled that the insured "must establish a high threshold of actual
malice in the settlement process," such that "the insurer actually knew that the claim was
proper, but the insurer nonetheless acted willfully, maliciously and intentionally in failing
to settle the claim on behalf of its insured."
Emotional Distress
A California court in 1967 noted that a suit for bad faith failure to settle a liability
insurance claim had both tort and contract aspects, and, on that basis, held that the
plaintiff's suit sounding in bad faith came within the general tort rule allowing recovery
for "mental suffering," including nervousness, grief, anxiety, worry, shock, humiliation,
and indignity. Similarly, another California court noted that a bad-faith plaintiff may
recover damages for emotional distress even in the absence of proof of any other harm.
A Texas court in 1995 held that "exemplary damages and mental anguish damages are
recoverable for a breach of the duty of good faith and fair dealing under the same
principles allowing recovery of those damages in other tort actions."
In 1982, a Colorado court held that emotional distress, allegedly caused by an
insurer's conduct in handling a third-party liability claim against its insured, was a
compensable element of damages. In characterizing the insured's bad-faith cause of
action as one based on intentional or willful conduct of the insurer, the court stated that
an insured, injured by intentional conduct, is entitled to recover traditional tort damages
for injuries suffered, including emotional distress.
Some courts have freely granted damages for emotional distress based solely
upon the insured's testimony. Thus, in Nevada in 1986, the court held that an award of
damages for mental distress was properly granted even if the only evidence supporting
the claim was the uncorroborated testimony of the insured. In a rather interesting case,
a California Court of Appeals in 2002 ruled that testimony regarding the insured's
shock after the insurance company denied life insurance benefits upon her husband's
death is enough to constitute evidence of emotional distress.
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THE SCOPE OF DISCOVERY IN BAD-FAITH ACTIONS
A bad-faith action is often based upon the manner in which an insurer handled a
claim. Since the claims file is a clear indicator of how the insurer handled the claim,
there is no basis to withhold the claims file from discovery in a bad-faith action. And
further, several courts have gone so far as to hold that documents in the claims file
reflecting the advice of counsel are not protected by the attorney-client privilege.
In one case, the court stated that "no matter how the test is defined, bad faith is a
question of reasonableness under the circumstances," and held that "the portions of the
claims file which explained how the company processed and considered Brown's claim
and why it rejected the claim are certainly relevant to these issues." A 2d Dist. Court in
1981 noted that "in a case of alleged bad faith refusal to settle, the circumstances and
content of the various negotiations and communications between the involved individuals
are clearly relevant."
Not all courts agree, however, for example a Connecticut court in 2005, limited
the right of an insured to obtain privileged discovery in a bad faith action against its
insurer. The court ruled that an allegation of bad faith alone does not justify disclosure
(or even an in-camera review) of materials that are otherwise protected by the attorneyclient privilege. Rather, to rebut the privilege, the insured must establish, by way of nonprivileged materials, probable cause to find that (i) the insurer acted in bad faith, and (ii)
the insurer sought the advice of counsel in order to conceal or facilitate its bad faith
conduct.
This same principle obtains in a bad faith action between the excess insurer and
the primary insurer, but this rationale may not extend to cases where the insurers are coinsurers.
FIRST-PARTY CLAIMS
General Rule
First-party insurance reimburses the insured for losses that he incurs as a result of
injury to himself or damage to his own or leased property. An insurer's failure to pay a
valid first-party claim is an actionable tort in many states. Nebraska law, Texas and
Kentucky courts state that tort remedies, including punitive damages, are available for
failure to pay first-party claim. The Iowa Supreme Court decided that "a violation of the
implied covenant of good faith and fair dealing is . . . a tort in [the insurance] context;"
therefore the insurer can be found liable in bad faith actions "only where it has
intentionally denied or failed to process or pay a claim without a reasonable basis." A
Wyoming court held in 1990 that a cause of action for compensatory damages exists
where the validity of the insured's health claim was "not fairly debatable," but punitive
damages were available only if insurer's conduct was wanton or willful.
Also, the Wyoming Supreme Court limited the recognition of a tort action for
failure to pay a valid first-party claim to those cases in which the policyholder can
demonstrate that the insurer intentionally, knowingly or recklessly denied the claim for
benefits. The court expressly adopted the "fairly debatable" objective standard which
denies tort liability for an insurer's denial of a claim where insurance coverage was
arguable.
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Several states have rejected bad-faith claims in the first-party context. "The
[insurer's] failure to indemnify its insured would be a breach of contract, and a bad faith
motive in breaching a contract does not convert a contract action into an action sounding
in tort." "Calling an intentional breach of contract a tort has no magical consequences
which change anything."
In Florida, First-Party Bad-Faith Cases are recognized by statute and case
references for Florida cases in this area are as shown in REFERENCE section.98
"REVERSE BAD FAITH" AND "COMPARATIVE BAD FAITH"
Courts have recently begun to consider whether the implied covenant of good
faith and fair dealing imposes a duty running not only from insurer to insured but also
from insured to insurer. California, Illinois, Iowa, Massachusetts, Mississippi, and
Pennsylvania courts have so expressly recognizes the covenant as reciprocal.
Whether an insurer can interpose a claim against an insured for breach of the
covenant of good faith has only recently become of interest to the courts. There is a
developing body of case law interpreting the related concepts of "reverse bad faith" and
"comparative bad faith."
"Reverse bad faith" is a claim against an insured, whether in tort or contract, for
breach of the implied covenant of good faith and fair dealing. "Comparative (or
"contributory) bad faith," is an affirmative defense, whether in tort or contract, which
depends upon a comparison of the insured's deliberate misconduct with that of the
insurer, and thereby seeking an apportionment of damages based on the relative bad faith
of each. Courts and commentators often use "comparative bad faith" interchangeably
with "comparative fault."
In Texas, two trial courts awarded damages to insurers for reverse bad-faith
claims against insureds in a tort action. A federal district court applying Pennsylvania
law concluded that the "absence of a statutory right of an insurer to punitive damages
does not preclude an insurer's claim against an insured for breach of a contractual
obligation of good faith with the right to recover whatever common law contract
damages, if any, it may have suffered." Tennessee has provided insurers with a statutory
remedy against insureds for prosecuting actions in bad faith. The right to pursue an action
"becomes vested in the insurer at the time of the institution of the insured's action, and
thus the action becomes part of the controversy. The statute does not require that an
insurance company . . . resort to an independent action."
Some courts that have rejected reverse bad faith actions have found other
available remedies adequate to address an insurer's claims. Other courts that have
rejected reverse bad faith have suggested that the elements, of the cause of action might
support an affirmative defense by an insurer.
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In addition, where an insured is found to have breached the covenant of good faith
and fair dealing, the trend seems to be to continue to apply a different standard of relief
from that applied to an insurer who has breached the covenant.
A few jurisdictions have implied that comparative bad faith may be a viable
affirmative defense in appropriate circumstances.
POST-DISCLAIMER BAD FAITH
Except in extraordinary circumstances, events occurring after an insurer's
disclaimer of coverage and, in particular, occurring in the prosecution or defense of a
coverage action, do not support an independent claim for bad faith-refusal to defend.
Underlying the immunity of litigation conduct from a bad-faith claim is a more
fundamental principle: it is not actionable bad faith to pursue a coverage declination in
litigation. Any determination of bad faith may be premised only upon facts existing at
the time the insurer decided to decline coverage and communicated that decision to its
insured. Litigation conduct is excluded by this formulation.
One reason that allegations relating to litigation conduct do not state a claim for
bad faith is because they can be used to intimidate insurers and their counsel. As one
court put it: "Stated simply, if after declination of coverage an insurer's litigation
concerning that coverage can give rise to a claim of breach of the contract on which
coverage is purportedly based, rising to the level of tortious bad faith, no insurer would
be able to present his defense without having the cloud of a bad faith claim looming in
the background. That is, one's right to present or defend against a lawsuit is an extremely
important right. I am not willing to allow a bad faith claim to be used in a manner which
could infringe on this right."
STUDY QUESTIONS - CHAPTER ELEVEN
1. The determination of whether an insurer has acted in bad faith generally requires as a
necessary condition
A. that substantial funds for legal representation is available to the insured.
B. a determination that coverage exists for the loss in question.
C. prior or immediate bad-faith actions by the insurer.
D. a full report from the Department of Insurance to the court.
2. The duty to attempt to settle in good faith requires the insurer to negotiate against an
opening settlement demand
A. as long as the demand is within the policy limits.
B. even though the demand may be in excess of the policy.
C. through arbitration.
D. or to void the policy and return all premium collected.
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3. According to a Florida ruling, absent unusual circumstances, if an insurer settled a
claim over the objection of the insured,
A. courts would automatically entertain a bad-faith claim against the insurer.
B. must deposit a like amount with the court until the court can rule on whether the
claim was made in bad faith.
C. courts will not entertain bad-faith claims against the insurer.
D. could lose its license to do business in Florida and its officers could go to jail.
4. In the settlement context, bad faith is normally demonstrated by proving that the risk
of unfavorable results was
A. out of proportion to the chances of a favorable outcome.
B. about equal to the chances of a favorable outcome.
C. purely imaginary and had no basis in fact.
D. not imminent and highly impossible.
5. Florida law states that the insurer has no duty to solicit or make an offer of settlement;
therefore, an insurer cannot be sued for wrongful failure to settle
A. with the insured, the claimant, or interested third party.
B. absent a demand for settlement.
C. unless the insured, claimant, or interested third party had committed fraud in
attempting a settlement.
D. under any circumstances.
6. The courts have generally agreed, either expressly or by implication, one of the factors
to be considered in determining whether an insurer breached its duty to its insured by
refusing to settle a claim against the insured would be
A. differences in racial or foreign characteristics or either party.
B. the attitudes of the insured.
C. reliance on the advice of counsel.
D. the ability of the legal counsel for the insured.
7. If an insurer is found to have violated its implied covenant of good faith and fair
dealing, it will be liable for
A. punitive damages.
B. fraud and misrepresentation.
C. violating of its charter and its license to do business in that jurisdiction.
D. compensatory damages for all detriment proximately caused by the breach.
8. The Florida Supreme Court ruled that an insured is entitled to recover attorneys' fees
A. charged for protection of civil rights.
B. for the giving of advice even though the purpose is remote from the case in
question.
C. spent in the enforcement of a settlement agreement with its insurer.
D. that are considered as excessive by the insured.
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9. A Florida District Court held that: "Because [a bad-faith action] is a contract claim,
the recoverable damages are . . . limited to those that can be said to have been
contemplated by the parties
A. at the time of the formation of the insurance contract.
B. at the time of claim.
C. prior to the formation of the insurance contract.
D. after the formation of the insurance contract when the contract is reviewed for
personal or business reasons, such as estate planning.
10. A Florida District Court stated that even though insurers are raising the issue, courts
have continued to be reluctant to allow claims for either reverse bad faith or
comparative bad faith, and as far as that court is concerned
A. they felt that comparative bad faith can legitimately be considered.
B. reverse bad faith is an important action that cannot be discarded so easily.
C. they are not reluctant to take steps forward.
D. they declined to create a new affirmative defense of comparative bad faith.
ANSWER TO STUDY QUESTIONS
1B
2B
3C
4A
5B
6C
7D
8C
9A
10A
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CHAPTER TWELVE - PROPERTY INSURANCE
OVERVIEW
Differences Between Property Insurance and Liability Insurance
Many courts at various times have differentiated between first-party property
policies and third-party liability policies as they involve different interests. First and
foremost, property insurance is first-party coverage; it compensates the insured for
damage to the insured's own property. Liability insurance, in contrast, is third-party
coverage; it reimburses the insured for its liability to a third-party for damages to that
third-party or to his or her property. As the Third Circuit Court in 2002 put it: "The
primary aim of third-party insurance is to defend and indemnify insureds against liability
for claims-made against them as a result of their own conduct." Thus, the nature of the
risk insured is fundamentally different in each type of coverage.
Viewing the difference as to the purpose for which it is purchased, first party
property coverage is typically purchased in an amount sufficient to cover the insured's
maximum potential loss at the insured location.

The extent of the insurer's liability under a first-party property
insurance contract can typically be calculated with precision based on assumption
and prediction.
The First Circuit court in 1990 stated: "[I]n property insurance models the
underlying asset limits and defines the insurer's obligation and serves to prevent the
insured from claiming more than was lost . . . " Conversely, in third-party liability
coverage, the policyholder's liability to third-parties cannot be quantified at the time
coverage is bound as a policyholder can be held liable to any number of third-parties or to
a particular third-party any number of times.
Courts have noted that public policy considerations, which often operate to
expand coverage in the third-party liability context, may be less important in the firstparty property insurance context:
In liability policies, the public interest in compensation for injured third parties is
a strong factor; in a first-party policy, the extent to which insured persons may protect
themselves is a matter that the insured determines is in his best interest. As a result, the
relationship between the insurer and insured and the incidence of property damage in
first-party matters are generally determined by reliance on traditional contract principles.
The public policy concerns dictate the interpretation of "occurrence" in respect to
making sure that there is adequate compensation for injured third-parties. In first-party
contracts, the property interest holder can take adequate measures to protect his
investment in advance of any loss. The courts are not so compelled to rewrite the terms
of the contract in first-party contracts. For instance, attorney's fees may be recoverable in
a third-party liability coverage action in some cases, these awards are not generally
available in first-party coverage suits., but courts have indicated that: "In any action
where an insured prevails against an insurer who has not paid a claim on any type of firstparty coverage, the insured person may be awarded reasonable attorney's fees and costs
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of the action upon a finding by the court that the insurer acted unreasonably in failing to
pay the claim."
Recently, courts have become more aware of the difference between first-party
and third-party liability coverage, and in particular in respect to claims as a result of the
World Trade Center and associated losses. A Federal court held that holding third-party
liability case law was inappropriate for interpreting the meaning of the term "occurrence"
in first-party property context.100 "The fundamental differences between liability policies
and first-party contracts make the multitude of appellate court opinions in [liability cases]
unhelpful in resolving the issues presented in this [first-party property] case."101 They
have even discovered that when construing a property damage policy . . . the business
purpose sought to be achieved by the parties is considerably different [than that of a
liability policy]."
Types of Property Insurance
Commercial property insurance can generally be divided into two categories: "all
risk" or "named perils." Under an "all risk" policy, losses caused by any fortuitous peril
not specifically excluded under the policy will be covered. Conversely, a "named perils"
policy covers only losses suffered from an enumerated peril." An insured must
specifically contract for economic losses resulting from property damage. (Minn. Ct.
App. 1996) "Absent explicit language, first-person property insurance does not provide
business interruption coverage."

For loss or damage to be covered under standard form commercial
property policies, there must be a direct physical loss to covered property by a
covered peril within the policy period.
As the policy says, in effect the "Insurer will pay for direct physical loss of or
damage to Covered Property at the premises described in the Declarations caused by or
resulting from any Covered Cause of Loss."
Direct Physical Loss
A "direct physical loss" often involves some physical alteration to the covered
property. A District court in Oregon, 1990, stated: no direct physical loss where "[t]he
building has remained physically intact and undamaged." "The language `physical loss
or damage' strongly implies that there was an initial satisfactory state that was changed
by some external event into an unsatisfactory state."
The alteration can be at the "microscopic" or "molecular" level,102 in respect to
destruction of bacteria colony in a sewage treatment facility, where, for instance it was
considered as a direct physical loss. A Minnesota Court in 2001 stated: "Direct physical
loss can exist without actual destruction of property or structural damage to property; it is
sufficient to show that insured property is injured in some way." Likewise, stated a
Massachusetts Superior Court in 1998: "direct physical loss or damage" encompasses
"more than tangible damage"; therefore, carbon monoxide contamination constitutes a
direct physical loss.
The direct physical loss requirement provision excludes coverage for intangible
and economic losses suffered by the insured. Per a 9th Circuit Court in 1992, "where the
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policy requires 'direct physical loss' there is no coverage for consequential losses
resulting from asbestos contamination." Conn. court in 2003–where contract language
refers to "physical loss" there is no coverage for intangible property losses. Washington
Court of Appeals 1976–no coverage for loss of boat due to defective title under all-risk
yachtsman's hull policy.
If the policy expressly provides business income or business interruption
coverage, the lost income must still result from a direct physical loss.
In 1992, a New York Court stated that there was no coverage under business
interruption policy where street closure forced a theater to cancel performances. An 11th
Circuit Court, 1988, stated: "fire destroyed one building in the complex; there was no
coverage for reduction in income of surrounding buildings that were not physically
damaged or did not suspend operations." Washington Court of Appeals 1992: No
business interruption coverage where motel suffered loss of business after volcano
eruption; decline in "physical attractiveness" of grounds due to ash from eruption was
insufficient physical damage since motel was able to stay open.
An imminent or threatened loss typically does not trigger coverage. A
Washington state court in 1994: the court denied coverage under a homeowner's policy
where an upslope landslide threatened the insured's home, but did not cause any physical
damage to the house during the policy period. However, some courts have construed the
"risks of physical loss" policy language to cover imminent losses.

If covered property becomes unusable, the "loss of use" is generally
not a direct physical loss.
In a 9th Circuit court ruling, 1935: A forest fire destroyed the railroad bridges
surrounding a locomotive. Although the locomotive was not damaged by the fire, the
destruction of the bridges left it isolated and ultimately unusable since the cost of
repairing the bridge exceeded the value of the locomotive. The court denied coverage
because there was no damage to the locomotive under the fire policy. A Minnesota Court
in 1989, stated: "all risk of direct physical loss" policy language does not cover damages
from loss of use. The 3d Circuit court in 2002: "physical loss" requirement satisfied if
release of asbestos fibers in building render the structure "useless or uninhabitable." The
3d Circuit court in 2005, ruled that under Port Authority standard, it was an issue of fact
as to whether presence of e-coli bacteria renders property useless or uninhabitable, thus
constituting a "physical loss."
Where the loss of use is a result of some physical damage or alteration to the
property, courts may allow coverage. In Colorado, gasoline contaminated the soil under
and around a church, which caused vapors to enter the building and rendered the church
unusable. The Colorado Supreme Court agreed that a loss of use, without more, does not
constitute a direct physical loss. However, the court found that when the loss of use was
the result of infiltration of a physical substance (such as gasoline), which rendered the
property uninhabitable, a direct physical loss had occurred. An Oregon Court in 1990
ruled that the coverage was denied for loss of use of building during asbestos removal,
since the building remained physically intact and undamaged.
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Faulty Construction Claims
The "direct physical loss" requirement also prevents coverage for the cost of
repairing faulty construction. In 2000, the Fifth Circuit rejected "the notion that a
Builder's Risk policy covers the cost incurred by the policyholder to correct faulty
workmanship." The Court held that "the language `physical loss or damage' strongly
implies that there was an initial satisfactory state that was changed by some external
event into an unsatisfactory state-for example, the car was undamaged before the
collision dented the bumper. It would not ordinarily be thought to encompass faulty
initial construction." The Court noted, however, that property insurance provides
coverage where the faulty design or construction has caused physical damage to covered
property:
"Thus, when an insured has made claims for the collapse of the insured subject
matter because of faulty design, district courts have awarded as damages the cost to
rebuild the structure in its defective state. They have not awarded as damages the cost to
redesign or rebuild the structure so as to eliminate the defect. This reflects an
interpretation of the all-risks policy to cover accidents resulting from defective design or
workmanship, but not the cost of repairing the defect itself."
The Fifth Circuit explained the distinction: "[I]f shoddy plumbing work caused
pipes to break and a building to flood, damaging the carpet, the policy would cover the
cost of replacing the carpet but not the cost of repairing or replacing the shoddy plumbing
job."
Environmental Damage and Pollution
Claims as Physical Loss
Insureds have asserted that first-party property policies should provide coverage
for cleaning up environmental contamination caused by the insured on its own property.
(Wash. 2000) insured sought environmental remediation coverage under first-party and
third-party policies. Efforts by insureds to recover costs stemming from environmental
contamination under first-party property policies have led to litigation over a number of
issues unique to first-party coverage, including the following: whether soil and
groundwater are covered "property" under the policies; what constitutes the appropriate
trigger of coverage; how provisions limiting the time in which insureds may sue their
insurers should be interpreted; and how costs incurred as the result of damage occurring
both inside and outside the relevant policy periods should be allocated.
One issue in respect to asbestos contamination is whether solely the presence of
asbestos in a building meets the "direct physical loss" requirement. Courts have
generally denied coverage for remediation claims where there is no evidence of asbestos
contamination. A District Court in Oregon 1990, ruled that there was no coverage for
asbestos removal claim because there had been no physical loss. In 1997, a Minnesota
Court of Appeal ruled that "where insured sought recovery "not for the mere presence of
[asbestos containing materials] in the buildings, but for the release of asbestos fibers and
resultant contamination," court denied insurer's motion for summary judgment, finding
that asbestos contamination may constitute a direct, physical loss to property under an allrisk policy. It seems to be a matter as to how it is presented.
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District Court in Conn., 2002: "The insured seeks coverage for the presence of
asbestos and lead contamination, rather than the mere presence of those products; the
insured has satisfied its threshold burden of demonstrating that it suffered physical loss or
damage to property under an all risk personal property policy."
Mass. App. Ct. (1998): There was no coverage for lead paint removal because "an
internal defect in a building (e.g., bad title, bad paint, etc.) does not rise to the level of a
physical loss." However, a Mass. Superior. Ct. (1998): "Direct physical loss or damage"
encompasses "more than tangible damage" and, therefore, carbon monoxide
contamination constitutes a direct physical loss.
Computer Data and Software
First-party policies generally refer to "physical" property, therefore, recovery for
lost computer data would seem to be ruled out if there were no express grant of coverage.
However, one district court allowed an insured to recover computer data losses caused by
a power outage. The court held that "’physical damage’ is not restricted to the physical
destruction or harm of computer circuitry but includes loss of access, loss of use, and loss
of functionality."
This decision has been widely criticized. It "does not adhere to traditional
insurance coverage analysis." The insured was unable to make prima facie case of
coverage for Y2K remediation costs under direct loss or damage policy.
The Ninth Circuit has found that trade secrets are not tangible property, noting
that "the plain meaning associated with `tangible property' is `that which may be felt or
touched, and is necessarily corporeal.' "
Covered Property

First-party policies provide coverage for damage to the insured's own
property and not damage to neighboring property.
Moreover, in order for coverage to be triggered', the damaged property must be
property that falls within the terms of the policy language. The 3d Cir. Ct. in 2004–the
insured may not recover the cost to replace damaged foundation pilings because the
pilings are not "covered property" under the terms of the policy.
In addition to the requirement of damage to covered property, the insured must
have an "insurable interest" in the damaged or lost property during the policy period.
Connecticut District Court in 1997 ruled that the determination of whether the insured
has an insurable interest is distinct from a covered property analysis; "the `insurable
interest' analysis involves whether the insurance policy is unenforceable or void because
it fails to protect any interest of the insured."
The issue of what constitutes an "insurable interest in property" was addressed by
the Second Circuit Court of Appeals. In that case, the insured provided engineering and
janitorial services to nearly all of the World Trade Center tenants. The insured also used
and/or leased common areas at that location for storage and operational purposes. After
the destruction of the World Trade Center, the insured sought coverage under the
property damage and business interruption provisions of the relevant policy. The District
court granted partial summary judgment in favor of the insurer, finding that the insured's
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performance of services and use of common areas at the World Trade Center did not
constitute a "property interest" in the World Trade Center because the insured did not
"use" or "control" the property, as required by the policy. The Second Circuit reversed,
finding that the areas used and/or occupied by the insured "were the means by which [the
insured] derived its income and were as essential to that function as [the insured]'s
cleaning tools." Thus, the appellate court held, the insured "used" the areas in the World
Trade Center "within the meaning of the Insurable Interest provision" of the policy.
Covered Peril—Efficient Proximate Cause Rule
To be covered under a first-party policy, the insured must suffer a loss caused by
a covered peril (in a named perils policy) or suffer a loss not caused by an excluded peril
(in an all risk policy). A covered peril and an excluded peril can combine to cause a
covered loss. The 8th Circuit Court in 2002: The covered peril of frozen pipes caused
water damage and the ensuing excluded peril of mold, which resulted in the loss.
In such a case, the majority of courts apply the efficient proximate cause rule:

Where a loss is caused by both covered and non-covered perils, there
is coverage only if the covered peril is the predominant cause of the loss or damage.
The West Virginia Supreme Court stated the efficient proximate cause rule as
follows:
"No coverage exists for a loss if the covered risk was only a remote cause of the
loss, or conversely, if the excluded risk was the efficient proximate cause of the loss. The
efficient proximate cause is the risk that sets others in motion. It is not necessarily the
last act in a chain of events, nor is it the triggering cause. The efficient proximate cause
doctrine looks to the quality of the links in the chain of causation. The efficient
proximate cause is the predominating cause of the loss."
Further discussion of the rule by the 7th Cir. Court in 1912—"When concurring
causes of the damage appear, the proximate cause to which the loss is to be attributed is
the dominant, the efficient one, that sets the other causes in operation; and causes which
are incidental are not proximate, though they may be nearer in time and place to the loss."
The California Insurance Code § 530: "[a]n insurer is liable for a loss of which a
peril insured against was the proximate cause, although a peril not contemplated by the
contract may have been a remote cause of the loss; but he is not liable for a loss of which
the peril insured against was only a remote cause. "
The North Dakota Code §26.1-32-01; (2003) states: Where the initial cause of
loss is excluded by the policy, and there is no separate, independent ensuing cause of loss
which would fall within an exception to the exclusion, no coverage is owed. Also,
(2002): "[The] insurer may not contractually exclude coverage when a covered peril is
the efficient proximate cause of damage, even though an excluded peril may have
contributed to the damage."
Courts have also utilized a "concurrent causation" doctrine to allow for recovery
where the loss is brought about by a covered risk combined with an excluded risk.
Concurrent Cause is one or two more causes that simultaneously create a condition that
no single cause could have brought about; or that any one cause could have created
alone.103
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A Tenn. Court in 2001, allowed recovery under "concurrent causation doctrine . .
. where the loss is essentially caused by an insured peril with the contribution of an
excluded peril merely as part of the chain of events leading to the loss." A Minn. court
decision in 1986: Insured is entitled to recover . . . where a cause of the loss is not
excluded under the policy . . . even though an excluded cause may have also contributed
to the loss."
A good description of this doctrine was addressed by the California Supreme
Court in 2005: The insureds sought coverage for damage caused by a tree falling on their
residence as a result of a landslide triggered by heavy rainfall. The insurer denied
coverage based on a provision that excluded coverage for losses caused by weather
conditions that "contribute in any way with" an excluded cause or event, such as a
landslide. The appellate court affirmed the trial court's ruling in favor of the insurer. On
appeal, the insured argued that the "weather conditions" provision runs afoul of the
efficient proximate cause doctrine and Section 530. The state Supreme Court viewed the
threshold question as "whether [s]ection 530 and the efficient proximate cause doctrine
inflexibly prohibit an insurer from insuring against some manifestations of weather
conditions, but not others." The high court answered this question in the negative,
finding that a policy may provide coverage for some, but not all manifestations of
specific perils without violating (California statutes).
Number of Occurrences
Parties to an insurance contract can define the term "occurrence" in whatever
manner they choose. The meaning of the term "occurrence" in the context of a first-party
property policy generally must be interpreted in accordance with the intentions and
expectations of the parties to the first-party coverage at issue.104
In order to determine the number of occurrences that are considered in first-party
property insurance, courts often invite "finders-of-fact" to examine a multitude of factors,
such as the expectation of the parties to the particular coverage, the circumstances under
which the property damage occurred, the period of time over which the damage occurred,
and the proximity of the damage. Courts, therefore, usually take the position that "the
question of how many occurrences . . . is a question properly left to the fact-finder. In a
case where a jury determined that collapses of two separate roof structures in a nonoperational mining facility occurring at least three days apart during a period of heavy
snow accumulation constituted two separate occurrences.
The Fifth Circuit Court (2003) determined on summary judgment that, based on
the parties' expectations, nineteen separate leaks in the basement of nineteen separate
buildings located in the insured's building complex constituted nineteen separate occurrences.
The Ninth Circuit (1975), in upholding trier-of-fact's determination that, based on
the parties' contractual intent, one hurricane damaging four separate factory plants
constituted a single "accident" under the first-party property policy at issue.
A New York Court (2004) found that injuries from continuous exposure to lead
paint over three year period resulted from one occurrence.
Questions as to number of "occurrences" in the first-party property insurance
context occasionally arise when the damage to the insured property results from the
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intentional acts of third-parties. A New York District court determines that a jury should
decide whether total destruction of the World Trade Center by terrorists two planes
constitutes one or two "occurrences."
The Ninth Circuit court upheld the District court's determination that four separate
fires set by an arsonist during a two-day period at four individual courthouses, all of
which were insured under a single blanket first-party property insurance policy,
constituted four separate occurrences,
A Texas Court of Appeals (1983) upheld the determination that two fires set at
two different times at two different insured locations, several blocks apart, constituted
two occurrences.
A decision by an English court offers what is perhaps the clearest articulation of
the concept of "occurrence" and how courts typically determine the number of
occurrences in the context of first-party property insurance. Various Iraqi military
personnel dispossessed the insured of fifteen commercial aircraft during Iraq's daylong
occupation of the Kuwaiti airport. The insured claimed each lost aircraft was a separate
"occurrence" under its property insurance policy, which set forth a monetary limit for
"any one occurrence, any one location." In rejecting the insured's claim, the Queen's
Bench observed the following:
"An 'occurrence' (which is not materially different from an event or happening,
unless perchance the contractual context requires some distinction to be made) is not the
same as a loss, for one occurrence may embrace a plurality of losses. Nevertheless, the
losses' circumstances must be scrutinized to see whether they involve such a degree of
unity as to justify their being described as, or as arising out of, one occurrence. The
matter must be scrutinized from the point of view of an informed observer placed in the
position of the insured . . .. In assessing the degree of unity regard may be had to such
factors as cause, locality and time and the intentions of the human agents."
The Court then determined that a reasonable business person would consider the
losses a single occurrence: "There is unity of time. There is also unity of location . . .
There is unity of cause . . . There is unity of intent."
Date of Occurrence
In order for a loss to be covered, it must occur within the policy period. The Fifth
Circuit Court (1993) stated: " `A11-risks' insurance does not cover loss for events that
occur prior to issuance of the policy. In addition, the "known loss" doctrine applies under
both first-party and third-party insurance contracts, and mandates that an insurer cannot
obtain coverage for a loss that is known or certain to happen.
Where the loss or damage is hidden or progressive, the date of the occurrence can
be difficult to determine. Courts have developed various triggers of coverage, including
the "exposure" trigger, the "manifestation trigger," the "continuous trigger" and "the
injury-in-fact trigger." At least two states have applied the manifestation trigger to firstparty claims, while applying a continuous trigger to third-party liability cases.
However, the North Dakota Supreme Court rejected the manifestation trigger:
"We do not believe that the manifestation rule is recognized as an industry-wide standard
in the first-party property insurance context." In this particular case, damage to the
insured's property took place several years before its discovery. The insured had separate
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property insurers at the time the damage took place and at the time of discovery. The
court found that the language of the policy was similar to that found in a third-party
occurrence policy. –"the policy in this case covers loss or damage commencing. . . during
the policy period." The court adopted the injury in-fact trigger and held that "a real but
undiscovered loss or damage, proved in retrospect to have commenced during the policy
period, triggers coverage, irrespective of the time the loss or damage became manifest."
Collapse
Standard form property insurance policies exclude coverage for a "collapse" of
covered property. However, additional collapse coverage is common and therefore, the
definition of "collapse" is important in determining the scope of property insurance
coverage. In defining "collapse," courts have followed two approaches. Under the
traditional view, "collapse" generally means actual collapse of at least part of the covered
property; while under an emerging trend in case law, "collapse" encompasses imminent
collapse as well.
Actual Collapse
In a First Circuit court case (2001), a first-party property policy covered "risk of
direct physical loss or damage involving collapse." The district court denied coverage for
a claim based on the structural unsoundness of a roof. On appeal, the First Circuit upheld
the district court's finding that, "under Massachusetts law, a collapse has three elements:
suddenness, a perceptible change in appearance, and completeness." The Circuit Court
held that coverage was appropriately denied because the roof did not sag "perceptibly to
the naked eye," even though the roof support system was structurally unsound.
In a Virginia case (2000), the court took the position that since "collapse" in an
insurance policy must be given its ordinary meaning, in a case involving hurricane
damage to docks, the only dock to "collapse" within the meaning of the policy was the
dock that suffered a "complete break." As far as courts are concerned, their position
usually is that whether collapse occurred is a question of fact.
The California Supreme Court ruled (2003) that property insurance does not
cover the costs of repairing a structure in a state of imminent collapse. Rather, coverage
is provided only in the case of an actual collapse. In reversing an appellate panel, the
high court applied the plain, unambiguous policy language, which stated that coverage is
provided only for "collapse," defined as "actually fallen down or fallen into pieces" and
does not include "settling, cracking, shrinking, bulging, expansion, sagging or bowing."
The California court found coverage for both actual and imminent collapse.
In a subsequent case in a similar situation, the California Supreme Court ruled
that the policy in this case did not define the term "collapse," and therefore, the court
construed the ambiguity in favor of the insured.
Emerging View: Imminent Collapse
There is an evolving approach that "collapse" also covers imminent collapse.
New Jersey court (2000) defined "collapse" under New Jersey law as "any serious
impairment of structural integrity that connotes imminent collapse threatening the
preservation of the building as a structure or the health and safety of occupants and
passers-by.
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The 9th Cir. Ct. (2004) stated that under Washington law, coverage is triggered by
imminent collapse where the policy insures against "risks of direct physical loss
involving collapse" caused by "hidden decay."
In a "head-scratcher," the Second District Court, California (1997) ruled that the
collapse provision of the policy covered actual and imminent collapse, though coverage
does not extend to "substantial impairment of structural integrity."
The South Carolina Supreme Court in 2002, noted that the policy phrase "risks of
direct physical loss involving collapse" was broader than the term "collapse," and thus
held that a requirement of actual collapse would be "too narrow an interpretation" of that
provision. The court held that the phrase includes an imminent collapse, which the court
defined as a collapse "likely to happen without delay."
The Pennsylvania Superior Court (2003) ruled that the policy that insures against
"risks of direct physical loss involving collapse" covers "imminent collapse." If the
wording is understandable, the courts have ruled with the intention of the policy in most
of these cases.
However, courts have expressly rejected the assertion that "substantial
impairment" constitutes "damage involving collapse." (2d Dist. Ct. 1997) Coverage is
not so broad as to encompass "substantial impairment of structural integrity," rather,
collapse must be actual or imminent. A South Carolina Court (2002) stated: "Collapse
coverage should not be converted into a maintenance agreement by allowing recovery for
damage, which while substantial, does not threaten collapse." And for those buildings in
hurricane-prone areas, the Third Circuit Court (2004) ruled that a building's alleged
vulnerability to high winds, which occur only rarely, does not constitute a threat of
"imminent collapse."
EXCLUSIONS
First-party property insurance policies may contain numerous exclusions:

In the insurance industry, `all risks' does not mean `every risk.'105
Mold Exclusions
Many property insurance policies contain exclusions for damages caused or
resulting from mold. However, unless the policy clearly states otherwise, if both mold
and a covered peril contribute to cause mold damage, and the covered peril is the
dominant and efficient cause of the mold, the damage generally will not be excluded
under the mold exclusion. The Eighth Circuit Court (2002): Water from a burst pipe and
mold resulting therefrom both contributed to inhabitability of insured's house. The
question of fact to be determined was as to whether mold or water leak was the dominant
and efficient cause of the loss. A Washington Court (2000) in a rather unusual type of
case, ruled that the creation of "sauna-like" conditions by marijuana-cultivating tenants
was proximately caused by vandalism, a covered event, rather than the mold that grew as
a result.
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Water Damage Exclusions
Water damage exclusions are another common provision in property insurance
policies. The Fifth Circuit adopted a limitation on the water damage exclusion offered
by the insured and found that water damage generally refers to "staining, rusting, or
other incidents of the chemical presence of water, and not to the strictly kinetic effects
of moving water." Accordingly, the court found that a building collapse caused by
heavy rains was not excluded under a water damage exclusion. However, in a later
Pennsylvania court, the court declared that damage caused by the run-off of water,
which eroded the soil and caused a foundation collapse, was subject to a water damage
exclusion and, thus, was not covered.
When water exclusion provisions are ambiguously worded, courts have
generally found that water exclusions encompass damage caused by naturally occurring
water phenomena but not man-made water events. A West Virginia Court (2000) said
that a policy that covered "accidental discharge or leakage of water or steam as the
direct result of the breaking or cracking of any part of a system or appliance containing
water or steam", but excluded flood, surface water, and groundwater damage was
ambiguous (and you know what that means)—the court concluded that damage had
resulted from a man-made structure and was thus covered by policy.
A Colorado Court (1990) stated that damage caused by water runoff diverted by
man-made trenches was covered despite a water exclusion clause because it was no
longer surface water after diversion. (Presto-chango?)
An Arkansas Court in 1999, ruled that the terms "flood" and "surface water" do
not include water from a burst water main.
Courts have also distinguished between damage caused by ice or snow and
water and have ruled that when "ice" was not specifically mentioned in a water damage
exclusion, the reasonable reading of an exclusion for "water" damage was for damage
caused by liquid form of water (and not the frozen form.) In the same vein, a
Pennsylvania Court in 1995 ruled that ice or snow that entered a basement and
subsequently melted was not surface water encompassed by the water damage exclusion of the policy.
Pollution and Contamination Exclusions
Many property insurance policies contain an exclusion for damages caused by
pollution or contamination. An Alabama Court found that a chemical, which was
federally regulated for use only in uninhabited open fields, was a pollutant even though it
had legitimate uses. Additionally, the court found that coverage was barred under the
contamination exclusion, given that use of the chemical inside the insured's business
rendered the establishment uninhabitable.106
Courts have generally held that pollution and contamination exclusions preclude
coverage for asbestos remediation claims.
In 1962, the Fifth Circuit held that contamination is "a condition of impurity
resulting from mixture or contact with a foreign substance." The 10th Cir. Ct. (1995)
ruled that damage caused by clay balls in the pavement of an airport runway was not
covered because clay balls constituted contamination. Likewise, a Texas Court in 1968
ruled that corrosion of metal was a degeneration of a substance rather than a mixing with
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an impurity; therefore, damage caused by corrosion was not excluded under the
contamination clause.
Design Defect Exclusion
In order to determine whether damage is due to a design defect and
therefore excluded by a design defect exclusion, courts look to the intended use of
insured
property and assess whether there is a design defect.
In a ruling by the 3d Cir. Ct. (2004), the court held that GTE intended for its
computer systems to be in use during both the 20th and 21st centuries, and that the socalled Y2K problem that required remediation was a design defect. The court found that
the cost of remedying this defect was excluded under the design defect exclusion.
In 1978, a court found that damage to a wall caused by unforeseeable pressure
due to unexpected earth movement was not caused by a design defect. The wall had
withstood the anticipated amount of pressure during tests, but the larger amount of
pressure exerted because of soil movement could not have reasonably been foreseen.
Applying Vermont law, the Second Circuit ruled that latent defect exclusion
expressly barred coverage under all-risk policy for property damage caused by defective
welds in a generator facility.
Inherent Vice Exclusion

The essence of the inherent vice exclusion is that the loss "does not
relate to an extraneous cause but to a loss entirely from internal decomposition or
some quality which brings about its own injury or destruction."
A Texas Court (1982) ruled but for the porous nature of bricks used in building a
house, water would not have seeped in and subsequently frozen causing cracking;
inherent vice of the bricks precluded coverage under the exclusion.
A Texas Appeals Court (1965) found that inherent vice in a shower stall caused a
water leak which resulted in damage to floors. The replacement cost of the shower was
not covered due to inherent vice exclusion. Damage to floors was covered because there
was no inherent vice in the floors themselves.
Another court recently found that damage to a wall due to unforeseen pressure
from soil movement was not excluded under inherent vice clause.
Earth Movement Exclusions
Earth movement exclusion clauses are another common feature of many property
insurance policies. The Ninth Circuit held in 2002 that earth movement generally refers
to movements underground that are not observable as well as to movements that manifest
themselves above ground.
However, courts have disagreed as to whether an earth movement exclusion refers
to only naturally occurring movements or to both naturally occurring and man-made
movements. The majority of courts that have addressed this issue have concluded that
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"absent specific language in the policy to the contrary, an earth movement exclusion is
limited to damage caused by natural phenomena."
The Florida Supreme court held that damages caused by blasting, a man-made
event, were not excluded under the earth movement exclusion, which referred only to
natural events, such as earth quakes, landslides and shock waves.107
In Ga. (1995), a court found that the insured's home was damaged by explosions
in the vicinity of their property. Although the earth movement policy exclusion barred
coverage for losses due to earth movement, "regardless of . . . the cause of the excluded
event," the court nonetheless permitted recovery. The court based its decision on the fact
that the exclusion referred only to earth movement by natural causes in its examples,
whereas the earth movement at issue was caused by a man-made explosion.
Similarly, the Third Circuit Ct. (1987) found that earth movement exclusion
referred only to damage from natural causes and natural phenomena, not to the collapse
of man-made mines.
Tenn. Ct. of App. (1998) ruled that the policy which excluded damage caused by
earth movement regardless of any concurrently contributing event was intended only to
exclude loss from "occasional major disasters" rather than movement caused by "human
action."
To illustrate how the courts can vary in this particular exclusion, in 1996, the
Alaska Supreme Court interpreted a policy provision identical to the one at issue in Cox
(above), but reached the opposite conclusion. This court held that the earth movement
exclusion applies to events triggered by both natural and human processes.
In 1998, the Court of Appeals of Missouri followed the reasoning of the Alaska
Court (above), finding that damage due to earth movement caused by a broken sewer line
was excluded under the earth movement clause.
A Court in Washington (1992) found that the language in the policy explicitly
excluding damage caused by earth movement resulting from faulty construction
precluded coverage where the use of unsuitable materials in providing support for a home
resulted in a landslide.
Ensuing Loss Clauses

Ensuing loss clauses act as exceptions to property insurance
exclusions and operate to provide coverage when, as a result of an excluded peril, a
covered peril arises and causes damage.
The 6th Cir. Ct. in 1999, ruled that water damage to ceiling insulation due to
faulty construction of a vapor barrier was a covered loss under the ensuing loss clause of
the policy despite a faulty construction exclusion.
The 9th Cir. Ct. in 2002, stated that the ensuing loss exception to the defective
workmanship exclusion permits coverage for losses associated with settlement of
foundation; movement of earth, a covered peril, caused loss.
In order for the ensuing loss exception to apply, there must be a distinct, new,
covered peril. As an example, the Washington Appeals Court (2002), held that losses
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during testing and assessment of Y2K compliance were not a distinct peril from Y2K
remediation, so that such losses were not excepted from the inherent vice exclusion.
A Cal. Court (1990) decided that damage caused by molten zinc, which spilled as
a result of an inherent vice of a kettle, was not caused by a distinct new peril but was the
result of the excluded peril of inherent vice; ensuing loss provision was therefore
inapplicable.
A Florida court in 2003, stated that loss from repairing a defectively designed
building was not caused by a distinct new peril other than the excluded design
defect.108
A Nebraska Court in 2004, stated that "resulting loss" provision was unambiguous
and was inapplicable because neither the initial cause of damage nor the resulting loss
were covered perils under the policy.
Also, a New York Court (1995) found that where there is no collateral or
subsequent damage as a result of a collapse of a retaining wall, and the collapse was
excluded under the faulty workmanship clause, ensuing loss exception does not apply.
OBLIGATIONS OF THE INSURED
First-party property policies may impose obligations upon the insured as
conditions precedent to coverage. For example, under the standard form property
insurance policies, the insured has a duty to set aside damaged property and permit its
inspection. Failure to do so can result in forfeiture of coverage. The 9th Cir. Ct. in 2001,
stated that coverage was denied where insured's failure to set aside damaged property
substantially prejudiced the insurer.
Property insurance policies also require the insured to provide notice to the
insurer of all claims asserted against the insured. Failure to comply with the notice
requirement may relieve the insurer of liability.
In addition, the insured must provide a sworn statement or proof of loss. Failure
to comply with proof of loss provisions may preclude coverage. (2d District Court, 2000)
Virtually all first-party policies require the insured to provide a sworn proof of loss
setting forth the amount of the loss before it can recover under the policy.
A New York Court, 1990, stated: "The submission of proofs of loss in accordance
with the provisions of the policy is a condition precedent to recovery." In this case, the
submission of un sworn proofs of loss did not satisfy insured's obligation under the
policy.
If an insured does not provide proof of loss within the required time period, it may
forfeit coverage. For such a waiver to occur, however, some jurisdictions require that the
insurer first make a formal demand for a proof of loss.
One court opined that providing that the insured's failure to provide a proof of
loss will not "invalidate or diminish any claim" under "the provisions of such contract of
insurance relating to the time within which proofs of loss are required" unless the insurer
has made a written demand for a proof of loss. Moreover, "substantial rather than strict
compliance" with the proof of loss requirement may be sufficient to prevent the insured
from waiving coverage altogether.
176
The substantial compliance rule, however, does not apply to all time limitations
contained in a policy. For example, an insured could not claim that its "preliminary"
proof of loss triggered a policy provision limiting the time within which the insurer can
demand appraisal.
As a general rule, if there is a dispute as to the amount of loss after the insured
submits a proof of loss, the insurer is not obligated to provide coverage until the amount
of loss has been "agreed to, appraised or judged."109
New York insurance law (§ 3404(e)) The statutory fire policy [must provide] that
the amount of loss is due after proof of loss is received and "ascertainment of the loss is
made either by agreement . . . or by the filing with [the insurer] of an award".
Courts have held that when an insured intentionally lists items in a statement of
loss that were not in fact lost, the insured's entire claim is barred as a matter of law.
In addition, first-party property insurance policies contain suit limitation clauses,
which generally provide that an insured must bring a coverage suit within one or two
years of the date of the loss. Suit limitation clauses may be shorter than the applicable
statute of limitations. Nonetheless, many states have provided that such clauses are
enforceable. Many states mandate that standard fire insurance policy coverage suits must
be brought within two years.
As an example as to how this time can fluctuate by court, the Second Circuit
Court in 1989 ruled that first-party business interruption coverage provided under a fire
policy is subject to a one-year suit limitation period rather than a two-year period
applicable to the remainder of policy.
The Supreme Court of California addressed the application of a statutory suit
limitation provision requiring an action against an insurer to be brought within one year
after the "inception of loss." The court held that " `inception of loss' should be
determined by reference to reasonable discovery of the loss and not necessarily turn on
the occurrence of the physical event causing the loss." The suit limitation period begins
to run at "that point in time when appreciable damage occurs and is or should be known
to the insured, such that a reasonable insured would be aware that his notification duty
under the policy has been triggered. " The court further held that the limitations period
may be equitably tolled when the insurer has received timely notice of the loss pursuant
to relevant policy provisions and is thus able to investigate claims without suffering
prejudice.
However, the Washington Supreme Court reached a different conclusion. As in a
previous case, the Court of Appeals had concluded that a suit limitation clause
commenced when "the insured first knew or should have known of a `risk of direct
physical loss involving collapse' caused by hidden decay in a specific part of the
complex." However, the Court ruled that this interpretation, which essentially imposed a
discovery rule for the purposes of determining when the suit limitation begins to run, was
inconsistent with the plain language of the policy, which provides that a suit must be
brought within one year "after a loss occurs." The court held that a plain reading of this
provision requires that a suit be brought within one year from the earlier of (i) the date of
collapse, or (ii) the date when the decay that poses the risk of collapse is apparent.
A suit limitation clause may not bar a bad-faith tort claim against an insurer based
on alleged mishandling of a claim.
177
A Circuit Court in 2001 stated that a one-year limitation period applied to bad
faith claims as well as breach of contract claims.
PROPERTY VALUATION
Replacement Cost Versus Actual Cash Value
There are two basic types of coverage for property damage: "replacement cost"
coverage and actual cash value or "ACV" coverage. The definitions and terms of
replacement cost and ACV coverage vary by policy. Therefore, the policy language
controls the application of each type of coverage, but, still, there are certain general
distinctions.

Replacement cost is typically defined as the cost to replace destroyed
property with property of "like kind and quality" or with property that is its
functional
equivalent.
The replacement cost is defined as costs to rebuild insured property with property
"of like kind and quality, either at the site of the loss or, at the sole option of the insured,
another site"
A court stated, that defining replacement cost as "the amount it would take to
replace property with property of the same kind and quality, determined at the time of
loss.
ACV (Actual Cash Value) coverage typically allows an insured to recover the
depreciated value of the destroyed property.

ACV is defined as "replacement cost less a reasonable allowance for
observable physical deterioration."
Policy language provides for "actual cash value with appropriate deductions for
depreciation."
Courts have utilized different methods to calculate the ACV of insured property.
A Federal court noted at least three formulae for calculating ACV: (i) appraised fair
market value of insured property; (ii) replacement cost of insured property less
depreciation; and (iii) "broad evidence rule," considering all facts and circumstances.
Numerous courts have addressed the scope of replacement cost and ACV
coverage in the context of specific policies.
The decisions regarding replacement cost and ACV turn on an analysis of the
specific terms used in the policy.
Courts have upheld the plain meaning of ACV provision and rejected the
insured's argument that such provision means something different based on "universally
understood" property insurance "practice."
178
The law requires "courts to enforce insurance policies as written and does not
allow the circumvention of clear terms of insurance policies through judicial
construction".
The Election To Recover Actual Cash Value and/or Replacement Costs
Many insurance policies expressly provide that an insured may recover the ACV
of destroyed property, and subsequently make an additional claim on a replacement cost
basis. Such policies usually require that the insured provide notice of its intent to make a
claim for replacement cost within a specific period of time.
Moreover, such policies invariably include as a condition precedent to a
supplemental replacement cost recovery, a requirement that the insured first complete
restoration of its property. A New York Court stated in 1987: "The most important
limitation on replacement cost coverages, as is evident from the ISO form, is that the
company has limited its liability to instances where the insured completes repairs or
replacement."
A Circuit Court ruled that "since no repairs had been made, plaintiff was entitled
only to the replacement cost minus depreciation," i.e., ACV.
The 9th Circuit Court, 1996, ruled that the (policy requires that "the lost or
damaged property is actually repaired or replaced" prior to payment of replacement costs.
A District Court in Texas in 2001 took the position that: "Obviously, an insured
cannot recover repair or replacement costs unless and until he actually repairs or replaces
the insured structure."
The 4th District Court, 2000, stated that the insureds concede that they are "not
entitled to replacement cost until they actually repaired or replaced their home."
An Iowa court in 1996—"The parties agree a condition precedent to recovery by
the [insureds] is that `replacement' must be `complete' under the replacement cost
coverage provision."
Washington Court, 1993—payment is conditioned upon completion of actual
repair or replacement.
Oregon Court, 1970—"We conclude that since plaintiffs have not expended
anything in repairing or replacing the insured building they are not eligible to recover
under the `Replacement Cost' extension of the policy."
Fourth District Court, 1006—where the insured has not incurred any actual
replacement costs, insured is entitled only to actual cash value.
Ultimately, as with any contract, the specific terms of the insurance policy
govern. Thus, where a broker's manuscript policy unambiguously provided that: (i)
recovery under the policy "shall be on a replacement cost basis" as costs are "incurred,"
and (ii) an insured may collect ACV only "in the event it decides not to repair, rebuild, or
replace damaged property," an insured electing to rebuild its property was not entitled to
ACV. Rather, the insured was entitled to periodic replacement cost payments on a rolling
basis as they were incurred.
A New York Court, 2005, ruled that the plain language" of the valuation section
of the policy "providing for ACV `in the event' the insured elects not to rebuild–operates
as a condition precedent to making a claim for ACV.
179
STUDY QUESTIONS - CHAPTER TWELVE
1. The extent of the insurer's liability under a first-party property insurance contract can
typically be calculated
A. approximately by accountants.
B. according to published schedules.
C. with precision based on assumption and prediction
D. with great difficulty, usually by court-appointed actuaries.
2. For loss or damage to be covered under standard form commercial property policies,
there must be a direct physical loss to covered property
A. by a covered peril within the policy period.
B. by a covered peril within a 6 months period prior to or after a policy period.
C. developed within the past 2 years (2-year pre-existing clause).
D. from any source or peril while the policy is in force.
3. If covered property becomes unusable, the "loss of use" is
A. immaterial.
B. always considered as a direct physical loss.
C. always a covered loss, although it is always not a direct physical loss.
D. generally not a direct physical loss.
4. First-party policies provide coverage for damage to the insured's own property and
A. not damage to neighboring property
B. damage to any adjacent property.
C. damage to neighboring property unless the property is immediately adjacent.
D. reputation.
5. The efficient proximate cause rule is where a loss is caused by both covered and noncovered perils, there is coverage only if the covered peril is
A. the proximate cause of the loss or damage.
B. an associated but unimportant cause of the loss or damage.
C. the predominant cause of the loss or damage.
D. severe in relation to all other non-covered losses.
6. In the insurance industry, `all risks'
A. means 'every risk.'
B. does not mean 'every risk."
C. is a catch phrase that really has no clear definition.
D. are uninsurable.
180
7. In order to determine whether damage is due to a design defect and therefore excluded
by a design defect exclusion, courts assess whether there is design defect by
A. reviewing architect's blueprints or construction instructions.
B. comparing the property to like property used for the same or similar purposes.
C. looking to the intended use of insured property.
D. obtaining a statement of design approval by the local architectural board.
8. The essence of the inherent vice exclusion is that the loss does not relate to an
extraneous cause but to a loss entirely from
A. error in construction.
B. internal decomposition or some quality which brings about its own injury or
destruction.
C. rot, mildew or time-caused natural deterioration.
D. overuse or physical abuse of the property.
9. Ensuing loss clauses act as exceptions to property insurance exclusions and operate to
provide coverage when, as a result of an excluded peril,
A. a design flaw becomes obvious.
B. another (secondary) excluded peril emerges, creating physical loss.
C. the insured must obtain additional insurance to cover future losses of the excluded
peril.
D. a covered peril arises and causes damage.
10. Replacement cost is typically defined as the cost to replace destroyed property with
property of "like kind and quality"
A. or with property that is its functional equivalent
B. that is less costly than the original property.
C. that is more costly than the original property.
D. that is of the same age as the destroyed property and used for the same purpose
within the same or immediate geographical areas.
ANSWERS TO STUDY QUESTIONS
1C
2A
3D
4A
5C
6B
7C
8B
9D
10A
181
EXHIBIT I
WHETHER EMOTIONAL DISTRESS W/O PHYSICAL MANIFESTATION
CONSTITUTES "BODILY INJURY" — SURVEY
STATE
Emotional Distress
Comments
.
Constitutes Bodily Injury?
.
ALABAMA
YES
Specific policy language caused Ct. to determine
"yes"
ALASKA
NO
"objectively reasonable expectations of the
insured"
ARIZONA
NO
Case hinged on Auto Uninsured Motorists
definition.
ARKANSAS
NO
Wording in Auto Policy covers only physical
injuries.
CALIFORNIA
NO
Physical injury required.
COLORADO
NO
injury must be accompanies by physical
manifestations of
emotional distress.
CONNECTICUT
NO
"…would define bodily injury with an antonym."
DELAWARE
NO
Uses common law definition of emotional distress.
D.C.
NO
Injury to reputation does not constitute bodily
injury.
FLORIDA
NO
Applied "impact rule"-emotional.distress must
flow from
physical injuries as result of impact. "Personal
injuries"
have broader meaning than "bodily injuries."
GEORGIA
NO
Wording in HO policy and CGL policy not allow.
HAWAII
YES
No-fault Auto policy definitions cover emotional
distress.
ILLINOIS
NO
Exclusion provision restricts it only to bodily
injury.
INDIANA
YES
Very liberal-BI includes emotional injury.
IOWA
YES
BI includes emotional injury arising from bodily
contact.
KANSAS
NO
Humiliation, emotional distress, etc., not bodily
injury.
LOUISIANA
YES
Mental anguish is bodily injury under auto &
liab.policies.
MAINE
YES
Can establish BI, as result of emotional distress,
CGL pol.
182
MARYLAND
YES
MASSACHUSETTS
MICHIGAN
s/evidence to
MINNESOTA
injury,
MISSOURI
NO
NO
MONTANA
physical
not BI
NEW HAMPSHIRE
BI as
NEW JERSEY
accompanied
NEW MEXICO
emotional
NEW YORK
covered
YES
NO
NO
NO
NO
NO
YES
loss, it is
NORTH CAROLINA YES
NORTH DAKOTA NO
otherwise is
OHIO
NO
include
involved in
OKLAHOMA
NO
OREGON
YES
expected
PENNSYLVANIA NO
cover
RHODE ISLAND
NO
SOUTH CAROLINA NO
present for
TENNESSEE
NO
physical
TEXAS
NO
Interpret BI to encompass pain, suffering, mental
anguish.
Emotional distress, etc., not BI under HO policy.
Must be allegations of physical manifest
trigger.
CGL pol. states emotional distress is not bodily
must have physical manifestations to be covered.
BI definition not ambiguous and refers to physical
condition of the body
Policy did not define BI, pre se allows for noninjuries. Under CGL policies, mental anguish, etc.,
and is not covered.
Physical discomfort, pain, etc., can rise to level of
defined in liability policy.
HO policy may cover emotional distress if
by physical manifestation.
"Plain meaning" of BI would not include
distress.
Definition of BI is ambiguous so mental anguish
under CGL.
However, if mental claim is caused by economic
not covered.
BI includes post-traumatic stress disorder but
limited to
physical injury, sickness or disease, not include
nonphysical harm.
Emotional injury, no matter how defined, do not
emotional injuries. (Various policy forms
decisions)
Emotional distress not within definition of policy.
Emotional distress can be bodily injury neither
nor intended.
"Soundly rejected" definition that CGL policies
mental/emotional harm.
BI in HO policy refers only to physical injury.
Physical manifestation in some form must be
emotional distress to be covered.
Multi-peril policy contemplates some form of a
nature to be covered.
BI does not include purely emotional injuries.
183
VERMONT
negligence.
WASHINGTON
NO
Must be actual physical harm caused by
NO
BI not emotional distress, follows majority of
jurisdictions.
WEST VIRGINIA NO
Sexual harassment is not covered, policy limited to
bodily
injury.
WISCONSIN
YES
"A reasonable insured would understand" that
emotional,
mental or psychological conditions would be
included
within the concepts of sickness of disease, which is
used
to define "bodily injury."
WYOMING
YES
(Really "yes" and "no") CGL policy is not bodily
injury.
But since definition is ambiguous in auto policy,
emotional distress claims are therefore covered.
NOTE: THOSE FEW STATES NOT SHOWN ABOVE SEEM TO HAVE NO
PARTICULAR RULING ONE WAY OR THE OTHER.
184
EXHIBIT II - SURVEY OF SEXUAL HARASSMENT LAWS BY STATE
NOTE: To refresh the memory in respect to "vicarious" and "disparate" which are used
frequently in this survey:
Vicarious: Performed or suffered by one person as substitute for another or to the benefit
of another; indirect; surrogate.
Disparate: To separate; containing or made up of fundamentally different and often
incongruous elements; markedly distinct in quality of character,
ALABAMA
Hostile environment and quid pro quo sexual harassment claims and retaliation claims
against the wrongdoer are disparate treatment claims that require proof of intent in order to discriminate,
therefore not covered. Hostile environment claims against employer and claims of negligent and wanton
supervision and retention are covered.
ARIZONA
Intentional sexual harassment is not covered, vicarious liability questions remain.
ARKANSAS
There is no coverage for sexual harassment as it is an intentional act. Statutory civil
rights violations requiring intent are not covered. Vicarious liability may be covered.
CALIFORNIA Disparate treatment is not covered unless it is imposed vicariously. Intentional discharge
of employee of application of an employment policy does not become an accidental occurrence even if it
has only unintended discrimination effect. Disparate impact is covered.
CONNECTICUT Vicarious liability may be covered.
D.C.
Disparate impace it covered, disparate treatment is not specifically addressed.
FLORIDA
Intentional discrimination is not covered. Disparate impact that is unintentional is
covered. Sexual harassment and discrimination acts are considered an intentional and are not covered.
Continuing pattern of harassment and discrimination should have been within the company's expectation,
and so no coverage. Employer with only constructive knowledge of employee's sexual abuse and with no
reason to expect such aberrant behavior on business premises, may be covered.
GEORGIA
Sexual harassment is considered as intentional by its very nature, so it is not covered.
HAWAII
Retaliatory discharge is a covered "occurrence."
IDAHO
Intentional acts are not covered.
ILLINOIS
It is covered–Illinois law concerns itself as to whether injury was expected or intended,
not whether the acts were performed intentionally. Intentional civil rights violations may be covered where
the injuries were not specifically intended.
INDIANA
There is no coverage for intentional discrimination, however, coverage is not precluded
for disparate impact where employment practices were adopted without discriminatory intent. There is
coverage in cases of employer's vicarious liability for employee misconduct as the standard of liability is
negligence.
IOWA
Retaliatory discharge is an intentional act, so it is not an "occurrence" covered by the
policy. Doctrine of reasonable expectations may be a factor in determining coverage.
KANSAS
Disparate treatment is not covered; disparate impact may be covered. Employer who is
on notice of employee's misconduct and who fails to take remedial action in effect ratifies the employee's
behavior. It would be contrary to public policy to allow employer to shift the loss from its own
wrongdoing to the insurer.
LOUISIANA
Intentional acts are not covered. Vicarious liability is covered. Sexual harassment
requires a factual determination as to intent.
185
MAINE
Where employment discrimination, sexual harassment, disparate treatment and disparate
impact are claimed, they are potentially covered where the intentional conduct caused unintended
consequences. The insured must subjectively have intended or foreseen the harm to preclude coverage.
MARYLAND Employment discrimination claims for equitable relief only, are not covered.
MASSACHUSETTS
Intentional discrimination is not covered. It is not clear as to disparate impact
and vicarious liability. Sexual harassment is intentional act with foreseeable harm. That corporate officers
committed intentional acts is not sufficient to impute their expectations and intentions to the corporation.
Acts performed on behalf of the corporation, or so routine as to constitute a general policy/practice, may be
attributable to the corporation.
MICHIGAN
Covered.
MINNESOTA Covered.
MISSISSIPPI
Hostile work environment, sexual harassment, and retaliation are intentional acts
precluding coverage. Vicarious liability may be covered if the employer did not participate in wrongful
practices.
MISSOURI
Where the policy specifically and unambiguously excludes coverage for expected or
intended acts, claims of intentional discrimination are not covered, otherwise they would be covered.
NEW HAMPSHIRE
Discrimination and wrongful termination are intentional conduct not covered
under the policy. Vicarious liability is covered.
NEW JERSEY Vicarious liability is covered. Intentional harassment is not an "occurrence" under the
policy.
NEW MEXICO There is no coverage for sexual misconduct. Discrimination claims may be covered.
Sexual harassment is deliberate, inherently harmful act and is excluded from coverage.
NEW YORK
Disparate treatment is not covered unless it is imposed vicariously. Disparate impact is
covered.
NORTH CAROLINA
Employment discrimination claims, including sex, age and religious
discrimination, and claims for sexual harassment and retaliatory discharge are not covered under personal
injury or defamation provisions. Acts of sexual harassment are so nearly certain to cause injury that intend
to injure may be inferred as a matter of law, thus precluding coverage for accidental occurrences. Disparate
impact covered. It is not clear as to disparate treatment and vicarious liability.
NORTH DAKOTA
Vicarious liability seems to be covered according to the most recent cases.
OHIO
Acts of sexual harassment are intentional and therefore are not covered. Claims of
employment discrimination where the injuries are unintended, may be covered. Permitting insurance
coverage for vicarious liability and negligence related to sexual molestation is not against public policy.
OKLAHOMA Covered. In a sexual molestation case, the employer's reinstatement of the employee,
with knowledge of the employee's past misconduct, does not necessarily ascribe to the employer the
requisite expectation and intent so as to transform its ordinarily negligence into gross or willful negligence,
which might exclude coverage.
OREGON
Vicarious liability is covered. Disparate treatment discrimination is not covered.
Disparate impact is potentially covered.
PENNSYLVANIA
Claims of defamation contributing to sexually hostile work environment are
potentially covered. Employer's vicarious liability for reckless scienter of sexual harassment is potentially
covered. Discriminatory termination of employee who is HIV positive is potentially covered where there is
no adjudication of unlawfulness. Negligent but good fair violation of equal pay statute is covered.
Collective instances of sexual harassment over a period of years are not covered. Wrongful termination of
an employee based on age is intentional act and is therefore not covered.
RHODE ISLAND
Acts that create racially hostile work environment are intentional discrimination
and are therefore not covered. Also, Rhode Island law prohibits insuring actions that are contrary to public
policy.
SOUTH CAROLINA
Intentional acts of employment discrimination are not covered. Further, insuring
against discrimination violates public policy. Employer's vicarious liability for sexual harassment claims
and co-employee's negligent acts, are governed by Worker's Compensation Act.
186
SOUTH DAKOTA
Sexual harassment and sexual misconduct are considered as civil rights
violations and are covered. Insuring against vicarious liability of the employer for intentional acts of the
employees does not violate public policy. Insuring wrongdoer against his own intentional acts would
violate public policy.
TENNESSEE
Unclear.
TEXAS
A determination as to whether acts of sexual misconduct constitute covered
"occurrences" within the meaning of the insurance policy is to be made from the standpoint of the insured,
unless the policy's terms provide otherwise. Previous case law that based coverage decisions on whether
negligent acts were related to and/or interdependent on underlying intentional misconduct is overruled.
VIRGINIA
Sexual discrimination, harassment, and retaliation are excluded from coverage as
intentional acts. Vicarious liability for intentional harassment is not recognized.
WASHINGTON Sex or age discrimination and wrongful discharge are intentional acts, not "occurrence"
covered under the insurance policy. Disparate treatment is not covered. Disparate impact caused by
negligence may be covered. A contract covering insured's own negligence will be enforced only if the
insurer specifically undertakes such coverage.
WEST VIRGINIA
Creating a hostile work environment and retaliation against an employee are
intentional acts and therefore they are not covered. Negligence and vicarious liability are not covered
because the essence of the claim is sexual harassment and its inherently non-accidental nature.
WISCONSON Intentional discrimination and racial segregation are not covered where the policy
excludes expected or intended acts. Allegations that the insured was "affected" by discriminatory conduct
of other entities are potentially covered. Declaratory and injuctive relief do not constitute "damages" under
insurance policies. Vicarious liability appears to be covered, but employer's failure to act when put on
notice of employee's misconduct can preclude coverage. Discriminatory conduct enumerated in the policy
or not specifically excluded, can be covered.
WYOMING
Discrimination claim may be covered.
187
EXHIBIT III - Homeowner's Ins. Loss Adjustment Method
Title XXXVII
The 2006 Florida Statutes
Chapter 627
627.7011 Homeowners' policies; offer of replacement cost coverage and law
and ordinance coverage.(1) Prior to issuing a homeowner's insurance policy on or after October 1, 2005,
or prior to the first renewal of a homeowner's insurance policy on or after
October 1, 2005, the insurer must offer each of the following:
(a) A policy or endorsement providing that any loss which is repaired or
replaced will be adjusted on the basis of replacement costs not exceeding
policy limits as to the dwelling, rather than actual cash value, but not including
costs necessary to meet applicable laws and ordinances regulating the
construction, use, or repair of any property or requiring the tearing down of any
property, including the costs of removing debris.
(b) A policy or endorsement providing that, subject to other policy provisions,
any loss which is repaired or replaced at any location will be adjusted on the
basis of replacement costs not exceeding policy limits as to the dwelling, rather
than actual cash value, and also including costs necessary to meet applicable
laws and ordinances regulating the construction, use, or repair of any property
or requiring the tearing down of any property, including the costs of removing
debris; however, such additional costs necessary to meet applicable laws and
ordinances may be limited to either 25 percent or 50 percent of the dwelling
limit, as selected by the policyholder, and such coverage shall apply only to
repairs of the damaged portion of the structure unless the total damage to the
structure exceeds 50 percent of the replacement cost of the structure.
An insurer is not required to make the offers required by this subsection with
respect to the issuance or renewal of a homeowner's policy that contains the
provisions specified in paragraph (b) for law and ordinance coverage limited to
25 percent of the dwelling limit, except that the insurer must offer the law and
ordinance coverage limited to 50 percent of the dwelling limit. This subsection
does not prohibit the offer of a guaranteed replacement cost policy.
(2) Unless the insurer obtains the policyholder's written refusal of the policies or
endorsements specified in subsection (1), any policy covering the dwelling is
deemed to include the law and ordinance coverage limited to 25 percent of the
dwelling limit. The rejection or selection of alternative coverage shall be made
on a form approved by the office. The form shall fully advise the applicant of the
nature of the coverage being rejected. If this form is signed by a named
188
insured, it will be conclusively presumed that there was an informed, knowing
rejection of the coverage or election of the alternative coverage on behalf of all
insureds. Unless the policyholder requests in writing the coverage specified in
this section, it need not be provided in or supplemental to any other policy that
renews, insures, extends, changes, supersedes, or replaces an existing policy
when the policyholder has rejected the coverage specified in this section or has
selected alternative coverage. The insurer must provide such policyholder with
notice of the availability of such coverage in a form approved by the office at
least once every 3 years. The failure to provide such notice constitutes a violation
of this code, but does not affect the coverage provided under the policy.
(3) In the event of a loss for which a dwelling or personal property is insured on
the basis of replacement costs, the insurer shall pay the replacement cost
without reservation or holdback of any depreciation in value, whether or not the
insured replaces or repairs the dwelling or property.
(4) Any homeowner's insurance policy issued or renewed on or after October 1,
2005, must include in bold type no smaller than 18 points the following
statement:
"LAW AND ORDINANCE COVERAGE IS AN IMPORTANT COVERAGE
THAT YOU MAY WISH TO PURCHASE. YOU MAY ALSO NEED TO
CONSIDER THE PURCHASE OF FLOOD INSURANCE FROM THE
NATIONAL FLOOD INSURANCE PROGRAM. WITHOUT THIS
COVERAGE, YOU MAY HAVE UNCOVERED LOSSES. PLEASE
DISCUSS THESE COVERAGES WITH YOUR INSURANCE AGENT."
The intent of this subsection is to encourage policyholders to purchase sufficient
coverage to protect them in case events excluded from the standard
homeowners policy, such as law and ordinance enforcement and flood, combine
with covered events to produce damage or loss to the insured property. The
intent is also to encourage policyholders to discuss these issues with their
insurance agent.
(5) Nothing in this section shall be construed to apply to policies not considered
to be "homeowners' policies," as that term is commonly understood in the
insurance industry. This section specifically does not apply to mobile home
policies. Nothing in this section shall be construed as limiting the ability of any
insurer to reject or nonrenew any insured or applicant on the grounds that the
structure does not meet underwriting criteria applicable to replacement cost or
law and ordinance policies or for other lawful reasons.
(6) This section does not prohibit an insurer from limiting its liability under a policy
or endorsement providing that loss will be adjusted on the basis of replacement
costs to the lesser of:
(a) The limit of liability shown on the policy declarations page;
189
(b) The reasonable and necessary cost to repair the damaged, destroyed, or
stolen covered property; or
(c) The reasonable and necessary cost to replace the damaged, destroyed, or
stolen covered property.
190
REFERENCES
The Legal Environment of Risk Management and Insurance, First CPCU Edition
Mallor – Barnes – Bowers – Phillips – Langvardt
McGraw-Hill Primus, 2000
Insurance Company Disputes, Thirteenth Edition, Volumes 1 and 2
Barry R. Ostrager & Thomas R. Newman
Aspen Publishers, 2006
Property and Casualty Insurance
Philip Gordis, CPCU, CLU
The Rough Notes Company
Torts and Personal Injury Law, Third Edition
William R. Buckley and Cathy J. Okrent
Thomson Delmar Learning, 2003
Civil Procedure, Fifth Edition
Joseph W. Glannon
Aspen Publishers, 2006
Inland Marine Insurance, Volume I
Roderick McNamara, Robert Laurence, Glenn l. Wood
Insurance Institute of America, December 1991
Inland Marine Insurance, Volume II
Roderick McNamara, Robert Laurence, Glenn l. Wood
Insurance Institute of America, December 1991
A Comprehensive Guide to Understanding Your Homeowners Policy
Gerald J. Curran, Jr.
Mellen University Press, 1995
Annotations to the Home Owners Policy, Third Edition (1998)
Paul W. Burke
Tort and Insurance Practice Section
American Bar Association, ABA Publishing
Dictionary of Insurance Terms, Third Edition
Harvey W. Rubin, Ph.D., CLU, CPCU
Barron’s Educational Series
Inland Marine Insurance
Private printing
Continuing Education Insurance School
Principles of Insurance Production, Volume 1
Kensicki, Smith, Marshall, Wearanch, Close
Insurance Institute of America, 1986
Black’s Law Dictionary, Seventh Edition
West Publishing Company, 1999
191
Principles of Risk Management and Insurance, Vol. II
Williams, Head, Horn, Glendenning
American Institute for Property and Liability Underwriters, 1981
Commercial Property Risk Management and Insurance
Rodda, Trieschmann, Wiening, Hedges
American Institute for Property and Liability Underwriters, 1988
Inland Marine Insurance, An Interpretation of the Policy
Earl Applemen (Reference)
Marine Insurance: Ocean and Inland
William Rodda
American Institute for Property & Liability Underwriters, 1991
References are made to various forms of the Insurance Service Office
forms filed with Department of Insurance, State of Florida
Commercial Insurance
Webb, Flitner, Trupin
American Institute for Chartered Property & Casualty Underwriters
The CPCU Handbook of Insurance Policies
American Institute for CPCU, Insurance Institute of America
Various references from ISO Links for Insurance Research (www/iso.com)
and ARIA Library
192
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2.
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4.
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Meraz v. Farmers Ins. Exch., 111 Cal. Rptr. 2d 804, 807, 92 Cal. App. 4th 321, 324 (2d Dist.)
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5. Russell v. Bush & Burchett, Inc., supra, 210 W. Va. at 705, 559 S.E.2d at 42
6. United Nat'l Ins. Co. v. Waterfront New York Realty Corp., 994 F.2d 105, 108-09 (2d Cir. 1993).
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30. Millspaugh v. Ross, 645 N.E.2d 14,16 (Ind. Ct. App. 1994)
31. Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Ins. Co., 711 So. 2d 1135, 1139 (Fla.
1998)
32. United States Fire Ins. Co. v. General Reins. Corp., 949 F.2d 569, 571 (2d Cir. 1991)
193
33. Cross Armored Carrier Corp. v. Valentine, 49 Misc. 2d 917, 922-23, 268 N.Y.S.2d 792, 799 (Sup. Ct.
Queens County 1966),
34. Morgan Stanley Group Inc. v. New England Ins. Co., 225 F,3d 270, 279 (2d Cir. 2000)
35. Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., supra, 69 Cal. 2d at 39-40, 442 P.2d
at 645, 69 Cal. Rptr. at 561, 564, (1968)
36. Encyclopaedia Britannica, Inc. v. SS Hong Kong Producer, 422 F.2d 7, 17-18 (2d Cir. 1969), cert.
denied, 397 U.S. 964 (1970)
37. Michigan Chemical Corp. v. Travelers Indemnity Co., 530 F. Supp. 147, 153 (W.D. Mich. 1982)
38. Golden Eagle Ins. Co. v. Insurance Co. of the West, 99 Cal. App. 4th 837, 846 n.4, 847-48, 121 Cal.
Rptr. 2d 682, 687 n.4, 688 (4th Dist. 2002)
39. SR Int'l Bus. Ins. Co., Ltd. v. World Trade Center Props., Ltd., No. 02 C 8133 (N.D. Ill. Jan. 21, 2003).
40. Liverpool & London & Globe Ins. Co. v. Kearney, 180 U.S. 132, 135-36 (1901).
41. National Fidel. Life Ins. Co. v. Karaganis, 811 F.2d 357, 361 (7th Cir. 1987Gibson v. Callaghan, 158
N.J. 662, 671, 730 A.2d 1278, 1283 (1999)
42. Matthews v. American Central Ins. Co., 154 N.Y. 449, 456-59, 48 N.E. 751, 752 (1897):
43. Hansen v. Ohio Casualty Ins. Co., supra, 239 Conn. at 544-45, 687 A.2d at 1265
44. United States Fire Ins. Co. v. General Reins. Corp., 949 F.2d 569, 573-74 (2d Cir. 1991)
45. Morrow Corp. v. Harleysville Mut. Ins. Co., 110 F. Supp. 2d 441, 452 (E.D. Va. 2000)
46. Eagle-Picher Indus. v. Liberty Mut. Ins. Co., 682 F.2d 12, 23-24 (1st Cir. 1982), cert. denied, 460 U.S.
1028 (1983)
47. Insurance Law Rights At Variance with Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970)
48. Eli Lilly & Co. v. Home Ins. Co., 764 F.2d 876, 884-85 (D.C. Cir. 1985)
49. Moshiko, Inc. v. Seiger & Smith, Inc., 137 A.D.2d 170, 176, 529 N.Y.S.2d 284, 288 (1st Dep't), affd,
72 N.Y.2d 945, 529 N.E.2d 420, 533 N.Y.S.2d 52 (1988)
50. Jurrius v. Maccabees Mut. Life Ins. Co., 587 F. Supp. 1301, 1304-05 (D. Conn. 1989)
51.
52.
53.
54.
55.
United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 310 (3d Cir.1985)
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Deni Assocs. of Florida, Inc. v. State Farm Fire & Casualty Ins. Co., 711 So. 2d 1135, 1140 (Fla. 1998)
Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873, 879 (Tex. 1999).
Liverpool & London & Globe Ins. Co. v. Kearney, 180 U.S. 132, 135-136 (1901)
55A. Ostrager
& Ichel, Should the Business Insurance Policy Be Construed Against the
Insurer?
56. Osborn v. Ozlin, 310 U.S. 53, 61 (1940)
57. 715 F.2d at 193. Accord Puerto Rico Elec. Power Auth. v. Philipps, 645 F. Supp. 770, 773 (D.P.R.
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59. Loblaw, Inc. v. Employers' Liability Assurance Corp., supra, 85 A.D.2d at 881, 446 N.Y.S.2d at 745
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61. Buss v. Superior Court. (Transamerica Insurance Co.), 16 Cal. 4th 35, 49-53, 939 P.2d 766, 775-78, 65
Cal. Rptr. 2d 366, 375-78 (1997),
62. Black's Law Dictionary, 7th Ed.
64. American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 861 (Tex. 1994)
65. Freeman v. Allstate Life Ins. Co., 253 F.3d 533, 536 (9th Cir. 2001)
66. Restatement (Second) of Contracts § 164(1) (1981).
67. Security Mutual Insurance Co. off. Y. v. Acker Fitzsimons Corp., 31 N.Y.2d 436, 293 N.E.2d 76, 340
N.Y.S.2d 902 (1972)
194
68.
69.
70.
71.
Allstate Ins. Co. v. Occidental Int'l, Inc., 140 F.3d l, 6 (1st Cir. 1998) (Florida law)
Black's Law Dictionary, 7th Ed.
Danek v. Hommer, 28 N.J. Super 68, 77, 100 A.2d 198, 202 (App. Div. 1953)
Heather Hill Villas Condominium Ass'n v. American Equity Ins. Co., 816 So. 2d 250, 251 (Fl. Dist. Ct.
App. 2002)
72. Aetna Ins. Co. v. Borrell-Bigby Elec. Co., 541 So. 2d 139, 141 (Fla. Dist. Ct. App. 1989)
73. Swire Pacific Holdings Inc. v. Zurich Insurance Co., 139 F. Supp. 2d 1374, 1382-85 (S.D. Fla. 2001)
74. Insurance Co. of N. Am. v. Forty-Eight Insulations, Inc., 451 F. Supp. 1230 (E.D. Mich. 1978)
75. Tucker Constr. Co. v. Michigan Mut. Ins. Co., 423 So. 2d 525, 527 (Fla. Dist. Ct. App. 1982)
76. Nixon v. United States Fidel. & Guar. Co., 290 So. 2d 26, 29 (Fla. 1973)
77. Sandpiper Constr. Co. v. United States Fidel. & Guar. Co., 348 So. 2d 379, 381 (Fla. Dist. Ct. App.
1977).
78. Allstate Ins. Co. v. Clohessy, 32 F. Supp. 1333, 1336 (M.D. Fla. 1998)
79. McGuire v. American States Ins. Co., 491 So. 2d 606, 608 (Fla. Dist. Ct. App. 1986)
80. Allstate Ins. Co. v. McCranie, 716 F. Supp. 1440, 1443 (S.D. Fla. 1989), aff'd without opinion sub nom
81. Fla. Stat. ch. 624.155(l)(b); State v. United Methodist Church, 167 A.D.2d 792, 793, 563 N.Y.S.2d
351, 351-52 (3d Dep't 1990)
82. State Farm Fire & Casualty Co. v. CTC Dev. Corp., 720 So. 2d 1072, 1074-76 (Fla. 1998)
83. Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515 (Fla. 1983).
84. Sekura v. Granada Ins. Co., 896 So. 2d 861 (Fla. App. 3d Dist. 2005)
85. American Bankers Ins. Co. v. Northwestern Ins. Co., 198 F.3d 1332, 1336-37 (11th Cir. 1999)
86. Southern Int'l Corp. v. Poly-Urethane Indus., 353 So. 2d 646 (Fla. Dist. Ct. App. 1977)
87. Koikos v. Travelers Insurance Co., 849 So. 2d 263 (Fla. 2003)
88. Insurance Co. of North America v. Forty-Eight Insulations, 633 F.2d 1212 (6th Cir. 1980), clarified
and aff'd on reh'g, 657 F.2d 814 (6th Cir )
89. Florida Ins. Guar. Ass'n v. Johnson, 392 So. 2d 1348, 1351-52 (Fla. Dist. Ct. App. 1980).
90. Aetna Casualty & Sur. Co. v. Market Ins. Co., 296 So. 2d 555, 558 (Fla. Dist. Ct. App. 1974)
91. Fla. Stat. Ann. §§ 626.951-626.9541, 626.9641
92. Shuster v. South Broward Hosp. Dist. Physicians' Professional Liab. Ins. Trust, 591 So. 2d 174, 177-78
(Fla. 1992).
93. Cheek v. Agricultural Ins. Co., 432 F.2d 1267 (5th Cir. 1970) (Florida law)
94. Higgs v. Industrial Fire & Casualty Ins. Co., 501 So. 2d 644 (Fla. Dist. Ct. App. 1986), review denied,
511 So. 2d 298 (Fla. 1987)
95. Cotton States Mutual Insurance Co. v. Trevethan, 390 So. 2d 724 (Fla. Dist. Ct. App.), petition denied,
392 So. 2d 1373 (Fla. 1980).
96. Pepper's Steel & Alloys, Inc. v. United States of America, 850 So. 2d 462 (Fla. 2003), answer to
certified question conformed to, 348 F.3d 964 (11th Cir. 2003).
97. Swamy v. Caduceus Self Ins. Fund, Inc., 648 So. 2d 758, 760 (Fla. Dist. Ct. App. 1994) 1990)
98. State Farm Mut. Auto. Ins. Co., v. Laforet, 658 So. 2d 55 (Fla. 1995); Allstate indem. Co. v. Ruiz, 899
So. 2d, 1121 (Fla. 2005); Imhof v. Nationwide Mut. Ins. Co., 643 So. 2d 617 (Fla. 1994); McLeod v.
Continental ins. Co., 591 So. 2d 621 (Fla. 1992); General Star indem. Co. v. Anheuser-Busch Cos.,
741 So. 2d 1259 (Fla. Dist. Ct. App. 1999); Talat Enterprises, Inc., v. Aetna Casualty & Sur. Co., 952
F. Supp. 773 (M.D. Fla. 1996); Franklin v. Minnesota Life ins. Co., 97 F. Supp. 2d 1324 (S.D. Fla.
2000); Fla. Stat. Annuity. § 624.155.
99. Nationwide Prop. & Casualty Ins. Co. v. King, 568 So. 2d 990, 99091 (Fla. Dist. Ct. App. 1990).
100. World Trade Center Properties, L.L. C. v. Hartford Fire Ins. Co., supra, 345 F.3d at 187-88
101. Port Auth. of N.Y & N.J. v. Affiliated FM Ins. Co., 311 F.3d at 233
195
102.
103.
104.
105.
106.
107.
108.
Azalea, Ltd. v. American States Ins. Co., 656 So. 2d 600 (Fla. Dist. Ct. App. 1995)
Black's Law Dictionary 7th Ed.
World Trade Center Properties, LL C. v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir. 2003)
Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 234 (3d Cir. 2002).
Haman, Inc. v. St. Paul Fire & Marine Insurance Co., 18 F. Supp. 2d 1306, 1308-09 (N.D. Ala. 1998)
Fayad v. Clarendon National Ins. Co., 899 So.2d 1082, 1087-88, n.3 (Fla. 2005)
Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 845 So. 2d 161, 166-68 (Fla.), aff d, 331 F.3d 844 (11th
Cir. 2003)
109. SR Int'l Bus. Ins. Co., Ltd. v. World Trade Center Props., LLC, 381 F. Supp. 2d 250, 261(S.D.N.Y.
2005).
196