MEALEY'S
LITIGATION REPORT
Employer Liability Insurance
Volume 1,
Issue #1
September 2002
|
NEGLIGENT HIRING
/ SUPERVISION HARASSMENT /
DISCRIMINATION / SLANDER / EMOTIONAL DISTRESS EMPLOYEE DISHONESTY
/ FALSE LIGHT CLAIMS EXCLUSIONS /
ENDORSEMENTS COLI / ERISA
PLANS WORKPLACE INJURIES BUSINESS AUTO
/ COMPANY VEHICLES CONSTRUCTION
/ CONTRACTORS
Negligent
Hiring, Supervision AUSTIN, Texas — An employer’s alleged negligent hiring, training and supervision can be an “occurrence” under the terms of a CGL policy, even though an injury was directly caused by an employee’s intentional conduct, the Texas Supreme Court held Aug. 29 (Carlyle King, individually and d/b/a Tiedown Construction Co. v. Dallas Fire Insurance Co., No. 00-1152, Texas Sup.). (Opinion in Section A. Document #59-020920-101Z. King’s Petition for Review in Section F. Document #59-020920-109M. Dallas Fire’s response to King’s petition available. Document #59-020920-010B. King’s brief on merits available. Document #59-020920-011B. Dallas Fire’s response to King’s merits available. Document #59-020920-012B. King’s reply to Dallas Fire’s response available. Document #59-020920-013B. Dallas Fire’s motion for rehearing available. Document #59-020920-014M. King’s motion for rehearing available. Document #59-020920-015M. Dallas Fire’s response to King’s rehearing motion. Document #59-020920-016B. King’s reply to Dallas Fire’s response to King’s rehearing motion. Document # 59-020920-017B.) In concluding that there was an “occurrence,” Justice Craig Enoch, who wrote the Supreme Court’s opinion, reversed the First District Court of Appeals and remanded the case. Assault Alleged Carlyle King is the sole proprietor of Tiedown Construction Co., which removes excess materials from building sites. Dallas Fire Insurance Co. insured King through a CGL policy. Greg Jankowiak, who was an employee of another company working on the same site as King, sued King, claiming that one of King’s employees, Carlos Lopez, assaulted and injured him. Jankowiak also alleged that King was liable for the injuries, not only on the basis of respondeat superior but also because of King’s negligence in hiring, training and supervising Lopez. Dallas Fire refused to defend King because Jankowiak did not allege an “occurrence” within the meaning of the policy. A trial court judge agreed with the insurer; the appeals court affirmed. ‘Occurrence’ Dallas Fire argued that there is no occurrence because the actions of King’s employee, Lopez, were intentional. King responded that Jankowiak’s injuries were not intended and were the result of an accident, triggering the duty to defend. The Supreme Court noted that the insured’s standpoint controls in determining an occurrence. The insurer’s argument that King’s employee’s intent should control the duty to defend not only ignores the policy’s language that delineates between separate insureds but also ignores the intended-injury exclusion provision. “That exclusion, which excludes coverages for injuries ‘intended from the standpoint of the insured,’ would have no purpose if all intended injuries were excluded at the outset from coverage because they would not be an ‘occurrence,’” the court held. Carlyle King and
Tiedown Construction Co. are represented by Earnest W. Wotring of Connelly,
Baker, Wotring & Jackson, David W. Hodges of Mayor, Day, Caldwell
& Keeton, Robert W. Higgason of The Law Offices of Robert W. Higgason
and Richard Gardner Wilson of Chamberlain, Hrdlicka, White, Williams
& Martin. Dallas Fire Insurance Co. is represented by Ronald E.
Tigner and Cynthia A. Holub of Greenberg Peden. All are in Houston.
Professional
Services NEW ORLEANS — A professional services exclusion does not apply to obligations arising out of an underlying personal injury action based on alleged failure to supervise removal of a cement head, the Fifth Circuit U.S. Court of Appeals held Aug. 16, reversing a Louisiana federal judge (Cory Dalton Cochran v. B.J. Services Company USA, et al., No. 01-30640, 5th Cir.). (Opinion available. Document #13-020820-016Z.) Cory Cochran sought coverage for a personal injury negligence action under a policy issued by Mid-Continent Group. Cochran was a derrick hand employed by Nabors Drilling USA. Drillmark Consulting Inc., Nabors and B.J. Services Company U.S.A. contracted with Union Pacific Resources Co. (UPR) to perform various functions on an oil drilling operation. In July 1997, Cochran was injured while removing a cement head owned by B.J. Services from the head’s casing on top of a drilling rig. Cochran’s lawsuit alleges negligence against B.J. Services, Nabors, UPR and Drillmark in that the absence of Drillmark supervisor Roy Springfield constituted a failure to supervise by Drillmark that caused Cochran’s injury. Cochran later added Mid-Continent as a defendant, seeking coverage pursuant to the policy between Mid-Continent and Drillmark. Mid-Continent denied coverage based on a professional services exclusion and moved for summary judgment. The U.S. District Court for the Western District of Louisiana held that the exclusion applied. Cochran, Nabors and Drillmark appealed. Case Law The appeals court noted that it has twice interpreted professional service provisions and in the absence of contradictory authority from the Louisiana Supreme Court, reaffirmed its reading of Louisiana law in Natural Gas Pipeline Co. of Am. v. Odom Offshore Surveys, Inc. (889 F.2d 633, 636 [5th Cir. 1989]) and Thermo Terratech v. GDC Enviro-Solutions, Inc. (265 F.3d 329, 337 [5th Cir. 2001]) that “when an allegedly negligent service performed by a contractor is not of the type recognized as requiring professional expertise or skill, the type of professional services exclusion provision at issue in the instant case will not operate to exclude coverage under a CGL policy for obligations arising from an insured contractor’s performance (or non-performance) of that particular service.” The panel explained that although Drillmark is described as a consulting engineering firm by trade, it is undisputed that Drillmark was not hired in its capacity as an engineering firm per se on the UPR drilling operation to design or approve design of any portion of the operation. ‘Overall Supervisor’ Rather, Drillmark contracted with UPR to be the overall supervisor of company-operated drilling activities and was charged only with monitoring the progress of other contractors and reporting back to UPR. Although Springfield was the “company man” on the UPR site, he testified that he is a nonengineer with a high school education. “Additionally, as the district court noted, undisputed testimony by Drillmark owner Dennis Kruse and Springfield indicated that it was not Drillmark’s job to provide, and Springfield did not provide, any instruction, specialized or otherwise, to contractors on how to accomplish any particular job, including cement head removal. Thus, in contrast to the contractors in Odom and Thermo Terratech, Drillmark did not contract to provide any package of professional services, such as engineering or surveying, to UPR,” the court found. Routine Task Further, other testimony indicated that that removal of a cement head is a routine task that does not require specialized instructions and ordinarily is performed by a cementing or drilling crew that includes nonprofessionals. “It follows that the supervision of (or failure to supervise) cement head removal likewise does not require professional engineering expertise or other expertise of a professional nature. These undisputed facts lead to the conclusion, in accord with our decisions in Odom and Thermo Terratech, that any negligent failure by Drillmark’s company man Springfield to supervise removal of the cement head does not constitute a failure in the rendering of a professional service by Drillmark within the meaning of the Mid-Continent-Drillmark exclusion provision,” according to the Fifth Circuit. The court concluded that “supervisory” within the meaning of the exclusion bars coverage only for obligations arising due to supervision of a professional nature, “thus applying only to supervision requiring a Drillmark employee’s professional or specialized expertise or skill.” Drillmark is represented
by Ronald J. Fiorenze and Andrew E. Schaffer of Provosty, Sadler, DeLaunay,
Fiorenza & Sobel in Alexandria, La. Mid-Continent is represented
by Larry A. Stewart and Andrew P. Texada of Stafford, Stewart &
Potter, also in Alexandria.
Ohio
Appeals Court CLEVELAND — Coverage is precluded for injuries allegedly caused by a former employee’s sexual harassment because the alleged victims did not suffer bodily injury under the policy, an Ohio appeals court affirmed Sept. 5. Further, no coverage exists because the alleged harasser intended harm (Vicki Dunn, et al. v. North Star Resources Inc., et al., No. 79455, Ohio App., 8th Dist.; 2002 Ohio App. LEXIS 4710). (Opinion available. Document #13-020917-104Z.) Vicki Dunn and Jacci Mancini, former employees of North Star Resources Inc., sued North Star and its president, Joyce McLean, alleging sexual harassment by fellow employee Al Bucco. Dunn and Mancini amended their complaint to include declaratory judgment on policies issued by Miami Insurance Co. and Grange Mutual Casualty Co. On cross-motions for summary judgment, a trial court found no duty to indemnify under the policies. Denying a motion for reconsideration, the trial court held that Dunn and Mancini did not suffer bodily injury under Miami’s policy. The appeal to the Eighth District Court of Appeals addressed only the motion as it pertained to Miami. Affirming, the Court of Appeals found that the record indicates that numerous employees informed their supervisors of Bucco’s offensive acts in the office. “Thus, North Star knew of its employee’s sexually harassing behavior, and may be liable for the harm caused by Bucco’s conduct,” according to the court. External Violence However, even if North Star could be legally obligated to pay damages, the insurer has no indemnity obligation unless Dunn and Mancini suffered bodily injury. Pursuant to Dickens v. General Accident Insurance Co. (119 Ohio App.3d 551, 695 N.E.2d 1168 [1997]), Dunn and Mancini must show actual physical injury from external violence, according to the court. “Although Dunn’s affidavit states she suffered ‘physical bodily injury,’ she failed to allege a ‘bodily injury’ covered by Miami,” the court found. “Sickness, vomiting, nausea, dizziness, and headaches may be covered ‘bodily injuries’ if caused by external force, but nowhere in the record did Dunn satisfy this requirement. Consequently, no genuine issue of material fact exists as to whether Miami is obligated to indemnify North Star in relation to Dunn’s complaint. Miami is entitled to summary judgment as a matter of law, and reasonable minds can only come to a conclusion adverse to Dunn.” Accident The court noted that Mancini alleged that she suffered bruises from Bucco and that barring a specific exclusion, Miami would be obligated to indemnify North Star if the bodily injury arose from an occurrence. However, no coverage exists if Bucco intended to harm Mancini or was reasonably certain he would cause her injury by his intentional conduct, the court said. “The sole insurable harm at issue here is the bruises suffered by Mancini. We view this specific harm in the general context of Bucco’s behavior to determine his intent to cause Mancini harm,” according to the court. Bucco’s conduct “clearly demonstrates Bucco intended to harm Mancini or was substantially certain harm would result from his conduct. Thus, the harm caused Mancini by Bucco was not accidental, and no genuine issue of material fact exists as to whether Miami is obligated to indemnify North Star in relation to Mancini’s complaint. Miami is entitled to summary judgment as a matter of law, and reasonable minds can only come to a conclusion adverse to Mancini. Accordingly, the trial court did not err by granting summary judgment in favor of Miami.” Miami is represented by Robert A. Flaugher, D. Wesley Newhouse and Mary Dengler McWilliams of Lane, Alton & Horst in Columbus, Ohio. North Star is represented
by Kerry S. Volsky of Hermann, Cahn & Schneider in Cleveland. Dunn
and Mancini are represented by Patrick J. Perotti of Dworken & Bernstein
in Painse-ville, Ohio.
Commercial
Umbrella Policy MOUNT VERNON, Ill. — There is no duty to defend a gender discrimination lawsuit pursuant to a commercial umbrella policy that excludes liability arising out of discrimination but provides coverage for liability resulting from sexual misconduct, the Fifth District Appellate Court of Illinois ruled July 24 (Larry C. Dobbs, N.D., et al. v. State Farm Fire and Casualty Company, No. 5-00-0817, Ill. App.). (Opinion available. Document #13-020806-023Z.) Gail Hite was terminated from her employment with Southern Illinois Otolaryngology Inc. (SIO) by Dr. Larry Dobbs. Hite sued SIO and Dobbs, alleging gender discrimination. Hite claimed that her employment was terminated because she became pregnant with Dobbs’ child. State Farm Fire and Casualty Co. refused to defend SIO and Dobbs under a commercial umbrella policy. The policy provides coverage for damages because of personal injury, property damage or advertising injury as the result of an occurrence. “Personal injury” is defined to include racial or religious discrimination. A fire endorsement excludes liability arising out of discrimination. However, a sexual molestation endorsement provides coverage for liability resulting from “sexual molestation or sexual misconduct.” SIO and Dobbs sued State Farm, seeking damages for the costs expended in defending Hite’s suit and monetary penalties for a vexatious refusal to defend. The trial court denied State Farm’s motion for summary judgment on the issue of its duty to defend SIO and Dobbs in Hite’s gender discrimination suit. No Ambiguity The appeals court reversed, concluding that gender discrimination is not the same as sexual misconduct. “‘Sexual’ as in ‘sexual misconduct’ refers to prurient conduct of some nature. ‘Sexual’ as in ‘sexual discrimination’ refers to a human’s gender,” the court reasoned. Based on those definitions, the appeals court found that the sexual molestation endorsement is not in conflict with the fire endorsement personal injury exclusions and that the fire endorsement personal injury exclusion unambiguously excludes coverage for discrimination. Because Hite’s complaint alleged gender discrimination and sought only economic damages as a result of such discrimination, coverage for Hite’s claims was excluded under the policy, the court ruled. Dobbs and SIO are
represented by George R. Ripplinger of George Ripplinger & Associates
in Belleville, Ill. State Farm is represented by Stephen W. Thomson
of Thomson Law Offices in Edwardsville, Ill.
New
Jersey Judge Denies NEW BRUNSWICK, N.J. — A New Jersey judge denied a motion to reconsider his adoption of a special master’s recommendation that the law of the jurisdiction of underlying employment-related claims applies to late notice and duty to defend issues (Merrill Lynch, Pierce Fenner & Smith Inc. v. AIU Insurance Co., et al., No. L-6347-99, N.J. Super., Middlesex Co.). (Special master’s letter order, judge’s order adopting recommendation and motion denying reconsideration available. Document #13-020806-021R.) Merrill Lynch, Pierce Fenner & Smith Inc. seeks coverage from numerous insurers for more than 900 individual employment-related gender discrimination claims filed by employees in more than 40 states. Many of the underlying claims were settled by an agreed creation of an ADR process through which each claim was individually evaluated and settled or arbitrated. In cross-motions for partial summary judgment on choice of law as to notice and the duty to defend, Merrill Lynch argued that the law of the state in which each underlying cause of action arose applies, while Atlantic Mutual Insurance Co. contended that New York law applies because it is the state of incorporation and functional home state of both parties, the place of contracting and performance and principal location of the insured risk. The applications were referred to Special Master Richard S. Cohen, who on Feb. 12, recommended that the issues be governed by the law of the jurisdiction in which the underlying cause of action arose. Parties’ Prior History “In my view, the motion record establishes beyond question that Merrill Lynch and Atlantic Mutual implicitly made an effective choice of law, governing late notice and duty to defend, for the administration of these policies; that their choice was made by the manner in which Atlantic Mutual always analyzed and resolved coverage questions over a period of many years, with the acquiescence of Merrill Lynch; that Atlantic Mutual’s choice in every case was to apply the law of the jurisdiction where the cause of action arose, and that there is no reason why the parties should not now continue to follow that choice,” the special master wrote. In none of the cases did Atlantic Mutual indicate an intent to apply New York law to cases arising in other states or to impose a nationwide uniformity of policy interpretation according to the law of any single state, he explained. He found the record clear that “Atlantic Mutual uniformly applied local law, and not New York law, to a broad range of coverage and exclusion questions in about 57 employment and other cases in which Merrill Lynch sought coverage under its 1982-92 liability policies. It did so, not so satisfy Merrill Lynch’s demands, but voluntarily and independently, and presumably because its own interests seemed to be served by doing so.” Atlantic Mutual’s longstanding and consistent position created a reasonable expectation on the part of the insured “and thus constitutes an additional contractual term that becomes part of the insurance contract just as if it were written into the policy.” Actions Taken On April 11, Middlesex Superior Court Judge Mark B. Epstein adopted the special master’s decision. At a June 21 hearing, the insurers’ motion for reconsideration was denied. An appeal for interlocutory review from the state’s Appellate Division has been filed. Merrill Lynch is
represented by Peter J. Kalis, James E. Scheuermann and Carl D. Hill
of Kirkpatrick & Lockhart in Pittsburgh, Matthew L. Jacobs of Kirkpatrick
& Lockhart’s Washington, D.C., office and Andrew T. Berry and
Alissa Pyrich of McCarter & English in Newark, N.J. Atlantic Mutual
is represented by Amy Paulus of Clausen Miller in Chicago and Kevin
E. Wolff and Kevin MacGillivray of McElroy, Deutsch & Mulvaney in
Morristown, N.J.
Employment
Clause VINTON, Iowa — An insurer’s employment practices exclusion is inapplicable, and another carrier waived or is estopped from asserting defenses for coverage, an Iowa judge found Aug. 27. The judge found the insurers obligated for approximately $1.8 million in settlement, interest, costs and fees in an underlying action against a former employer (William C. Talen, et al. v. Employers Mutual Casualty Co., et al., No. LACV-4480-4-99, Iowa Dist., Benton Co.). (Findings of fact, conclusions of law, judgment and decree available. Document #13-020917-101Z.) Minnesota Fire & Casualty Co., now known as Harleysville Insurance Co., issued a business protector program policy to William C. Talen, president and chief executive officer of Farmers Savings Bank & Trust Co., and provided coverage to Talen for specified injuries or damage arising out of his business activities. Farmers is insured under an Employers Mutual Casualty Co. (EMC) CGL policy that also covers Talen for his duties as an executive officer. Duane R. Pearson was a Farmers Savings employee and entered into a separation agreement upon his resignation. Pearson initially sued Talen and Farmers Savings in 1996, alleging that Talen breached the agreement by contacting prospective employers and disclosing confidential information. That petition was amended in May 1997. A subsequent petition filed in September 1997 included allegations of slander and tortious interference. The Pearson action ultimately settled. Benton County District Court Judge Thomas M. Horan, noting that the underlying petitions specifically asserted claims for slander, found that Minnesota Fire and EMC each have an independent duty to defend Talen and Farmers Savings for the claims asserted by Pearson unless the insurers can prove a defense to coverage or liability. Waiver, Estoppel Judge Horan held that Minnesota Fire has waived or is estopped from asserting defenses. Explaining that Minnesota Fire initially agreed to handle the defense, the judge rejected “as implausible Minnesota Fire’s attempt to characterize its agreement to ‘handle’ the defense as a denial of coverage. Indeed, the very reason for giving an insurer notice of claim is to provide the insurer ‘the opportunity to handle the defense’ [citation omitted]. Minnesota Fire did not fulfill its agreement to defend. Therefore, as a result of this breach, Minnesota Fire has waived its right, or is estopped from asserting, coverage defenses.” The judge rejected the insurer’s notice argument pertaining to the 1997 petition. Minnesota Fire did not dispute that it had proper notice of the claims in the 1996 petition and the amended petition. “The claims in the 1997 petition are all contained in the proposed amended petition. Minnesota Fire considered and relied upon all of the claims and allegations in the proposed amended petition when it denied coverage in July 1998. Because Minnesota Fire had a copy of the specific allegations against Mr. Talen, Minnesota Fire was able to determine the potential for coverage under its policy for Mr. Pearson’s specific claims,” the judge found. The judge also held that Talen qualified as an insured and that Minnesota Fire’s “other insurance” clause does not apply. He said the insurer not only waived exclusions for injury caused by an intent to do harm by knowingly making false statements and by willful violation of a penal statute but also failed to prove that the exclusions applied. Further, Minnesota
Fire’s failure to defend the Pearson litigation was knowingly unreasonable
because it had agreed to handle the defense in a May 1996 letter. EMC’s Employment Practices Exclusion The judge found no basis for applying exclusions for acts intending harm or willful violations of a penal statute as to EMC’s policy and that the insurer did not plead the knowingly false statement exclusion in its defenses. As to EMC’s employment practices exclusion, the judge said it applies only to claims that are directly and proximately employment-related. “Mr. Pearson did not seek any damages based upon his employment at Farmers Savings,” Judge Horan explained. “He sought damages for failure to be hired by a subsequent employer based on post-employment defamation. The ERP exclusion does not exclude coverage under those circumstances and, therefore, does not apply to the Pearson litigation.” Further, the exclusion is ambiguous and inapplicable as to invasion of privacy and disparagement allegations that are other types of personal injury not enumerated in the policy. Finding that EMC also breached its policy, the judge said EMC did not have a reasonable basis for refusing to defend and indemnify. “EMC knew or should have known that it unreasonably failed to defend or settle the Pearson litigation beginning in May 1996. EMC followed a consistent corporate policy of denying all claims that had any connection with employment, contrary to its policy obligations. Nothing in the petition or the information known to EMC at the time of its denial showed that Mr. Pearson’s claims arose out of employment-related acts or practices of Farmers Savings. Nevertheless, EMC refused to defend on this basis. Two other insurers, who were similarly situated, properly defended the Pearson litigation. Under these circumstances, EMC is liable for insurance bad faith,” Judge Horan held. Talen and Farmers
are represented by Murray D. Sacks, Andrew M. Reidy and Cass W. Christenson
of McKenna Long & Aldridge in Washington, D.C., and Eugene J. Kopecky
of Ackley, Kopecky & Kingery in Cedar Rapids, Iowa. Minnesota Fire
is represented by Michael J. Coyle of Fuerste, Carew, Coyle, Juergens
& Sudmeter in Dubuque, Iowa. EMC is represented by Lorraine J. May
of Hopkins & Huebner in Des Moines, Iowa.
No
Duty To Defend WASHINGTON, D.C. — An underlying action alleging inadequate representation and intentional infliction of emotional distress does not give rise to a duty to defend under a policy providing personal injury liability coverage, the District of Columbia Court of Appeals affirmed July 25 (Air Line Pilots Association v. Twin City Fire Insurance Company, No. 99-CV-1726, D.C. App.; 2002 D.C. App. LEXIS 391). (Opinion available. Document #13-020806-022Z.) Air Line Pilots Association (ALPA), a labor union, represented David Zumbrun in a grievance arbitration proceeding arising from Delta Airlines’ refusal to reinstate him after a leave of absence. Zumbrun did not prevail in the arbitration. Zumbrun sued ALPA, alleging that ALPA breached its duty to represent him fairly by conspiring with Delta to permit his discharge and alleging intentional infliction of emotional distress. Zumbrun’s complaint requests “compensatory damages for losses resulting from embarrassment, humiliation, mental anguish, and emotional distress.” Twin City Fire Insurance Co. refused to provide a defense for ALPA under a policy that provides personal injury liability coverage for ALPA. The policy lists covered “offenses” that constitute personal injury, including “discrimination or humiliation.” The policy’s Special Broad Form provides coverage for “discrimination or humiliation that results in injury to the feelings or reputation of a natural person” as the result of unintentional conduct. ALPA filed this action against Twin City for breach of contract. The trial court granted Twin City’s motion for summary judgment, concluding that Zumbrun’s complaint did not allege a personal injury cause of action covered by the policy. Specific Pleading Required The appeals court affirmed, finding that the complaint did not state a cause of action for humiliation. The court noted that under Virginia law, coverage is determined by the legal claims or causes of action that have been specifically pleaded in a complaint. In the instant case, the court found that the complaint mentions “humiliation” in the prayer for relief only. “Our interpretation that the complaint’s mention of humiliation was a description of injuries suffered, as opposed to a recognized tort claim, may appear to render the coverage provision for humiliation a nullity.” The appeal court continued, “We think, however, that a common sense reading of the language in the contract makes sense when humiliation, which is not a known tort, is read in the context of discrimination, which can be plead as a substantive claim.” Similarly, the court ruled that Twin City did not have a duty to defend ALPA against Zumbrun’s intentional infliction of emotional distress claim. Because the complaint accused of ALPA of engaging in intentional conduct calculated to cause Zumbrun emotional distress, the court concluded that Zumbrun was charging ALPA with intentional conduct, rather than unintentional or negligent conduct that might arguably be covered by the policy. Twin City is represented
by Thomas S. Schaufelberger and Christopher A. Glaser of Wright, Robinson,
Osthimer & Tatum in Washington. ALPA is represented by Jerry D.
Anker and James K. Lobsenz of the Air Line Pilots Association in Washington.
Alleged
Theft Of SACRAMENTO, Calif. — Finding property interest in an insured’s alleged trade secret information to be intangible, a federal judge on July 10 found no coverage under policy language for “direct physical loss” to “covered property” (Knuth Hinge Co., Inc. v. Travelers Indemnity Company of Illinois, et al., No. CIV S-01-424 FCD GGH, E.D. Calif.). U.S. Judge Frank C. Damrell Jr. of the Eastern District of California granted summary judgment to Travelers Indemnity Company of Illinois and Travelers Property Casualty Corp. (Opinion in Section D. Document #13-020903-018Z. Memorandum of points and authorities in support of Travelers motion for summary judgment or, in the alternative, partial summary judgment available. Document #59-020920-025M. Knuth’s points and authorities in opposition to Travelers’ motion for summary judgment or, in the alternative, for partial summary judgment available. Document #59-020920-026B. Reply brief in support of Travelers’ motion for summary judgment or, in the alternative, partial summary judgment available. Document #59-020920-027B.) Knuth Hinge Co. Inc. seeks coverage from Travelers for an underlying action involving the alleged theft of trade secret information by three former Knuth employees. Knuth also asserts that it is entitled to punitive damages. In March 2000, Knuth discovered that the former employees were using its alleged trade secrets by calling Knuth’s customers and advising them that the new company could manufacture the same devices for less than Knuth was charging. Travelers’ policies include “Buildings” and “Business Personal Property” in their definition of “Covered Property.” Under “Additional Coverages,” the policies provide that “We will pay for loss or damage to Business Personal Property resulting directly from ‘Employee Dishonesty.’” Travelers denied coverage, saying “proprietary information” and/or “trade secrets” do not constitute “covered property” under its policies. Arguments Moving for summary judgment, Travelers argued that neither of the intangible business interests asserted by Knuth — the confidential nature of information and the patronage of customers — can reasonably be said to be “property” that can sustain a “direct physical loss or damage” and neither constitutes buildings or business personal property. Knuth contended that Travelers imports the term “tangible” to modify “Covered Property” and that the definition of “Covered Property” does not contain such a restriction. Knuth further argued that “Business Personal Property” includes trade secrets. ‘Direct Physical Loss’ Judge Damrell agreed with Knuth that the definition of “Business Personal Property” does not restrict it to physical or tangible property. However, the policies provide only for “direct physical loss of or damage to Covered Property,” the judge held, and distinguished this case from Hughes v. Potomac Ins. Co. (199 Cal. App. 2d 239, 18 Cal. Rptr. 650 [Cal. Ct. App. 1962]), on which Knuth relied. “If read broadly, Hughes could stand for the proposition that ‘loss of use’ of property can constitute a direct physical injury,” Judge Damrell said. “However, like the other cases cited by Knuth, Hughes involved a loss to a physical structure. In this case, Knuth’s property interest in its alleged trade secret information is intangible.” Moreover, Knuth does not allege that it physically lost the alleged trade secrets. “On the contrary, Knuth still has possession of the alleged trade secret information,” the judge pointed out. Extra Expenses / Employee Dishonesty Also, because Knuth did not suffer a direct physical loss, it cannot recover “extra expenses,” such as attorneys’ fees under the “Additional Coverages” section, the judge held. The provision entitling Knuth to payment for damage to “Business Personal Property” resulting from “Employee Dishonesty” does not specifically reference direct physical loss, the judge said. “Reading the insurance contract as a whole, the court finds that the contract makes more internal sense to read ‘damage to Business Personal Property’ as incorporating the term ‘direct physical loss,’ ” Judge Damrell said. “As such, Knuth has not suffered [a] direct physical loss to its Business Personal Property.” Bad Faith The judge also rejected Knuth’s claims that Travelers committed bad faith by not consulting independent coverage counsel before denying its claim and not investigating whether the alleged thieves were employees at the time of the theft. He ruled that “it is clear” that Travelers did consult coverage counsel. In addition, Judge Damrell said that “a genuine dispute did exist over the provisions of the policy. As such, Travelers’ denial of the claim, and its failure to investigate further, do not constitute bad faith.” As for Knuth’s fraud and negligent misrepresentation claims, the judge said the company owner’s deposition testimony “makes clear” that Travelers nor anyone else made any representation to him regarding coverage of misappropriation of trade secrets by employees. Regarding Knuth’s claim of intentional infliction of emotion distress, the judge noted Dynamic Image Tech., Inc. v. United States (221 F.3d 34, 37 n.2 [1st Cir. 2000] and FDIC v. Hulsey (22 F.3d 1472, 1489, [10th Cir. 1994]), which held that corporations may not maintain such actions. “The court finds this persuasive authority and finds that Knuth cannot maintain an action for intentional infliction of emotional distriess since it is a corporation,” he said. Knuth Hinge is represented
by James Franklin Kemp of Kemp and Kemp in Sonoma, Calif. Travelers
is represented by Thomas Holden of Morison-Knox Holden Melendez and
Prough in Walnut Creek, Calif.
Discovery
Request ‘Not BALTIMORE — An insurer’s request for additional discovery was rejected by a federal judge Aug. 29 because the allegations of the underlying complaint and the policy provisions used to determine a duty to defend are already in the insurer’s possession (Applied Signal and Image Technology, Inc. v. Harleysville Mutual Insurance Co., No. CCB-02-1944, D. Md.; 2002 U.S. Dist. LEXIS 16293). U.S. Judge Catherine C. Blake of the District of Maryland denied the insurer’s motions for extensions of time but allowed the carrier to respond to the plaintiff’s motions for summary judgment. (Opinion and order available. Document #59-020920-005Z.) Applied Signal and Image Technology Inc. (ASIT) sued Harleysville Mutual Insurance Co. for attorneys’ fees and costs incurred in defending a suit filed by Joseph Hejl, a shareholder and former corporate officer of ASIT. ASIT asserts that Harleysville’s duty to defend was triggered by a “false light” claim. Harleysville denied a duty to defend based on its employment-related practices exclusion. ASIT moved for summary judgment on the duty to defend; Harleysville moved for the extension of time to respond. Duty To Defend ‘Test’ Harleysville sought discovery regarding “the nature of the [Hejl] litigation, the pleadings filed in court, [and] all work or tasks performed in defense of the suit.” However, Judge Blake said the information Harleysville seeks is “not essential to determine” whether Harleysville has a duty to defend. The court need only look to the allegations in the complaint and the coverage provisions of the policy, “both of which are already in the possession of [ASIT],” Judge Blake said, denying the motion to extend time. Applied Signal is
represented by Peter H. Gunst, Donna M.D. Thomas and Jonathan F. Monheit
of Astrachan Gunst Thomas and Ahn in Baltimore. Harleysville Mutual
is represented by William Carlos Parler Jr. of Parler and Wobber in
Towson. Md.
Fact
Issue Exists DALLAS — Fact issues exist as to whether a man killed by an elephant was an employee of a circus and whether a “fellow employee” exclusion applies, a federal judge held Sept. 4 (St. Paul Surplus Lines Insurance Co. v. Clyde Brothers Johnson Circus Corp., et al., No. 3:01-CV-0443-P, N.D. Texas). (Memorandum opinion and order available. Document #13-020917-103Z.) St. Paul Surplus Lines Insurance Co. seeks a declaration that it is not obligated to defend or indemnify Clyde Brothers Johnson Circus Corp. under a CGL policy for an underlying action. In May 1999, a performing elephant leased to Clyde Brothers by defendant intervenor Miller Equipment Co. killed Shayne Gressett. Lena Nolan, individually and as the representative of Gressett’s estate, sued Clyde Brothers, Don and Shane Johnson and Bob Gibbs for negligence. Nolan is an intervenor in this action. Moving for summary judgment, St. Paul argued that Gressett was an employee of Clyde Brothers and not covered under the policy. However, Nolan countered that Gressett was not an employee and provided statements from Gibbs denying that Gressett was his assistant and that there were certain tasks Gressett could not do because he was not a regular employee. Further, Nolan argued that Gressett was not an employee but merely a friend of Shane Johnson who had time off and wanted to travel. In addition, although a Clyde Brothers employee said Gressett was paid weekly by Shane Johnson, testimony by Gibbs and Don Johnson indicates that Gressett was not paid, according to U.S. Judge Jorge A. Solis of the Northern District of Texas. “Because the specific facts show the case presents a genuine issue of material fact, Plaintiff, Defendant’s and Intervenor’s Motions for Summary Judgment are denied as to the issue of Gressett’s employment status,” the judge held. Fellow Employee Exclusion St. Paul’s policy excluded coverage to any employee or volunteer worker for bodily injury or personal injury to any fellow employee, any fellow volunteer worker or any of the insured’s employees. “The use of the word ‘fellow’ preceding employee and volunteer makes it clear that the first listed exclusion applies to employees and the second to volunteers,” the judge said. “Thus, according to the Court’s interpretation of the CGL Policy, no employee is covered for an injury to a fellow employee and no volunteer is protected for injury to either a fellow volunteer or an employee. If the jury determines that Gressett was a volunteer worker, then St. Paul has a duty to defend and indemnify Shane Johnson, Don Johnson and Gibbs because there is no exclusion for an employee injuring a volunteer worker.” The judge explained that if the jury finds that Gressett was an employee, the clause applies because this is a case of an employee injuring a fellow employee. Officers Further, finding that Clyde Brothers is a corporation, the judge held that Don Johnson is an executive officer and subject to an executive officer exemption. But the judge found insufficient evidence to support the argument that Shane Johnson was an officer at the time of the accident. “Therefore, if the jury finds that Gressett was an employee of Clyde Brothers, then having resolved the issue pertaining to the executive officer’s exemption, St. Paul would have the duty to defend or indemnify Don Johnson. However, St. Paul would not have the duty to defend or indemnify Gibbs or Shane Johnson because they are not executive officers and they fall within the fellow employee exclusion.” Clyde Brothers, the Johnsons and Gibbs are represented by Allen R. Weed of Dallas. Nolan is represented by David H. Hill and James A. Holmes of Wellborn Houston Adkison Mann Sadler & Hill in Henderson, Texas. St. Paul is represented
by J. Hampton Skelton and Kyle M. Jones of Skelton Woody & Arnold
in Austin, Texas.
‘Independent
Acts’ NEW ORLEANS — Although an equipment company is an additional insured under a CGL policy of the company to which it leased equipment, no coverage exists for an underlying personal injury complaint against it that asserts liability based upon the “independent acts” of the equipment company, a Louisiana federal judge held Sept. 4 (Eddie Edwards v. Brambles Equipment Services, Inc., No. 01-0892, Section “L” 2, E.D. La.; 2002 U.S. Dist. LEXIS 16718). U.S. Judge Eldon E. Fallon of the Eastern District of Louisiana denied the equipment company’s motion for summary judgment and dismissed with prejudice the company’s claim against Travelers Indemnity Co. (Opinion available. Document #59-020920-023Z.) Eddie Edwards was employed by Laiche and Co. and was painting light poles when he was injured while using a man lift owned by Brambles Equipment Services Inc. Pursuant to a rental agreement, Brambles leased the man lift to Laiche. Edwards sued Brambles for damages, alleging that his injuries were caused by Brambles’ negligence, including its alleged failure to discover and to warn of the defective condition of the man lift and failure to maintain it. Brambles filed a third-party complaint against Travelers for coverage. The District Court severed the third-party demand from the original claim, which ultimately settled, leaving only the action against the insurer’s additional insured endorsement. Judge Fallon found that Brambles must be considered as an additional insured even though it was not specifically named because the written contract with Laiche required Laiche to “protect the Company with comprehensive general liability insurance” and Brambles qualifies under the terms of this agreement. However, the judge noted that it does not automatically follow that coverage exists for this claim. An policy endorsement provides that coverage is limited to “liability arising out of ‘your work,’” referring to the work of the insured, Laiche, he pointed out. The next sentence in the endorsement specifically states that “this coverage does not include liability arising out of the independent acts or omissions of [the additional insured].” It is “well settled” that a limitation on liability, such as “arising from the insured’s operation” or “arising from insured’s work” in an additional insured endorsement will nevertheless provide coverage to an additional insured, “even if the additional insured is solely negligent,” Judge Fallon said, pointing to several cases. Vicarious Liability Not Alleged However, the judge distinguished those cases because they involve direct relationships between the insured and the person claiming status as an additional insured. “In the present case, there was no such direct relationship between Brambles (who claims status as an additional insured) and Laiche (the insured). Rather, the insured, Laiche, was performing work for an unrelated company when the accident occurred which caused injuries to the plaintiff,” Judge Fallon said. “In this case, Edwards complaint does not allege vicarious liability of Brambles due to acts or omissions of Laiche,” the judge said. “Rather, the only allegation of vicarious liability refers to Brambles’ liability for acts and omissions of its employees, not of Laiche. In fact, no basis exists for Brambles to be vicariously liable for the acts of Laiche because no employer-employee relationship exists between the two.” Because Edwards did not allege vicarious liability to Brambles for the acts of Laiche, the exclusionary language in the additional insured endorsement excludes coverage to Brambles, Judge Fallon concluded. Edwards is represented
by Robert Hugh Murphy, Gary Joseph Gambel and Scott E. Oliphant of Murphy,
Rogers & Sloss in New Orleans. Brambles is represented by Robert
I. Siegel and William Matthew Blackston of Hoffman, Siegel, Seydel,
Bienvenu, Centola & Cordes in New Orleans. Travelers is represented
by Simeon B. Reimonenq Jr. of Lugenbuhl, Wheaton, Peck, Rankin &
Hubbard in New Orleans.
Insurer
Has Duty To MINNEAPOLIS — An insurer has a duty to defend a day care facility for an underlying action under a day care endorsement but not to defend the former teacher’s aide who allegedly abused a minor, a federal judge held Aug. 29 (Capitol Indemnity Corp. v. Especially For Children Inc., et al., No. 01-2425, D. Minn.). (Memorandum opinion and order available. Document #13-020917-011Z.) Capitol Indemnity Corp. seeks a declaration that it has no obligation to defend or indemnify Especially for Children Inc. (EFCI) for an underlying personal injury action involving sexual abuse against the child care facility. In the underlying action, E.L. and P.L., individually and as the parents of a minor child, T.L, allege that former teacher’s aide Scott Hudlow sexually abused T.L. at an EFCI facility. Capitol is defending the action under a reservation of rights. On cross-motions for summary judgment, the insurer argued that the alleged abuse did not occur during the policy period or, if it did, that exclusions apply. EFCI countered that Capitol cannot, at this juncture, show that the abuse occurred outside the policy period. On the duty to defend, U.S. Judge Richard H. Kyle of the District of Minnesota found fact issues as to when the abuse occurred and that a reasonable jury could find that Hudlow abused T.L. during the policy period and found that Capitol is not entitled to summary judgment on that ground. Day Care Endorsement EFCI argued that coverage exists under a day care endorsement because the underlying claim is for damages arising out of the rendering or failure to render professional services in the conduct of the day care facility. Judge Kyle found that as a day care provider, EFCI provided professional services by offering the parents a place to take T.L. each day where she was to be cared for by qualified teachers and aides. “In their negligence claims, Claimants allege that EFCI failed to perform certain duties in the hiring and supervising of Hudlow as well as in the caring for T.L. These failures stem directly from the duties EFCI should have performed, and accordingly, the negligence claims can only be described as falling within the scope of the failure to render professional services. As to the negligence claims, the Court concludes that the Day Care Endorsement provides coverage,” the judge held. Capitol contends that its abuse exclusion modifies the day care endorsement so that the day care endorsement does not apply if the abuse exclusion applies. EFCI argued that the day care endorsement supercedes the abuse exclusion. The judge noted that the broader day care endorsement governs to the extent that it conflicts with the abuse exclusion or the intentional exclusion. “Therefore, the Court need not reach the issue of whether the Abuse Exclusion or Intentional Exclusion applies to the claims against EFCI because if the exclusions did apply, they would be superceded by the coverage provided for under the Day Care Endorsement. EFCI has met its burden of showing that at least some of the claims against it in the underlying state action are potentially covered by the Policy. The claims arguably fall within the policy period, and coverage is provided for the negligence claims under the Day Care Endorsement. Accordingly, Capitol has a duty to defend EFCI in the underlying action,” Judge Kyle held. The indemnity issue is not ripe for decision, the judge added, because of the questions surrounding when the abuse occurred. Claims As To Hudlow Capitol also moved for summary judgment, arguing that it is not obligated to Hudlow because the claims against him are not covered by the policy. EFCI and Hudlow are treated separately under the policy, and the claims against Hudlow include negligent infliction of emotional distress and for battery. The judge found that the claims against Hudlow are not covered by the day care endorsement because they are not related to the professional services the endorsement is meant to cover. However, the abuse exclusion applies to bar coverage for claims against Hudlow. “A review of the underlying complaint reveals that the claims against Hudlow arise out of the alleged sexual abuse of T.L. In fact, as recited in each specific count, both claims stem directly from the alleged sexual abuse that is specifically described in the general allegations section of the underlying complaint,” the judge found. Capitol is represented
by Joseph A. Nilan and Craighton T. Boates of Gregerson, Rosow, Johnson
& Nilan in Minneapolis. EFCI is represented by Jeanne Hvass Unger
and Kimberly T. Ross of Rider, Bennett, Egan & Arundel in Minneapolis.
Hudlow is represented by Patrick V. Johnson of Speeter, Johnson, Hautman
& Hamilton in Minneapolis.
Wal-Mart
Files Complaint WILMINGTON, Del. — Wal-Mart Stores Inc. has filed a complaint against two insurance companies, several brokers and other companies, alleging that they “misrepresented and failed to disclose material information” gained through their involvement in developing, promoting, recommending, advising, selling and administering corporate-owned life insurance (COLI) policies to Wal-Mart, resulting in the retailer losing more than $135 million (Wal-Mart Stores Inc. v. AIG Life Insurance Company, a Delaware corporation; Hartford Life Insurance Company, a Connecticut corporation, et al., No. 19875-NC, Del. Chanc., New Castle Co.). (Complaint in Section G. Document #59-020920-119C.) The complaint, filed Sept. 3 in the New Castle County, Del., Chancery Court, alleges unjust enrichment and misrepresentation, among other counts. Named defendants are AIG Life Insurance Co., Hartford Life Insurance Co., Westport Management Services Inc., which designed, marketed and administered the COLI plans for AIG, and International Corporate Marketing Group, which designed, marketed and administered the COLI plans for Hartford. The other defendants, National Benefits Group Inc., dba Marsh Financial Services, Seabury & Smith Inc., Marsh Inc. and Marsh & McLennan National Marketing Corp., now known as J&H Marsh & McLennan Private Client Services Inc., provided professional insurance brokering and consulting services to Wal-Mart in connection to the purchase of the AIG and Hartford COLI plans and are collectively known as the “broker defendants.” COLI Plans Purchased According to the complaint, for three years, starting in December 1993, Wal-Mart purchased COLI plans underwritten by AIG and Hartford insuring certain of its associates. The COLI plans were to provide life insurance on “broad classes” of management and nonmanagement associates, which permitted Wal-Mart to provide such associates with certain free death benefits, while providing Wal-Mart with “substantial tax savings and cash flow advantages” that ultimately would accrue to the benefit of Wal-Mart and its associates. In total, 354,626 full-time Wal-Mart associates ultimately were covered by the AIG Life and Hartford COLI plans. The COLI plans were designed, promoted, sold and purchased “with the understanding, by all parties” that the insurance policies would comply with state insurance laws and would satisfy applicable Internal Revenue Service (IRS) regulations, the company contends. ‘Arcane And Complicated Intricacies’ According to the company, the defendants promoted the COLI plans to Wal-Mart as a “commonplace, low-risk means” of generating annual positive cash flow, primarily through the favorable tax treatment afforded life insurance, including the deductibility of interest payments made by Wal-Mart on policy-based loans from the insurer defendants, the tax-deferred “inside build-up” of policy values and the tax-exempt receipt of policy benefits upon the death of a covered associate. In developing, promoting, recommending, advising, selling and administering the COLI plans to Wal-Mart, each of the defendants “held itself out as an expert in the complex area of COLI plans, intended for Wal-Mart to rely on such expertise, understood that Wal-Mart was reasonably relying on their expertise in this area, and owed Wal-Mart a duty to make full, fair and prompt disclosure of all material information relative to Wal-Mart’s decisions to evaluate, purchase, continue and terminate the COLI plans,” the company alleges. “Wal-Mart is a large and sophisticated company; however, at all times pertinent, Wal-Mart did not have internal expertise in the arcane and complicated intricacies of broad-based COLI plans,” the company asserts. “Instead, Wal-Mart relied on defendants’ expertise in connection with the AIG Life and Hartford Life COLI policies.” Changes In Tax Law, ‘Insurable Interest’ The COLI plans failed in their fundamental purpose, Wal-Mart asserts. First, as a result of the changes in the tax laws and challenges by the IRS to broad-based COLI plans that Wal-Mart and “many other large corporations” bought, the tax benefits essential to the viable funding of the COLI plans have been disallowed. Recently, under threat of litigation, Wal-Mart concluded a settlement with the IRS in which substantial tax benefits contemplated by the COLI plans were disallowed, the company asserts. Second, Wal-Mart’s COLI plans and similar COLI plans have been challenged by employees and their estates questioning whether the companies/employers had an “insurable interest” in the lives of employees coverage by broad-based COLI plans, the company maintains. These cases have resulted “in a number of rulings” requiring employers to disgorge, or hold in constructive trust, policy proceeds in favor of the employee estates, the company asserts. “Accordingly, death benefits that were intended to flow to the employer/company have instead been redirected by the courts to the employees and their estates,” the company alleges. Recently, in a putative class action on behalf of Texas citizens covered under the AIG and Hartford COLI plans, the U.S. District Court of the Southern District of Texas, entered an order in Mayo v. Hartford Life Ins. Co., et al. (No. H-01-2139 [S.D. Tex, Aug 8, 2002]), finding that Wal-Mart lacked an “insurable interest” in the life of one of its former employees. Another putative class action was recently filed on behalf of New Hampshire citizens covered under Wal-Mart’s COLI plans in the Merrimack County, N.H., Superior Court, the company asserts, citing Rice v. Wal-Mart Stores, Inc., et al. (No. To Be Assigned [N.H. Sup. Ct., Merrimack Co., July 23, 2002]). Counts / Relief Sought To date, Wal-Mart calculates its losses to be more than $80 million (not including tax deduction disallowances) as a result of the failure of the AIG COLI plan and more than $55 million (not including tax deduction disallowances) as a result of the failure of the Hartford COLI plan. “In stark contrast,” Wal-Mart estimates that the defendants collectively were enriched through profits of more than $100 million as a result of developing, promoting, recommending, advising, selling and administering the failed AIG Life and Hartford Life COLI plans. Wal-Mart cites six counts: unjust enrichment and restitution against all defendants, breach of fiduciary duty against all defendants, misrepresentation against all defendants, breach of contract against all defendants, professional negligence against the broker defendants and declaratory relief against all defendants. Wal-Mart Stores
Inc. is represented by Robert K. Payson and Gregory A. Inskip of Potter
Anderson & Corroon in Wilmington and Michel Y. Horton of Zevnik
Horton in Los Angeles and Paul A. Zevnik of Zevnik Horton in Washington,
D.C.
Sponsor’s
Insurance Policy CHICAGO — An “executive protection policy” did not cover benefits a plan sponsor agreed to pay in settlement of two class action suits because the policy excluded suits seeking benefits due under the plan’s terms, the Seventh Circuit U.S. Court of Appeals ruled Aug. 19 (May Department Stores Company, et al. v. Federal Insurance Company, et al., No. 01-3861, 7th Cir.; 2002 U.S. App. LEXIS 16638). (Opinion available. Document #54-020910-023Z. Appellants’ brief available. Document #54-020910-024B. Federal Insurance Co.’s brief available. Document #54-020910-026B. National Union’s brief available. Document #54-020910-025B. Appellants’ reply brief available. Document #54-020910-027B.) Underlying Lawsuits May Department Stores Co. and May Department Stores Company Retirement Plan were insured under an “Executive Protection Policy” issued by Federal Insurance Co. and National Union Fire Insurance Co. The policy gave May or the plan $25 million in insurance coverage for liability resulting from “any breach of the responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan [the May plan] by [ERISA]” unless the breach is “willful” or unless the loss for which liability is sought “constitutes benefits due or to become due under the terms” of the plan. Within the two-year period in which the policy was in effect, May and the plan were sued together in two class actions brought by plan participants. The first complaint alleged that the interest rate specified in the plan for converting an annuity to a lump sum when an employee who is vested leaves May’s employment before reaching retirement age did not produce an actuarial equivalent as required by ERISA Section 204(c)(3). The second complaint alleged that the plan violated 29 Code of Federal Regulations Section 2530.203-3 by failing to notify employees who continued to work after retirement age that they would not receive benefits until they retired and, once they did retire, would not receive additional benefits to make up for the delay in receiving benefits. Both suits were settled for more than $25 million. Basis Of Liability The U.S. District Court for the Southern District of Illinois granted summary judgment to the insurers, ruling that the suits sought plan benefits and, therefore, that the amount for which May settled was excluded from coverage under the policy. May appealed, contending that the legal basis of the claims were ERISA and regulations issued under ERISA, not plan language. Therefore, according to May, the claims did not come within the policy’s exclusion. The Seventh Circuit disagreed. The appeals court explained that “[t]he benefits sought were plan benefits; the question was how to compute them. The answer was given by ERISA, but that is just to say that, like many other contracts, pension plans governed by ERISA contain provisions implied by law.” The court rejected May’s argument that if the policy did not cover the amounts paid in the settlement, its coverage was illusory. The court noted that because May directs the investments of the plan’s assets, violations of the rules regulating trust investments would be covered by the policy. The court also rejected May’s distinction between an award of benefits and equitable relief because the participants could obtain all the relief they were seeking in a suit for benefits. Jurisdiction Addressing jurisdiction, the court found that the presence of the plan as a party destroyed complete diversity. The court said it was “inclined” to “dismiss the present suit rather than to drop the plan as a party” because of the possibility of a second suit brought by the plan. However, because the plan “has committed itself in writing to abide by whatever judgment we issue, so there is no danger of a second, identical suit,” the court dismissed the plan from the suit “by agreement of the parties concurred in by this court.” May and the plan
are represented by Wil- liam P. Skinner of Covington & Burling in
Washington, D.C. Federal Insurance Co. is represented by Matthew J.
Verschelden and Don M. Downing of Stinson Morrison Hecker in Kansas
City, Mo., and St. Louis. National Union Fire Insurance Co. is represented
by Lisa A. Pake of Haar & Woods in St. Louis.
2nd
Circuit Affirms Duty NEW YORK — The Second Circuit U.S. Court of Appeals on Sept. 6 affirmed that a potential for coverage exists under workers’ compensation and employer liability insurance policies that gives rise to a duty to defend toxic tort claims and that those policies are primary to other insurance (International Business Machines Corp., et al. v. Liberty Mutual Fire Insurance Co., et al., No. 01-9065, 2nd Cir.). (Opinion available. Document #03-020917-106Z.) Liberty Mutual Insurance Co. appealed a ruling obligating it to defend an underlying action arising out of employees’ exposure to toxic chemicals and that policies of another insurer are excess to its policies. Second Generation Claims In 1996, International Business Machines Corp. (IBM) began to face suits by current and former employees alleging that they were injured while working at IBM facilities. The claimants also include children of employees who claim that they, too, were injured because of their parents’ exposure to chemicals before conception and during gestation. The suit in question, referred to as the Ruffing action, was filed in 1996. A claim by infant Zachary Ruffing was severed for expedited discovery and trial. In response to an interrogatory, Ruffing’s mother said she was not claiming bodily injury to herself at that time but stipulated that she was not waiving any right to assert such a claim later. IBM moved to dismiss Zachary’s “pre-conception” tort claim, claiming that the parents did not suffer any injury. The district court denied the motion. Zachary’s claims were eventually dismissed pursuant to a settlement. IBM then sought to recover defense costs from its insurers. Liberty and Liberty Mutual Fire Insurance Co. issued workers’ compensation and employers liability policies to IBM. The policies provide coverage for damages because of bodily injury to IBM’s employees, including bodily injury to a spouse, child, parent, brother or sister of the injured employee if the damages are the direct result of bodily injury arising out of and in the course of the injured employee’s employment by IBM. In addition, Zurich Insurance Co. had issued to IBM a series of general liability policies from 1962 to 1995. Zurich acknowledged that some policies covered IBM’s defense costs. IBM sought partial summary judgment on the duty to defend, and Zurich moved for summary judgment, asking for a declaration that its coverage is excess to Liberty’s policies. The U.S. District Court for the Southern District of New York ruled in their favor. As to the duty to defend, the court found that the underlying complaint establishes at least a potential for covered claims giving rise to Liberty’s duty to defend the underlying suit. Allegations Of Complaint On appeal, Liberty argued that the underlying complaint alleges only parental exposure and not injury to Zachary’s parents. Therefore, it has no duty to defend. The inconsistency in the complaint does create ambiguity as to whether coverage exists where in one paragraph parent plaintiffs allege only exposure and in another all plaintiffs claim injury as a result, the Second Circuit said. However, the underlying complaint alleges at least the “reasonable possibility” or “potential” that it could be determined that Zachary’s parents were employed by IBM or both parents suffered bodily injury due to workplace exposure to chemicals and that Zachary suffered bodily injury as a result of his parents’ injury, it said. The court noted that the plaintiffs claim that “as a result of exposure to said chemicals, the plaintiffs suffered . . . [and] will continue to suffer, serious injury, illness and disease.” Therefore, Zachary’s mother who is part of the group of plaintiffs, expressly alleged injury due to toxic exposure. Extrinsic Evidence Liberty further argued that extrinsic evidence compels a finding that it has no duty to defend. However, according to the appeals court, there is no consistent rule under New York law allowing an insurer to use extrinsic evidence to deny coverage. Nevertheless, the extrinsic evidence offered by Liberty fails to eliminate a “reasonable possibility” of coverage, the Second Circuit said. Other Insurance Zurich’s policies contained one form or another of an “other insurance” clause, providing that these policies shall be excess over any other insurance. Liberty’s polices also contained such a clause providing for a pro rata sharing of covered liability. IBM is entitled to coverage under a Liberty policy and another issued by Zurich, while other Zurich policies are excess to Liberty’s policies and are triggered only if and when Liberty’s coverage has been exhausted, the court said. “[T]he New York rule is that the insurer with the pro rata clause (Liberty Mutual) loses. It becomes the primary insurer and the insurer with the excess clause (Zurich) is indeed excess, not pro rata,” it said. Thomas H. Sear, Steven C. Bennett and Mark R. Seiden of Jones Day Reavis & Pogue in New York represent IBM. Joseph G. Blute
of Mintz Levin Cohn Ferris Glovsky & Popeo in Boston and Marshall
Potashner and Darin Billing of Jaffe & Asher in New York are counsel
for Liberty Mutual Fire Insurance. Attorneys for Liberty Mutual Insurance
are John M. Eickenmeyer of Vedder, Price, Kaufman & Kammholz in
New York and Thomas W. Brunner, Thomas W. Queen and Alysa B. Wakin of
Wiley Rein & Fielding in Washington, D.C.
Insurer
Can’t Raise WEST PALM BEACH, Fla. — An insurer providing employer liability coverage is bound by the settlement of an underlying civil action and may not relitigate liability by raising any affirmative defenses, such as workers’ compensation immunity, that could have been raised in the underlying suit, a Florida appeals court ruled Aug. 7, reversing a trial court (Stanley Wright, Uzi Jacobi, and Pettit Tools & Supplies, Inc. v. Hartford Underwriters Insurance Co., No. 4D01-3371, Fla. App., 4th Dist.; 2002 Fla. App. LEXIS 11285). The Fourth District Court of Appeal reversed and remanded the case to the Circuit Court for the 17th Judicial Circuit. (Opinion available. Document #59-020920-003Z. Appellant’s initial brief available. Document #59-020920-020B. Answer brief available. Document #59-020920-021B. Appellant’s reply brief available. Document #59-020920-022B). Employee Injured Stanley Wright, employed by Pettit Tools & Supplies Inc., was injured while working with his supervisor, Uzi Jacobi. Pettit had workers’ compensation and employer liability coverage from Hartford Underwriters Insurance Co. After settling his workers’ compensation claim, Wright sued Pettit and Jacobi, alleging that his injury resulted from Jacobi’s gross negligence, for which Pettit was vicariously liable. Wright also alleged that Pettit violated the Florida Building Code and that the violation contributed to his injury. Hartford denied coverage. Pettit, Jacobi and Wright settled the underlying action. Under the terms of the settlement, Pettit and Jacobi admitted liability and conceded damages for $25,000. The parties further agreed that a final judgment be entered, providing that Wright would not seek to levy execution on the judgment, Pettit and Jacobi would assign their rights as insureds under the Hartford policy to Wright and Wright would seek to recover under the judgment only against Hartford under the policy. When Hartford refused to pay on the judgment, Wright sued Hartford for damages under the policy. The trial court granted Hartford’s motion for summary judgment, ruling that Pettit was entitled to immunity from Wright’s civil claims under the workers’ compensation statutes and that Wright’s exclusive remedy for the claims covered by the judgment was workers’ compensation benefits. Insurer ‘Ceded Control’ However, the appeals court found that under the facts, Hartford is not entitled to raise any defense to Wright’s claims that Pettit could have raised in the civil action. “When Hartford refused both coverage and a defense to its insured for Wright’s claims in the civil action, it thereby ceded to its insured control of the litigation and the right to settle the claims,” Judge Gary M. Farmer wrote for the appeals court, citing Taylor v. Safeco Insurance Co. (361 So. 2d 743, 746 [Fla. 1st DCA 1978]). Workers’ compensation immunity is a defense that Pettit could have raised in the civil action, the court explained. “Because Hartford refused to defend its insured, it is bound by the settlement waiving the defense of workers compensation immunity and may not assert that defense against Wright’s claim for policy benefits to satisfy the judgment,” the court said, referring to Ahern v. Odyssey Re (London) Ltd. (788 So. 2d 369, 371 [Fla. 4th DCA 2001]). The appeals court also said the court’s disposition of the workers’ compensation immunity defense addresses the only basis for the trial court’s grant of summary judgment. Remaining Issues “On remand, the trial court will be confronted with the remaining coverage issues — e.g. whether its employer’s liability policy coverage in part II extended to include Wright’s civil action,” it noted. In addition, the court pointed out that whether Jacobi is an insured under the policy and whether the intentional tort exclusion applies remain to be determined. If the court determines that coverage exists, then it will need to be determined whether the amount of the judgment is reasonable, it explained. Wright, Jacobi and
Pettit are represented by Sharon Degnan and Diane H. Tutt of Diane H.
Tutt P.A. in Plantation, Fla. Hartford is represented by Gina E. Caruso
and Mark A. Faris of Hinshaw & Culbertson in Fort Lauderdale, Fla.
Refusal
To Cover Exposure INDIANAPOLIS — An insurer that refused to defend and indemnify an insured in an underlying action for injuries to workers allegedly caused by exposure to glue from carpet fumes did not act in bad faith, the Indiana Supreme Court ruled Aug. 28 (John Freidline, et al. v. Shelby Insurance Co., No. 71S03-0107-CV-335, Ind. Sup.). (Opinion in Section C. Document #03-020903-107Z.) John and Donna Freidline sought coverage from their CGL insurer, Shelby Insurance Co., for an underlying tort action filed by claimants who worked as telemarketers in a building they owned in South Bend, Ind. The workers alleged that they were injured by exposure to toxic fumes from the glue used to install carpeting in the building. Pollution Exclusion Shelby refused to defend or indemnify the Freidlines, citing the pollution exclusion in the policy. The Freidlines filed a breach of contact, bad faith action against Shelby. The trial court granted Shelby summary judgment on both claims, finding that the pollution exclusion is not ambiguous and bars coverage for the workers’ injuries. The Fourth District Indiana Court of Appeals reversed, concluding that the exclusion is ambiguous and should be construed in favor of coverage. The appeals court relied on case precedent in three actions that found the exclusion ambiguous: Travelers Indemnity Co. v. Summit Corp. of America (715 N.E.2d 926, 935 [Ind. Ct. App. 1999]), American States Insurance Co. v. Kiger (662 N.E.2d 945, 948-949 [Ind. 1996], rehearing denied) and Seymour Manufacturing Co. v. Commercial Union Insurance (665 N.E.2d 891, 892 [Ind. 1996], rehearing denied). The appeals court also found that Shelby’s refusal to defend and indemnify was done in bad faith. The appeals court said counsel for the Freidlines provided the insurer’s counsel with the case law of Summit, Kiger and Seymour and that therefore the insurer knew that the provision it was relying on to deny coverage was previously found to be ambiguous. Shelby appealed. Rational Basis The Supreme Court upheld the appeals court ruling that the pollution exclusion in Shelby’s policy was ambiguous and should be construed in favor of coverage. However, the appeals court reversed the finding that Shelby acted in bad faith. Under Indiana law, there can be no bad faith when there is a good faith dispute over whether an insured has a valid claim under the policy, the Supreme Court said, citing Erie Insurance Co. v. Hickman (622 N.E.2d 515, 518 [Ind. 1993]). To show bad faith, an insured must prove with clear and convincing evidence that the insure had no “legitimate basis” to deny coverage, the Supreme Court held, citing Ind. Ins. Co. v. Plummer Power Mower & Tool Rental Inc. (590 N.E.2d 1085, 1093 [Ind. Ct. App. 1992). Shelby argued that it believed the rulings in Kiger, Seymour and Summit were distinguishable from the Freidline’s case because they involved the handling of “toxic or potentially polluting substances,” while the Freidlines owned an office building that does not regularly use toxic or caustic substances. The Supreme Court ruled that Shelby had a rational, principled basis for denying coverage despite a finding that coverage did exist under the policy. “The scope of the pollution exclusion is an evolving area of law, subject to differing interpretations. The pollution exclusion is one of the most frequently litigated exceptions found in staple insurance industry product — the comprehensive general liability policy,” the Supreme Court said. Trial Court Ruling Further, the Supreme Court said the difficulty with the interpretation of the applicability of the pollution exclusion is also supported by the trial court’s initial grant of summary judgment to Shelby over Freidlines’ claims. “After considering Kiger, Seymour and Summit, the trial court found that the pollution exclusion in Shelby’s general liability policy ‘does not appear ambiguous.’ In as much as we find there is a rational basis for Shelby’s actions, and Shelby supports its position with good faith legal argument, the Freidlines have failed to establish by clear and convincing evidence that Shelby breached its duty to act in good faith,” the Supreme Court held. The Freidlines are
represented by Fred R. Hains in South Bend. Daniel W. Glavin of Beckman,
Kelly & Smith in Hammond, Ind., represents Shelby.
Workers’
Comp Benefits SEATTLE — Because an employee is “directed” by an employer to be in the employer’s parking lot to use a company vehicle to drive to and from work, the employee is entitled to workers’ compensation coverage after he was injured in the parking lot, despite a statutory exception for parking areas, a Washington appeals court ruled Aug. 23 (Puget Sound Energy, Inc. v. John M. Adamo, No. 49898-3-I, Wash. App., Div. I; 2002 Wash. App. LEXIS 1969). The Division I Court of Appeals ruled that a trial court did not err when it affirmed an award of workers’ compensation benefits to the employee. (Opinion available. Document #59-020920-007Z.) John Adamo was employed as a public improvement inspector at Puget Sound Energy Inc. As part of his job, Adamo was assigned a company truck. Adamo was required to take the truck home so he would be able to drive to emergencies on an on-call basis. He used the truck to commute to and from work and for job assignments during regular working hours. Parking Lot Injury On Dec. 24, 1998, Adamo walked from the building to his company truck, parked in Puget Sound Energy employee parking lot. Adamo slipped on ice and snow in the parking area and sustained an injury. In June 1999, Adamo filed for workers’ compensation benefits. The Department of Labor and Industries allowed Adamo’s claim. Puget Sound Energy appealed to the Board of Industrial Insurance Appeals. In February 20001, the board affirmed the department’s decision in a final decision and order. Puget Sound Energy then appealed to King County Superior Court. The Superior Court, affirming the board’s decision, concluded that Adamo “was acting in the course of his employment . . . when he fell in a parking lot.” ‘In The Course Of Employment’ The Industrial Insurance Act, Revised Code of Washington (RCW) 51.32.010, provides coverage for a worker who is “injured in the course of his or her employment.” However, the statute expressly excludes parking areas from the act and disassociates them from the legislative definition of what constitutes a jobsite, the appeals court explained. “The parking area exception is not, however, an absolute bar to industrial insurance coverage,” Chief Judge Mary Kay Becker wrote for the court, noting that the “appropriate inquiry” is whether the injury occurred while the employee was acting in the course of his employment. “If so, the situs of the accident is, as to him, immaterial,” the court said. To elaborate, the court cited its own decision Bolden v. Department of Transportation (95 Wn. App. 218, 223, 974 P.2d 909 [1999]). Bolden In Bolden “[t]his court stated . . . that if the employee had been directed to be in the parking lot, he would be covered. This describes Adamo’s situation. He was not free to take the bus home, or drive his own car, or get a ride. He was in the parking lot because his employer required him to take this particular vehicle home. As the trial court stated, it was in the furtherance of his employer’s interests for him to have this vehicle at his disposal, and that fact ‘trumps’ the parking lot exception,” the court ruled. Puget Sound Energy contended that when an employee is about to leave work in an employer-furnished vehicle, the statutory bar on coverage in parking areas operates to deny industrial insurance coverage while the employee is walking in the parking area on his way to the vehicle. It cited the California case State Lottery Commission v. Workers’ Comp Appeals Bd. (50 Cal. App. 4th 311, 57 Cal. Rptr.2d 745 [1996]). However, the court dismissed this argument. “Coverage for Adamo is not in conflict with the California case because Adamo was not at home when his injury occurred,” the court noted. “Rather, the time of his injury was immediate to the actual time he was engaged in work at the jobsite. Immediacy in time is a consideration expressly included in RCW51.08013,” the court held, adding that it agrees with the trial court on this point. “Allowing coverage on these facts appropriately fulfills the statutory directive to focus on acting in the course of employment, while also preserving the parking area exception for cases where the employee’s presence in the parking lot is not in furtherance of the employer’s interests,” the court concluded, affirming the trial court. Puget Sound Energy is represented by Michael L. Hall of Perkins Cole in Seattle. Adamo is represented
by Kathryn Carman Comfort of Small Snell & Weiss in Tacoma, Wash.
Employee’s
Wife Is KNOXVILLE, Tenn. — An employer’s motor vehicle insurance policy covered the spouse of an employee where the employee was permitted to use the vehicle for personal business, a Tennessee appeals court affirmed Aug. 5 (Kelly Dean and Lara Lynn Brisco v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, No. E2001-02311-COA-R3-CV, Tenn. App.) (Opinion available. Document #13-020820-018Z.) Lara Lynn Brisco was in an accident while driving a motor vehicle leased to Merico Abatement Contractors, her husband’s employer. Merico provided Travis Brisco with the vehicle, which he used to replace his personal vehicle. Travis used the leased vehicle for both personal and business purposes, and he testified that he was not given restrictions on his use of the vehicle. At the time of the accident, the Briscos were traveling to a softball tournament that was a business-related marketing function. Travis asked his wife to drive because he had been drinking. ‘Insureds’ Merico owned three other trucks for employee use. Merico’s procedures required employees to gain approval from its home office before driving the trucks. The insurance policy issued to Merico by National Union Fire Insurance Co. listed Merico and “[a]nyone else while using with your permission a covered ‘auto’” as insureds. The trial court found coverage under Merico’s insurance policy, holding that Brisco was a permissive user of the vehicle at the time of the accident. The trial court credited Travis’ testimony that he was allowed to use the vehicle as a personal vehicle over his supervisor’s testimony that Travis was repeatedly told he was not permitted to use the vehicle for personal business. The Tennessee Court of Appeals affirmed. The appellate court relied on its decision in Tennessee Farmers Mut. Ins. Co. v. Moore (958 S.W.2d 759 [Tenn. App. 1997]), in which it extended coverage to the daughter of the employee. In that case, the court found that the employer gave its employee “broad permission and wide discretion as to the use of the vehicles,” which included use by family members. National Union is
represented by J. Eddie Lauderback and Bradley E. Griffith in Johnson
City, Tenn. Plaintiff Kelly Dean is represented by Jonathan R. Bunn
in Gulf Shores, Ala., and David S. Bunn in Norfolk, Va. Lara Lynn Brisco
is represented by Mark D. Harris in Kingsport, Tenn.
Auto
Policy Excludes SHREVEPORT, La. — An employee driving his own car who was injured in an accident while acting in the course of his employment is not entitled to coverage under the liability provision of his Louisiana employer’s automobile policy, a Louisiana appeals panel affirmed Aug. 16 (Johnny Lynn McEachern v. John Mills, et al., No. 36-156-CA, La. App.; 2002 La. App. LEXIS 2605). (Opinion available. Document #59-020920-028B.) Further, the Second Circuit Court of Appeal of Louisiana found that the employee was specifically excluded under the policy’s uninsured motorist (UM) provisions and affirmed a trial court’s summary judgment in favor of the insurer and the dismissal of the employee’s action against the insurer. Car Accident While in the course and scope of his employment, Johnny Lynn McEachern was driving his personally owned car when he was injured in an accident with a vehicle driven by John Mills. McEachern sued Mills and his insurer, State Farm Mutual Insurance Co., along with Travelers Indemnity Insurance Co., which insured his employer. Subsequently, McEachern dismissed his action against Mills and State Farm pursuant to a settlement. McEachern’s own auto insurer was State Farm, which paid McEachern $10,000 under the State Farm UM coverage. Moving for summary judgment, Travelers argued that McEachern had no coverage under the policy because he was not a named insured for auto liability. Alternatively, if McEachern was found to be an insured for liability coverage, then the UM coverage did not apply because McEachern was operating his personal vehicle, which was not a described vehicle in the policy, Travelers argued. Liability Insured Although Louisiana’s public policy “strongly favors” UM coverage, “it is well settled that a person who does not qualify as a liability insured under a policy of insurance is not entitled to UM coverage under the policy,” the appeals panel noted, citing Magnon v. Collins (98-2822 [La. 7/7/99], 739 So. 2d 191). The Magnon court held that a plaintiff must be an “insured” under auto liability coverage to be entitled to UM coverage and concluded that Magnon was not insured under the general liability coverage, which excluded any employee using his own personal auto. Therefore, Magnon was not entitled to UM coverage under the general liability portion of the policy. Relying on Magnon, and other cases, the appeals court found that McEachern also is not entitled to recover under the liability provisions of his employer’s policy, which excludes employees who drive their personally owned vehicles. UM Coverage As for UM coverage, the court pointed to Carrier v. Reliance Ins. Co. (99-2573 [La. 4/11/00], 759 So. 2d, 37), in which the plaintiff was injured during the course of his employment and sought damages under his employer’s UM coverage. The Carrier court concluded that the plaintiff was not an insured under the policy’s liability portion and was not entitled to UM benefits under the policy’s liability portion. Ultimately, even if coverage could be found under the Travelers policy’s definition of covered autos, Travelers’ policy contains another exclusion of UM coverage for “bodily injury sustained by an insured while occupying or struck by any vehicle owned by that insured is not a covered auto,” the appeals panel pointed out. “Under the explicit exclusion in the Travelers UM coverage, McEachern is not entitled to recover under the UM provision of the policy,” it said. McEachern is represented
by Robert Allen Lee and Francis C. Broussard of Broussard & Lee
in Monroe, La. State Farm is represented by Thomas G. Zentner Jr. of
Nelson, Zentner, Sartor & Snellings in Monroe. Travelers is represented
by Joseph S. Woodley of Pettiette, Armand, Dunkelman, Woodley, Byrd
& Cromwell in Shreveport.
Employee
Covered By MADISON, Wis. — An employer’s umbrella policy limited its coverage to fewer insureds than did the broader underlying garage policy, the Wisconsin Court of Appeals held in an unpublished July 23 opinion (Susan A. Riemer, et al. v. Universal Underwriters Insurance Co., et al., No. 02-0257-FT, Wis. App.; 2002 Wisc. App. LEXIS 835). Reversing a trial court, the appeals court granted the insurer summary judgment, ruling that there was no genuine issue of fact regarding whether an employee was within the scope of his employment at the time of his automobile accident, which is necessary to find coverage under the theory of vicarious liability. (Opinion in Section B. Document #13-020806-106Z.) Susan and Michael Riemer were injured when their automobile collided with an automobile driven by Neng Nathan Lee. Lee was driving a car owned by Burnsville Automobile, his employer, when the accident occurred. Burnsville let its employees use its vehicles for personal business. The Riemers sued Lee, Burnsville and Universal Underwriters Insurance Co., which issued a garage policy and an umbrella policy to Burnsville. Universal paid the Riemers the $500,000 limit under the garage policy. The Riemers sought a declaration of additional coverage under Burnsville’s umbrella policy. Universal moved for summary judgment, arguing that although Lee was covered under the underlying garage policy, he was not covered under the umbrella policy because he was not within the scope of his employment when the accident occurred. Named Insureds The trial court granted the Riemers’ motion and denied Universal’s motion, holding that the umbrella policy’s coverage is co-extensive with the underlying garage policy. The appeals court reversed. The court rejected the Riemers’ argument that because the underlying policy covers Lee, the umbrella policy also covers Lee. The court noted that the “Who Is An Insured” clause of the umbrella policy provides coverage in the event of an automobile accident to the “Named Insured” and “Designated Person”; that the “Named Insured” are Burnsville, its owners and Burnsville’s employee retirement plan; and that the “Designated Person” is defined in the umbrella policy’s declarations as the owners. The appeals court concluded that the reasonable meaning of the “Who Is An Insured” clause of the umbrella policy is that it limits coverage to Burnsville, its owners and its employee retirement plan. “Simply put, the umbrella policy limits its coverage to a smaller number of insureds than does the broader underlying policy,” the court said. The trial court’s reliance on the insuring agreement to determine that the umbrella policy provided coverage for all excess liability beyond that covered in the underlying garage policy ignored the umbrella’s limitations on what it insures, the appeals court explained. Scope Of Employment Moreover, the appeals court ruled that the trial court erred in denying Universal’s motion for summary judgment. The court found that although the umbrella policy “would cover Lee’s negligence under a theory of vicarious liability had he been acting within the scope of his employment at the time of the accident,” the record of the trial court’s proceedings does not indicate that a genuine issue of fact existed. The court noted that the Riemers’ complaint did not allege that Lee was an employee, the Reimers attached to their affidavit supporting their declaratory judgment motion an adjuster’s report that stated Lee was not in the scope of his employment, and the Reimers admitted in their trial brief that Lee was not within the scope of his employment. The appeals court also concluded that the trial court’s denial of Universal’s summary judgment motion, which was based on the scope of employment issue, was not a finding that Lee was acting within the scope of his employment. “Instead, it appears the court based the denial on its determination the umbrella policy’s coverage was coextensive with the underlying policy,” the appeals court wrote. The Riemers are
represented by David E. Sunby of Habush, Habush, Davis & Rottier
in Wausau, Wis. Universal and Burnsville Automobile are represented
by Stanley J. Lowe of White & Lowe in Waukesha, Wis.
‘You’
In Business Auto BOSTON — The term “you” in an uninsured motorist (UM) endorsement of an employer’s business automobile policy is not ambiguous and reasonably could be understood to refer only to an employer, a federal appeals court affirmed Aug. 20 (Seaco Insurance Co. v. Laura Davis-Irish, No. 02-1143, 1st Cir.; 2002 U.S. App. LEXIS 16699). (Opinion available. Document #59-020920-002Z.) Automobile Accident During the course of her employment with Garrand & Co., Laura Davis-Irish was injured in an auto accident involving an uninsured motorist while a passenger in a vehicle driven by Lorraine Wark. The uninsured motorist’s negligence was the principal cause of the accident. Garrand owned a vehicle, not involved in the accident, for which it had purchased a business automobile policy underwritten by Seaco Insurance Co. That policy contained uninsured motorist (UM) coverage. The UM endorsement delineated who was insured for coverage purposes. The policy’s declarations page lists the named insured as “Garrand & Co. Inc.” and the form of business as “Corporation.” The first page of the policy form explains that throughout the policy, the word “you” refers to the named insured shown in the declarations. Davis-Irish sought compensation for her injuries, arguing that “you,” as used in the endorsement, reasonably could be understood to include Garrand’s employees while acting in the course of their employment. Insurer Brings Action Seaco disagreed, denying coverage for Davis-Irish’s injuries and filing suit in the U.S. District Court for the District of Maine seeking a declaration as to whether Davis-Irish was an insured for purposes of the UM endorsement. The First Circuit U.S. Court of Appeals agreed with the District Court that “you” in the UM endorsement is unambiguous and reasonably can be understood to refer only to Garrand. Davis-Irish “relied heavily” on the Ohio Supreme Court’s decision in Scott-Pontzer v. Liberty Mutual Fire Ins. Co. (85 Ohio St. 3d 660, 710 N.E. 2d 1116 [Ohio 1999]), which examined the language of a substantially similar UM endorsement and determined that the term “you” was ambiguous, the court added. “We consider Scott-Pontzer an anomaly and we therefore decline the follow it” because the Scott-Pontzer court was “sharply divided” and the majority opinion has had a “rude reception” since, the First Circuit said. “The Ohio legislature lost little time in superseding it due to its destabilizing effect on the automobile market,” the court said, adding that the majority opinion also has come “under fire” in the Ohio courts. Further, the majority in Scott-Pontzer appears to deviate from “well-established tenets” of contract interpretation, it said. “The Maine courts have held, with a regularity bordering on the monotonous, that contracts of insurance ought to be construed in a manner consistent with the intent of the parties,” the First Circuit said. Davis-Irish is represented
by William D. Robitzek and Paul F. Macri of Berman & Simmons in
Lewiston, Maine. Seaco Insurance Co. is represented by John S. Whitman
of Richardson, Whitman, Large & Badger in Portland, Maine. Representing
National Union Fire Insurance Co., as amicus curiae, is Randall B. Weill
of Preti, Flaherty, Beliveau, Pachios & Haley in Portland.
Ohio
Judge: Optional COLUMBUS, Ohio — An insurer’s failure to show the cost of each optional uninsured motorist (UM) coverage limit to a company’s director of corporate insurance “must be construed” as a failure to make an effective and commercially reasonable offer, an Ohio federal judge held Aug. 29. Without such an offer, the judge found, “there could be no knowing, intelligent waiver of the optional coverage” (Jimmy Ammons v. Transportation Insurance Co., et al., No. 00-cv-1080, S.D. Ohio; 2002 U.S. Dist. LEXIS 16217). (Opinion available. Document #59-020920-018Z.) U.S. Judge Algenon L. Marbley of the Southern District of Ohio ruled that optional UM coverage up to a $2 million policy limit is included in an insurer’s policy by law. Jimmy Ammons was in an automobile accident with Shane Britton, an uninsured driver, in Washington County, Ohio. Flowers was insured under an Allstate motor vehicle liability policy, which had a $2 million liability limit. While driving his West Virginia employer’s vehicle, Ammons was acting in the scope of his employment with Flowers. Ammons seeks UM coverage benefits from Allstate Insurance Co. Allstate contends that Ammons is entitled to, at the most, $50,000 in UM coverage, while Ammons asserts that he is entitled to UM coverage equal to Flowers’ liability limit of $2 million. West Virginia establishes a minimum amount of UM coverage that must be included in every automobile policy and places a duty on insurers to offer optional UM coverage equivalent to the bodily injury liability limits of the policy. Allstate argued that Flowers waived any UM coverage beyond $50,000. The insurer acknowledged that the forms it provided to Flowers’ director did not contain a listing of each vehicle covered under the policy or the premiums associated with each option level or coverage, saying it would be unreasonable to list all options because Flowers’ director knew from the outset that the company was not interested in more than the minimum coverage required. Carved-Out Exception Judge Marbley noted that Allstate bases its arguments on its premise that the applicable statute was designed to assist unsophisticated consumers who do not understand UM coverage. “The Court rejects Allstate’s invitation to carve out an exception to the insurer’s duty to comply with . . . statutory requirements when dealing with a corporate consumer,” he said. “Though it may be logical to assume that such a statute primarily aids such consumers, there is no indication of such a limitation in the language of the statute.” Ammons is represented by Andrew J. Wilhelm in Columbus. Allstate is represented by Mark A. Bramble of Kesner Kesner & Bramble in Charleston, W.Va.
Employees
Not Driving CINCINNATI — Two Ohio school district employees involved in automobile accidents are not covered by the uninsured motorist/underinsured motorist (UM/UIM) provisions of their school districts’ automobile liability policies because they were not driving vehicles owned or operated by the districts at the time of their accidents, a federal appeals panel has held (Nationwide Agribusiness Insurance Co. v. Earl Roshong, et al., No. 01-4009, 6th Cir.; 2002 U.S. App. LEXIS 18671). (Opinion in Section H. Document #59-020920-124Z.) In an unpublished Sept. 5 opinion, the Sixth Circuit U.S. Court of Appeals held that the U.S. District Court for the Northern District of Ohio erred in granting summary judgment for the school district employees, reversed the District Court’s judgment and remanded with instructions to grant the insurer’s motion for summary judgment and to dismiss the employees’ counterclaim. School District Employees Janet Bowser was employed by the Ostego Local School District (OLSD) when she was killed in an automobile accident in September 1999. She was not acting within the scope of her employment when the accident occurred. Nationwide Agribusiness Insurance Co. issued an auto liability policy to the OLSD that was in effect on the date of the accident. Richard Bowser, her husband and the executor of her estate, filed a claim pursuant to the UM/UIM provision in the OLSD’s policy. Nationwide denied the claim. Earl Roshong filed a similar claim with Nationwide after he was severely injured in an automobile accident in April 2000, when he was employed by the Toledo City School District (TCSD). Roshong, who also was not acting within the scope of his employment at the time of his accident, sought benefits under the similar provision. Nationwide also denied his claim. Nationwide sued Richard Bowser and Roshong, seeking a declaration that it had properly denied the claims. Relying upon the Ohio Supreme Court’s interpretation of an identical UM/UIM provision in Scott-Pontzer v. Liberty Mutual Fire Insurance Co. (85 Ohio St. 3d 660 710 N.E. 2d 1116 [Ohio 1999]), the District Court concluded that Richard Bowser and Roshong were entitled to benefits under the provision in the school districts’ policies and granted them summary judgment. This appeal followed. Scott-Pontzer Relying on Scott-Pontzer, Bowser and Roshong contended that the term “You” in the UM/UIM provision includes employees of the OLSD and the TCSD because the school districts are not individuals. In addition, they argued that provision contains no limiting language as to employees acting within the scope of their employment. Nationwide maintained, however, that Scott-Pontzer is distinguishable because, unlike the private corporation that was the named insured in Scott-Pontzer, the OLSD and the TCSD are public school districts. According to Nationwide, Ohio does not give a public school district the authority to obtain UM/UIM coverage that insures its employees when they are acting outside the scope of their employment. Nationwide contended that the courts may not construe the provision to provide coverage that the OLSD and the TCSD allegedly had no authority to obtain. The Circuit Court first explained that the issue is not whether a school district is statutorily prohibited from purchasing UM/UIM coverage on behalf of employees acting beyond the scope of their duties. “The relevant inquiry is instead whether a statute specifically provides a school district with authority to obtain such coverage,” it held. Disputed Provision Richard Bowser and Roshong contended that Ohio Revised Code Section 3313.201(A) authorizes a school district, through its board of education, to obtain UM/UIM coverage “without any limitation on the scope” of that coverage. Ultimately, however, the appeals panel said that when read as a whole, “the most reasonable” interpretation of Section 3313.201(A) “allows boards of education to purchase UM (and perhaps) UIM coverage only as additional insurance protection for employees while driving ‘a motor vehicle . . . owned or operated by the school district,’ ” the panel said, quoting the statute. The panel said it does not believe that the Ohio Supreme Court would apply its holding in Scott-Pontzer to this case “because to do so would be contrary to the unbroken line of Ohio cases holding that actions taken by school boards in excess of the statutory authority are void.” “In our view, the court would instead construe the disputed provision as providing UM/UIM coverage to employees while they drive a vehicle owned or operated by the school district, an interpretation that would not invalidate the entire provision,” the panel concluded, adding that Janet Bowser and Roshong were not driving such vehicles when their accidents occurred. ‘Off The
Hook’ Nationwide is represented
by Scott A. Haselman of Robison, Curphey & O’Connell in Toledo,
Ohio. Earl Roshong is represented by Stuart J. Goldberg and Michael
W. Regnier of Eastman & Smith in Toledo and Clayton M. Gerbitz in
Swanton, Ohio.
Employee’s
On-Site Presence LOS ANGELES — The mere presence of a subcontractor’s employee on a job site does not constitute an “act or omission” on the subcontractor’s part that would trigger the indemnity provision of the subcontract requiring coverage to a contractor, a California appeals court held Sept. 6 (St. Paul Fire and Marine Insurance Co., et al. v. American Dynasty Surplus Insurance Co., et al., Sasco Electric, No. B148904, Calif. App., 2nd Dist.; 2002 Cal. App. LEXIS 4603). (Opinion available. Document #59-020920-004Z.) Leo Casados is an employee of subcontractor Sasco Electric and was injured when a pipe being pressure tested at a Burlington Northern Santa Fe Railroad Co. (BNSF) construction site, exploded. Neither Sasco nor Casados was involved in pressure testing the pipe. Casados sued ARB, BNSF and others for negligence and strict liability. ARB was a named insured under a general liability policy issued by St. Paul Fire & Marine Insurance Co. St. Paul’s coverage also applied to BNSF. ARB and BNSF tendered defense of the Casados lawsuit to St. Paul, which tendered defense to Sasco’s insurer, American Dynasty Surplus Lines Insurance Co., contending that ARB and BNSF were covered under American Dynasty’s “additional insured” endorsement. American Dynasty denied coverage and defense. A Los Angeles Superior Court judge entered a $113, 383.05 judgment against Sasco Electric and American Dynasty and in favor of St. Paul and ARB. Sasco then filed an appeal directed at the entire judgment, including the post-judgment award of attorneys’ fees. American Dynasty satisfied the $113, 383.05 judgment, plus interest, and did not file an appeal. Subcontract Language Sasco contended that it has no obligation to defend or indemnify ARB or BNSF in the Casados lawsuit because the indemnification language in Article 4.1 of the subcontract clearly limits its obligation to ARB (and therefore to BNSF) to liability imposed on ARB by reason of some “act or omission” of Sasco. ARB and St. Paul countered that the subcontract’s phrase “arising out of” and “resulting from” have received the broadest possible construction in the decided cases and are uniformly held to be broader than the term “caused by.” The appellate court concluded that the subcontract does not require Sasco to provide a defense to ARB. “Since, under the stipulated facts, the injuries to Casados did not “result” or “arise” from any act or omission of Sasco, then, as a matter of law, it [Sasco] was entitled to judgment,” Associate Justice H. Walter Croskey wrote for the court. ARB argued that the “mere presence” of Sasco employees on the job site, while engaged in performance of the work called for under the subcontract, is a sufficient “act or omission” by Sasco to trigger the indemnity clause of Article 4.1 in the subcontract. However, this argument “not only defies common sense and a fair reading of the indemnification commitment” but is also “not supported by the case authority relied upon,” the court said. “To construe the promise of indemnity made by Sasco as applying merely because its employee was present within the zone of danger created solely by the negligence of ARB clearly would offend not only the clearly expressed intent of the parties in Article 4.1 of the Subcontract, but also the express prohibition set out in Civil Code section 2782,” the court said. Therefore, Sasco’s duty to indemnify under the subcontract was never triggered with regarding the Casados claim, the court concluded. Additional Insured As to what it called an “ambiguous” additional insured endorsement in the American Dynasty policy, the court said it appears necessary to read the additional insured endorsement provision along with, and in the context of, the subcontract. Ultimately, “[a]s the stipulated and undisputed facts demonstrate that no act or omission of Sasco in the performance of the Subcontract played any part in any claim of liability arising from Casados’ injury, there never was any potential for coverage under the American Dynasty policy,” the court ruled. St. Paul is represented
by represented by Carol Boyd and Larry Nathenson of Neumeyer & Boyd
in Los Angeles. Sasco Electric is represented by Brian E. Claypool of
The Claypool Law Firm in Los Angeles.
Statute
Does Not Allow CLEVELAND — Although a person can purchase insurance for “his/her own protection,” an Ohio statute does not allow for the purchase of insurance for “another’s own negligence,” the Eighth District Ohio Court of Appeals affirmed Aug. 22 (Liberty Mutual Insurance Group v. Travelers Property Casualty, et al., No. 80560, Ohio App., 8th Dist.; 2002 Ohio 4280; 2002 Ohio App. LEXIS 4473). (Opinion available. Document #59-020920-008Z.) Writing for a concurring panel of the Court of Appeals, Judge Frank D. Celebrezze Jr. affirmed the ruling, stating that to rule in favor of an insurer’s position “would circumvent established precedent and the clear reading” of the applicable state statute. Construction Project Turner Construction Co. contracted with the Board of Trustees of the Cleveland Public Library to act as construction manager for a library renovation project. As construction manager, Turner did not subcontract the various prime contractors on the project; instead, the prime contractors contracted directly with the library trustees while Turner managed their performance. Donley’s Inc., a prime contractor, entered into a contract with the library trustees to install, maintain and operate a hoist at the job site. Pursuant to the agreement between Donley’s and the trustees, Turner was entitled to the performance of Donley’s obligations, which were intended for its benefit. Even though Donley’s was not a subcontractor of Turner, Donley’s was bound to perform its contractual duties for Turner as construction manager. Additionally, pursuant to the contract between Donley’s and the library trustees, Donley’s was required to deliver a certificate of insurance to Turner, showing that Donley’s maintained commercial general liability insurance of certain minimum limits, and to name Turner as an “additional insured” on that policy for the duration of the library renovation project. Worker Injured In March 1996, Robert J. Vargo, an employee of Burkshire Construction Co., a subcontractor of Donley’s, was injured while operating the hoist. Vargo filed a personal injury claim against Donley’s and Turner. Turner asked that Donley’s tender defense of the action to Donley’s insurer, Travelers Property Casualty Co. Both Donley’s and Travelers refused to defend Turner and indemnify it for the Vargo claims. Liberty Mutual Insurance Co., Turner’s insurer, defended Turner and eventually entered into a settlement agreement with Vargo. As a result of the settlement, Liberty Mutual became subrogated up to that amount to any rights Turner possessed against Travelers under the policy. 2305.31 The Cuyahoga County Court of Common Pleas held that Ohio Revised Code (R.C.) 2305.31 does not permit enforcement of insurance coverage purchased by a construction subcontractor to protect the construction manager’s negligence. The Court of Appeals explained that R.C. 2305.31 “prohibits indemnity agreements, in construction-related contracts described therein, whereby the promisor agrees to indemnify the promisee for damages caused by or resulting from the negligence of the promisee, regardless whether such negligence is sole or concurrent.” The court said the blanket additional insured endorsement states that it “does not include liability arising out of the independent acts or omissions of such person or organization,” with the “organization” being Turner. “As such, the clear wording of the endorsement does not provide coverage for Turner’s own negligence, but rather only for liability arising out of Donley’s operations,” the appeals court held. A “clear reading” of the additional insured endorsement obtained by Donley’s through Travelers was not insurance coverage obtained to protect Donley’s “action,” as R.C. 2305.31 would permit, but rather, the endorsement was purchased by Donley’s, the promisor, to protect Turner, the promisee, for Tuner’s own negligence. Therefore, it is in “direct conflict” with what R.C. 2305.31 prohibits, the court held. Liberty Mutual is
represented by Matthew W. Oby and Hamilton Desaussure Jr. of Oldham
& Dowling in Akron, Ohio. Travelers Property Casualty and the other
appellees are represented by David W. Mellot and Edward J. Stoll Jr.
of Benesch, Friedlander, Coplan & Aronoff in Cleveland.
Qui
Tam Claims Not ANNAPOLIS, Md. — An insurer has no duty to defend or indemnify a qui tam lawsuit against an insured because the policies provide coverage only for “property damage caused by an occurrence,” and none of those elements is present in the qui tam action, a Maryland appeals court held Aug. 28 (Information Systems and Network Corp., et al. v. Federal Insurance Co., No. 1874, Sept. Term 2000, Md. Spec. App.; 2002 Md. App. LEXIS 131). (Opinion in Section E. Document #59-020920-106Z.) Retired Judge Theodore G. Bloom, specially assigned to the Court of Special Appeals of Maryland, wrote that the Montgomery County Circuit Court did not err when it found that the insurer had no duty to defend or indemnify the qui tam lawsuit. However, the appeals court vacated the order and remanded the case for entry of a written declaratory judgment in conformity with the appeals court opinion. Qui Tam Suit Securacom Inc. filed a qui tam lawsuit in the U.S. District Court for the Northern District of California against Information Systems and Networks Corp. (ISN), alleging that ISN, ISN’s president and chief executive officer and one of ISN’s vice presidents had knowingly submitted false claims to the Board of Port Commissioners of the City of Oakland, Calif., in violation of 31 U.S. Code Section 3729 et seq. and California Government Code Section 12650 et seq. The alleged false claims related to work ISN was to perform at the port’s Oakland International Airport. In October 1991, ISN was the low bidder for a contract to provide a new automated access control system (AACS) to be installed at the airport. In the qui-tam suit, Securacom alleged that ISN knowingly and fraudulently concealed material information and affirmatively misrepresented facts to the port to induce the port to award the contract to it. Securacom sought delay damages, loss of use of the security system, the need for repair or replacement of the security system and treble damages. Pursuant to a settlement agreement between ISN and the port, judgment was entered against ISN for $1,322,726 in actual damages and $75,000 in attorneys’ fees. ISN assigned to the port its rights under certain insurance policies with respect to the claim to the extent necessary to secure payment of the judgment. ISN agreed to cooperate with the port in a direct action against ISN’s insurer, Federal Insurance Co., to collect the balance of the judgment. ISN and the port subsequently filed a complaint in the Circuit Court against Federal and the Chubb Corp. The claims against Chubb were eventually dismissed. ISN and the port seek a declaration that Federal is obligated under CGL and excess policies to defend and indemnify ISN in the qui tam action. ISN and the port also seek damages for breach of contract arising out of Federal’s failure to defend and indemnify. Circuit Court’s Oral Ruling The parties filed motions for summary judgment. ISN asserted that it was entitled, as a matter of law, to a declaratory judgment that the insurance policies provide coverage for the defense and indemnity of ISN with respect to the qui tam action. Federal argued that the qui tam action was predicated upon the fact that ISN knowingly defrauded a government entity and that such claims do not constitute “property damage caused by an occurrence” as required by the provisions of both the CGL and the Commercial Excess Umbrella policies. In an oral ruling, the Circuit Court granted summary judgment to Federal, concluding that the subject insurance policies provide coverage only for “property damage caused by an occurrence” and that none of those elements was present in the qui tam action. ISN appealed. No ‘Property Damage’ Claim The appeals court noted that both policies “basically cover the same losses, are subject to the same exclusions, and are governed by the same definitions.” “When we look at the Port’s claim for damages under the California False Claims Act . . . it is clear that the claim was not for ‘property damage’ in any sense of those words,” Judge Bloom wrote for the panel. “The Port sought damages resulting from the allegation that ISN had knowingly provided false, misleading and fraudulent information in order to obtain the contract. The Port did not complain of any damage to its property.” As to the original qui tam action brought by Securacom, that claim was abandoned, the court noted. Therefore, the only issue to be resolved is whether Federal had any duty to defend that action before it was dismissed. On its face, the action on behalf of the United States and the State of California for false claims made in submitting claims for payment does not constitute a property damage claim, the court said. The appellant argued that the loss of the use of the AACS system and the need to replace it constituted a loss of the use of property, which constituted property damage. However, the court ultimately concluded that because of the policy exclusions, the appellant’s claim would not be covered under the insurance policies. Order Vacated The summary judgment granted by the Circuit Court was vacated because in cases in which a party requests a declaratory judgment, “the trial court may not dispose of the case simply with an oral ruling and a grant of judgment in favor of the prevailing party,” the appeals court explained, citing Allstate Ins. Co. v. State Farm Mutual Auto Ins. Co. (363 Md. 106, 767 A.2d 831 [2001]). Therefore, the panel
vacated the judgment and remanded the case to the circuit court for
the entry of a written declaratory judgment in conformity with the court’s
opinion.
Insurer
Must Defend NEW YORK — An insurer must defend criminal proceedings against the director of a community-based outpatient mental health provider from the filing of an indictment until final resolution of the claims or exhaustion of the policy limits, a federal judge held Aug. 2 (Herbert Sklar v. Federal Insurance Co., No. 02 CV 4099, S.D. N.Y.). (Order and judgment available. Document #13-020903-013R.) Herbert Sklar seeks defense of claims of making misstatements and/or misleading statements in connection with New Hope Guild Centers Inc.’s (NHG) billing of Medicaid for services rendered by NGH employees. Sklar was the center’s executive director and had an Association Directors & Officers liability policy issued by Federal Insurance Co. After a grand jury investigation, Sklar was indicted. Federal initially defended under a reservation of rights but subsequently denied coverage based on a professional services exclusion. Sklar moved for summary judgment, arguing that the clause does not apply because Sklar is not accused of professional malpractice. Even if some of the underlying allegations arguably fall within the exclusion, Federal has a duty to defend until it can show that all of the allegations come within the clause, the insured contended. (Plaintiff’s brief available. Document #13-020903-014B.) According to Sklar, none of his conduct falls within the exclusion. Professional services require specialized skill and training and do not extend to generic business activities. “The claims against him allege billing and other managerial irregularities, which are incidental to the business of NHG — providing mental health care — and are not considered by the courts to be ‘professional services.’ An examination of the allegations against Sklar reveals that the claims against him do not arise from, or relate to, the provision of ‘professional services,’” the policyholder argued. Federal’s Cross-Motion Federal opposed the motion and filed a cross-motion for summary judgment because there is no genuine dispute that coverage for the indictment is excluded. (Federal’s brief in opposition and in support of cross-motion available. Document #13-020903-015B.) According to the insurer, the policy expressly bars coverage for claims “based on, attributable to, arising out of, resulting from or in any manner related to the rendering or failure to render professional services.” Federal argued that
“every count of the Indictment is based on the allegation that
Herbert Sklar falsely represented that ‘outpatient mental health
care services’ had been provided to patients ‘in accordance
with’ New York state laws and applicable regulations, when in fact
‘services were not rendered in accordance with regulations.’
If those are not claims ‘arising out of . . . or in any manner
related to the rendering [of] professional services,’ nothing is.
Thus, every count of the Indictment falls within the ‘Professional
Services’ exclusions and outside the coverage provided by the insurance
policy.” U.S. Judge Gerard E. Lynch of the Southern District of New York on July 31 ruled from the bench and granted Sklar’s motion. In an Aug. 2 judgment, the judge found that Federal has a duty to defend and pay all defense costs “that Sklar incurs in defending the criminal proceedings against him commenced by the filing of the Indictment, until final resolution of the claims made against Sklar, or exhaustion of the remaining, relevant limits of the policy, whichever comes first.” Sklar is represented by Adam S. Ziffer and Mark H. Kolman of Dickstein Shapiro Morin & Oshinsky in New York. Federal is represented by Christopher B. Wren of Hogan & Hartson in New York and Jonathan A. Constine and Deborah L. Boardman of Hogan & Hartson in Washington, D.C.
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