May 22, 2012

Insurance Coverage Practice Group List



 

 

 

 

PBM Nutritionals, LLC v. Lexington Insurance Co.
(Pollution Exclusion – April 20, 2012)


In PBM Nutritionals, LLC v. Lexington Insurance Co., No. 110669 (Va. April 20, 2012), the Virginia Supreme Court affirmed a trial court ruling that a pollution exclusion in property insurance policies barred coverage for contaminated baby formula.  PBM was forced to destroy batches of baby formula it had manufactured after it discovered that a water filter had disintegrated and contaminated the formula.  PBM sought coverage for the loss under property and business interruption insurance policies issued by three insurers.  The insurers denied coverage under pollution exclusions added to the policies by endorsement.  The pollution exclusions barred coverage for the release of contaminants or pollutants, which included materials that could cause or threaten damage to human health or welfare.  PBM argued that the endorsements were unenforceable because they were inconsistent with a pollution exclusion in the policy form that included an exception for releases covered by an insured peril. The Court rejected this argument holding that the exception did not create coverage or have any application to pollution exclusion endorsements.  PBM also argued that the pollution exclusion endorsements were ambiguous and should be applied only in cases of traditional environmental pollution.  The Court rejected that argument as well.  It held that the exclusions were unambiguous and were not limited to traditional environmental pollution.

For a copy of the April 20, 2012, Pollution Exclusion click HERE

AES Corporation v. Steadfast Ins. Co.
(Occurrence – April 20, 2012
)


In AES Corp. v. Steadfast Ins. Co., No. 100764 (Va. April 20, 2012), on rehearing, the Virginia Supreme Court reaffirmed its prior decision that the insurer had no duty to defend or indemnify the insured because no occurrence was alleged in the underlying suit.  The insured, AES, owns companies that generate and distribute electricity in various states.  In February 2008, a native village in Alaska filed suit in California against AES and others for allegedly damaging the village by producing greenhouse gases that cause global warming.  AES requested that Steadfast defend and indemnify it with respect to the suit under several Commercial General Liability policies.  Steadfast filed a declaratory judgment action.  On cross-motions for summary judgment, the trial court granted Steadfast’s motion holding that Steadfast had no duty to defend or indemnify AES because the underlying complaint did not allege an “occurrence” as required to give rise to coverage under the Steadfast policies.


On rehearing, the Virginia Supreme Court once again affirmed the trial court’s ruling.  The policies at issue defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general condition.”  The Court noted that an accident is “an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed or reasonably anticipated.”  The Court further noted that an intentional act is not an accident and “[i]f a result is the natural and probable consequence of an insured’s intentional act, it is not an accident.”  The focus, according to the Court, is not on whether the insured’s action was intended but whether the resulting harm is “alleged to have been a reasonably anticipated consequence of the insured’s intentional act.”  Reviewing the underlying complaint pursuant to Virginia’s “eight corners” rule, the Court held that the village clearly alleged that AES intentionally released greenhouse gases and the resulting injuries were the natural and probable consequence of the intentional emissions.  In a concurring opinion, Justice Mims noted that, under the Court’s decision, negligence cannot be a covered occurrence because negligence requires that an injury be the natural and probable consequence of the action causing the injury.

For a copy of the April 20, 2012 occurrence, click HERE

Graham v. National Union Fire Ins. Co. of Pittsburgh, Pa.
(Duty to Defend – April 11, 2012)


In Graham v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 11-1222 (4th Cir. April 11, 2012), the United States Court of Appeals for the Fourth Circuit reversed the trial court’s determination that an insurer had no duty to defend its insured.  The State of West Virginia brought suit against Robert Graham, the former Executive Director of two not-for-profit corporations that provided social services to the elderly through federal and state grants.  Mr. Graham was allegedly unjustly enriched at the expense of taxpayers through the corporations’ breach of the public trust through misuse of public funds.  Mr. Graham sought coverage under a National Union insurance policy issued to the corporations that covered claims for certain wrongful acts.  National Union declined coverage based on three policy exclusions.  The trial court found no duty to defend based on an exclusion barring damages “attributable to wages, salaries and benefits,” because the complaint focused on Mr. Graham’s excessive compensation and overly generous benefits package.  The Fourth Circuit reversed, holding that the complaint also included allegations of other misconduct.  It further concluded that no other exclusion applied.  Notably, it held that National Union had a duty to defend based on an exception to an exclusion.  The exclusion provided that the policy did not cover claims for fraud or dishonesty but the insurer had to defend such claims until the insured admitted liability or a court found the insured committed the acts.  Mr. Graham allegedly enriched himself through fraud and dishonesty but the suit was dismissed as moot.  The Fourth Circuit held that the exception required a defense even if another exclusion applied.

For a copy of the April 11, 2012 decision, click HERE

Farkas v. National Union Fire Ins. Co. of Pittsburgh, Pa.
(Criminal Act Exclusion – March 21, 2012)


In Farkas v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 1:11-cv-529 (E.D. Va. March 21, 2012), the trial court held that the insurer had no further obligation to defend the insured and was entitled to recoup defense costs it had paid.  Lee Bentley Farkas, the chairman and majority shareholder of Taylor Bean & Whitaker Mortgage Corporation (TBW), was indicted on multiple counts of bank, wire and securities fraud.  He sought coverage from National Union under a directors and officers liability policy issued to TBW with respect to the criminal proceeding.  National Union agreed to advance defense costs subject to a reservation of rights to deny coverage and recoup defense costs as provide in the policy.  The policy provided that National Union had no obligation to pay any loss in connection with any claim “arising out of, based upon or attributable to the committing in fact of any criminal, fraudulent or dishonest act,  or any willful violation of any statute, rule or law.”  Relying on that provision, National Union declined to pay any defense costs after Mr. Farkas was convicted by a jury on all counts, even costs incurred prior to the jury verdict.  Mr. Farkas argued that National Union was obligated to advance defense costs through final adjudication on appeal.  The trial court disagreed, holding that that the jury verdict satisfied the “in fact” requirement in the policy.  It further held that National Union was entitled to recoup defense costs it had paid from Mr. Farkas in addition to seeking recoupment from TBW.

For a copy of the March 21, 2012 decision, click HERE.

 

 

Womack v. Transportation Ins. Co.
(Payment Pending Final Judgement – March 14, 2012)


In Womack v. Transportation Ins. Co., No. 3:12-cv-11 (E.D. Va. Mar. 14, 2012), the court declined to order an insurer to pay uninsured motorist benefits before the underlying judgment against the liable party was final.  The plaintiff, while working, was involved in a car accident caused by another driver.  The plaintiff filed suit against the driver seeking $4 million in damages.   Plaintiff’s employer was insured under a business automobile policy issued by the defendant insurer.  The insurer intervened in the underlying lawsuit in its own name as permitted under Virginia law.  Plaintiff prevailed in the tort action on summary judgment because the driver had previously admitted fault.  The court in that case denied the insurer’s motion for reconsideration, and the insurer appealed to the Virginia Supreme Court, which will hear the case.  Plaintiff filed a breach of contract action claiming that the insurer was required to pay the underlying judgment under the uninsured motorist coverage of the policy or post a supersedes bond.  The court held that the insurer was not obligated to pay the judgment because it was not final and was not against the insurer.  Instead, the court stayed the action pending the outcome of the underlying action on appeal.

For a copy of the March 14, 2012 decision, click HERE.

 

Maximus, Inc. v. Twin City Fire Insurance Co.
(Exhaustion – March 12, 2012)

In Maximus, Inc. v. Twin City Fire Ins. Co., No. 1:11-cv-1231 (E.D. Va. March 12, 2012), the court dismissed an insurer’s counterclaim seeking a declaration that coverage under a policy had not been triggered because the insured had not exhausted coverage under lower tier carriers.  The insured, a provider of health and human services programs, was involved in a dispute with prime contractor and a government entity over services the insured provided under a contract.  After the dispute was settled, the insured sought coverage for roughly $80 million in damages under five professional liability policies providing a tower of coverage above a substantial self-insured retention.  The insured settled with the three carriers that provided coverage at the first three levels above the retention.  In each case, the insured accepted less than the full policy limits from the carrier and paid the difference between the settlement amount and the policy limit.  The fourth tier carrier claimed that it had no coverage obligations because the carriers below it had not paid their full limits.  The carrier relied on language providing that the insurance applied only after the underlying insurance “has been exhausted by actual payment under such Underlying Insurance . . . .”  The court rejected this argument holding that the language did not unambiguously provide that the underlying coverage is exhausted only if the underlying carriers pay their full limits.  It held that the underlying policies were properly exhausted where the carrier paid less than its full limit in settlement, the functional equivalent of exhaustion, and the insured paid the remainder.  The court noted that this result caused the fourth tier carrier no harm because its policy would be reached regardless of whether the underlying insurers paid their full limits.

For a copy of the March 12, 2012 decision, click HERE.

 

Travco Ins. Co. v. Ward
(Homeowner's Policy Exclusions– March 1, 2012)

The Fourth Circuit has certified a question to the Virginia Supreme Court regarding coverage under a homeowner’s insurance policy for damages due to allegedly defective drywall.  Travco Ins. Co. v. Ward, No. 10-1710 (4th Cir. March 1, 2012).  Larry Ward sought coverage from Travco Insurance Company, which issued his homeowner’s policy, for damages allegedly due to the drywall installed in his home that released sulfuric gas creating noxious odors and corroding metal in the home.  Travco denied coverage and filed suit seeking a declaration that it had no coverage obligations.  Travco argued that the home had not sustained direct physical loss.  Alternatively, it claimed that even if there was direct physical loss, coverage was excluded under faulty materials, latent defect, corrosion and pollution exclusions.  The district court held that there was direct physical loss but each exclusion unambiguously barred coverage.  It held that the drywall was defective even though it continued to perform as drywall.  The district court concluded that the defect in the drywall, which was integral to construction of the home, was latent.  It further held that losses allegedly due to corrosion were excluded because such losses were barred regardless of the cause.  Finally, the district court held that the pollution exclusion was not limited to traditional environmental pollution and applied under the circumstances.  On appeal, Ward claims that the district court erred because the exclusions are ambiguous and not intended to apply to the loss at issue.  Finding no clear precedent under Virginia law, the Fourth Circuit has asked the Virginia Supreme Court to address whether the exclusions apply.

For a copy of the March 1, 2012 decision, click HERE.

 

Republic Franklin Ins. Co. v. Albemarle County School Bd.
(Wrongful Act– February 24, 2012)

In Republic Franklin Ins. Co. v. Albemarle County Sch. Bd., No. 10-1961, 2012 U.S. App. LEXIS 3735 (4th Cir. Feb. 24, 2012), the Court of Appeals held that an insurer had a duty to indemnify its insured because the failure to comply with the Fair Labor Standards Act constituted a “wrongful act” within the meaning of the insurance policy at issue.  Employees of the Albermarle County school system filed a class action alleging that the schools violated the FLSA for unpaid wages and overtime pay.  Under the policy at issue, the insurer was obligated to “pay for all ‘loss’ resulting from a ‘claim’ for a ‘wrongful act’ to which this insurance applies.”  The insurer claimed that the school did not commit a “wrongful act” because it had a pre-existing duty to pay the wages.  The district court agreed, but on appeal, the court reversed.  It held that under the policy, a “wrongful act” included any breach of duty and the failure to pay wages and overtime was a breach of duties imposed by the FLSA.  Although the school had committed a “wrongful act,” the court held that the obligation to pay back wages and overtime pay was not a “loss” because it was a pre-existing obligation.  Finally, it held that the liquidated damages and attorney’s fees award permitted by the FLSA did constitute covered “loss.”  The court rejected the insurer’s argument that these damages were penalties or fines excluded from coverage.

For a copy of the February 24, 2012 decision, click HERE.

 

State Farm Mut. Auto. Ins. Co. v. Va. Farm Bur. Mut. Ins. Co.
(Use of a Vehicle– February 2, 2012)

In State Farm Mut. Auto. Ins. Co. v. Va. Farm Bur. Mut. Ins. Co., No. 10-1227, 2012 U.S. App. LEXIS 2096 (4th Cir. Feb. 2, 2012), the Court reversed the District Court ruling that the insured’s auto insurance policy provided coverage for a loss arising from a fire that started in the insured’s van.  The insured, a carpenter, parked his van at a work site and used the van to store tools and equipment.  A fire destroyed the vehicle and caused extensive damage to the home on which the carpenter was working.  The evidence showed that the fire was caused by equipment the insured stored in the van.  Virginia Farm paid the homeowners for the loss under a homeowner’s policy and then sought to recover from the carpenter.  The carpenter made a claim to State Farm under his business auto policy.  The District Court held that State Farm covered the loss because the damages arose from the “ownership, maintenance or use of a covered ‘auto’,” as required by the State Farm policy.  The Court of Appeals, applying Virginia law, reversed the lower court decision.  It held that the relevant inquiry was how the van was being used at the time of the loss.  Under the facts, the Court concluded that it was being used as the equivalent of a tool shed rather than as a means of transportation, the use commonly associated with the function of a vehicle.  Accordingly, the Court held that the loss did not arise from the ownership or use of the van as contemplated by the business auto policy. 

For a copy of the February 2, 2012 opinion, click HERE.

 

AES Corporation v. Steadfast Ins. Co.
(Occurrence – September 16, 2011)

In The AES Corp. v. Steadfast Ins. Co., No. 100764 (Va. Sep. 16, 2011), the Virginia Supreme Court held that the insurer had no duty to defend or indemnify the insured because no occurrence was alleged in the underlying suit.  The insured, AES, owns companies that generate and distribute electricity in various states.  In February 2008, a native village in Alaska filed suit in California against AES and others for allegedly damaging the village by producing greenhouse gases that cause global warming.  AES requested that Steadfast defend and indemnify it with respect to the suit under several Commercial General Liability policies.  Steadfast filed a declaratory judgment action.  On cross-motions for summary judgment, the trial court granted Steadfast’s motion holding that Steadfast had no duty to defend or indemnify AES because the underlying complaint did not allege an “occurrence” as required to give rise to coverage under the Steadfast policies.

The Virginia Supreme Court affirmed the trial court ruling.  The policies at issue defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general condition.”  The Court noted that an accident is “an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed or reasonably anticipated.”  The Court further noted that an intentional act is not an accident and “[i]f a result is the natural and probable consequence of an insured’s intentional act, it is not an accident.”  The focus, according to the Court, is not on whether the insured’s action was intended but whether the resulting harm is “alleged to have been a reasonably anticipated consequence of the insured’s intentional act.”  Reviewing the underlying complaint pursuant to Virginia’s “eight corners” rule, the Court held that the village clearly alleged that AES intentionally released greenhouse gases and the resulting injuries were the natural and probable consequence of the intentional emissions.  As noted by the Court: “If an insured knew or should have known that certain results would follow from his acts or omissions, there is no occurrence . . . .”

For a copy of the September 16, 2011 opinion, click HERE.

 

Evanston v. Harbor Walk
(Pollution Exclusion – September 9, 2011)

In Evanston Ins. Co. v. Harbor Walk Dev., LLC, No. 2:10-cv-312 (E.D. Va. Sep. 9, 2011), the court granted the insurer’s motion for summary judgment, holding that the insurer had no duty to defend or indemnify the insured under the policies at issue.  Homeowners filed a class-action in federal court and various individual actions in Virginia state court against the insured, Harbor Walk Development, LLC, and others.  The homeowners alleged in their complaints that drywall installed in their homes emitted gases that damaged property and caused bodily injuries.

The insurer moved for summary judgment on the grounds that under Virginia law, the pollution exclusion in the policies at issue barred coverage for the alleged injuries. The exclusion at issued provided in part that the insurance did not apply to property damage or bodily injury “which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.”  The court rejected arguments that the exclusion was ambiguous and should be interpreted to apply only to environmental pollution.  It found that the language unambiguously barred coverage because the underlying complaints alleged the discharge, release or escape of a pollutant, gases that allegedly corroded metals and endangered a person’s health.  For that reason, the court concluded that the insurer had no duty to defend or indemnify the insured with respect to the claims.  This decision is the fourth such decision by a judge in the Eastern District of Virginia.  See Dragas Mgmt. Corp. v. Hanover Ins. Co., No. 2:10-cv-547 (E.D. Va. Aug. 8, 2011); Nationwide Ins. Co. v. Overlook, L.L.C., No. 4:10-cv-69 (E.D. Va. May 13, 2011); Travco Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010).

For a copy of the September 9, 2011 decision, click HERE.

 

Dragas Mgmt. Corp. v. Hanover Ins. Co.
(Pollution Exclusion – August 8, 2011)

In Dragas Mgmt. Corp. v. Hanover Ins. Co., No. 2:10-cv-547 (E.D. Va. Aug. 8, 2011), the United States District Court for the Eastern District of Virginia held that the pollution exclusion contained in policies issued by primary and excess insurers barred coverage for property damage allegedly due to defective drywall installed in homes.  After the general contractor that built the homes obtained a $4.9 million arbitration award against the subcontractor (later reduced to judgment), the general contractor brought suit against the subcontractor’s general liability insurers to recover the judgment.

The insurers moved for summary judgment arguing that the pollution exclusion in several of the policies at issue barred coverage.  The court agreed, holding that the pollution exclusions were unambiguous and were not limited to traditional environmental pollution.  The court concluded that the reduced sulfur gases emitted from the drywall clearly were “pollutants” within the meaning of the policies based on their corrosive effects.  In reaching that conclusion, the court noted that even a product or substance such as sulfur, which is found in all drywall, that is not normally a pollutant may be so in certain situations.   Finally, even though the exact mechanism was uncertain, the court found that the gases had been discharged, dispersed or released, as required in the exclusions because the gases clearly had moved from the drywall.  The Dragas case follows decisions from two other judges in the same court holding that pollution exclusions barred coverage for property damage due to the allegedly defective drywall.  See Nationwide Ins. Co. v. Overlook, L.L.C., No. 4:10-cv-69 (E.D. Va. May 13, 2011); Travco Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010).

For a copy of the August 8, 2011 decision, click HERE.

 

Dragas Mgmt. Corp. v. Hanover Ins. Co.
(Number of Occurrences – July 21, 2011)

In Dragas Mgmt. Corp. v. Hanover Ins. Co., No. 2:10-cv-547 (E.D. Va. July 21, 2011), the United States District Court for the Eastern District of Virginia held that damage caused by faulty work is an occurrence and that there were multiple occurrences under the facts of this case.  After reducing a $4.9 million arbitration award to judgment, a general contractor filed suit against a drywall subcontractor’s general liability carriers.  The general contractor claimed that the carriers provided coverage for the judgment which involved costs the general contractor incurred to remove and replace allegedly defective drywall installed in homes.  

The general contractor moved for summary judgment arguing that the installation of the drywall constituted an occurrence.  Each policy defined an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Although the carriers conceded that property damage caused by the drywall was an occurrence, they argued that defective drywall itself was not an occurrence, and therefore, the costs to replace it were not covered.  The court held that an “accident,” which was not defined in the policies, was an unforeseen and unintended consequence.  Relying on Fourth Circuit precedent, the court further held that the need to replace the defective drywall was not unexpected or unforeseen under the general contract, but the damage to other property was an unexpected and unforeseen consequence.

The general contractor also argued that installation of the drywall constituted a single occurrence.  Relying on Virginia law, the court held that it had to look to the cause of the injury to determine the number of occurrences.  The court stated that this test required it to determine what ultimately caused the injury, as with a proximate cause analysis applied in tort cases.  The court ultimately concluded that the installation of drywall in each home at issue, not the initial purchase of the defective drywall, gave rise to the damage in each home and the general contractor’s liability to each homeowner.  Thus, the court held that there were seventy-four (74) occurrences at issue in the case, one for each home that sustained damage.

For a copy of the July 21, 2011 decision, click HERE.

 

 

 

 

 

 

 
 

 

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Because each client’s situation must be evaluated on its own merits, taking into account all relevant circumstances, this case review must be understood as intended for general informational purposes only and should not be considered legal advice. Moreover, this case review is not intended to create nor does it constitute an attorney-client relationship.

 

 

 

 © 2011 Jackson & Campbell, P.C.