One Man’s Cow Manure is Another’s Liquid Gold: The Wisconsin Supreme Court Dumps on Policyholders

On By coveragelawIn Guest Blog Posts, Policy HoldersLeave a comment

cow goldGuest Blogger: Emily Breslin Markos, Esq., Weisbrod Matteis & Copley PLLC

The Wisconsin Supreme Court recently held that cow manure used to fertilize a farm was a “pollutant” triggering the pollution exclusion in a farmer’s insurance policy. See Wilson Mutual Insurance Company v. Falk (Dec. 30, 2014). The Wisconsin Department of Natural Resources (“DNR”) advised the farmer that manure used as fertilizer had contaminated neighboring wells. The DNR cleaned up of the neighboring wells, and sought reimbursement from the farmer.

The farmer sought coverage under two farm-owner insurance policies. The insurer, Wilson Mutual, then filed a declaratory judgment action to determine whether the alleged contamination was covered by the policies. The central question before the Court was whether cow manure used to fertilize farm fields was a “pollutant” falling within the exclusion for bodily injury or property damage which results from the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” into or upon land, water or air. Id. at 6.

The trial court found that the manure triggered the pollution exclusion but the court of appeals reversed, holding that a reasonable farmer considers cow manure to be “liquid gold,” and not a pollutant.

The Wisconsin Supreme Court agreed with the trial court, and held that a “reasonable insured would consider manure that seeped into a well to unambiguously be a pollutant.” Id. at 18. The Court had some precedent for this holding, the Wisconsin Supreme Court having concluded previously that bat guano can be a pollutant, despite its potential beneficial use as a fertilizer.

The Court noted that while “to a reasonable farmer” manure is generally not a pollutant under the test, manure “in relation to a well” is a pollutant. Id. at 23. The analysis of whether manure is a pollutant had to take place in the context of the occurrence at issue. Thus, the Court held that “manure is a unique and largely undesirable substance commonly understood to be harmful when present in a well.” Id. at 25.

The news wasn’t all bad for the farmer. A separate policy provision under the incidental coverages section provided that Wilson Mutual would indemnify the farmer up to $500 for each occurrence of damage to the property of others. The pollution exclusion did not apply to this provision. The provision additionally required Wilson Mutual to defend the farmer for claims of property damage. This actually entitled the farmer to a full defense for all claims because “[w]here an insurer’s policy provides coverage for even one claim made in a lawsuit, that insurer is obligated to defend the entire suit.” Id. at 39. Of course, the Court noted that, practically speaking, Wilson Mutual could extinguish its duty to defend and indemnify by settling each claim at the policy limit of $500.

Overall, the case serves as an important reminder that the interpretation of insurance policies is often subjective and largely dependent on context. One man’s pollutant is quite often another’s liquid gold.

Emily Breslin Markos is an associate at Weisbrod Matteis & Copley PLLC, where she focuses her practice on commercial litigation and insurance coverage counseling and litigation for policyholders. She received a B.A. from Brywn Mawr College in 2004 and graduated magna cum laude from Rutgers University School of Law – Camden in 2010. She can be reached at emarkos@wmclaw.com or 267.262.5589.

Loose Lips Sink Ships: Policyholder Communications with Insurance Brokers May Not Be Privileged and Immune from Disclosure

On By coveragelawIn Insurance Brokers, policyholdersLeave a comment

Insurance brokers play a vital role in the insurance process. Beyond assisting in the placement of the insurance program, they are often the first to be consulted by the policyholder after a major loss or liability. In fact, brokers are often so involved in the claim process that policyholders may consider their communications with brokers to be privileged and immune from discovery by insurers after a claim dispute arises. Unfortunately, that is not always the case.

Generally, the attorney-client privilege protects confidential communications between attorneys and their clients with regard to the rendering of legal advice. Communications are protected when they are necessary for the effective communication between attorneys and their clients. Protection may not be available when the communication is extended to someone outside of the attorney-client relationship or when the communication involves business, as opposed to legal advice.Man afloat on desk in sea of currency

Courts throughout the country are split on whether broker communications are privileged. Those courts that uphold the privilege recognize that insurance brokers negotiate the coverage and, thereafter, serve as necessary advisors to policyholders. Other courts uphold the privilege when the communications with the broker are made for the purpose of facilitating legal advice. Conversely, some courts refuse to extend the privilege after concluding that insurance brokers are outside the scope of the attorney-client relationship or that the broker provided business, as opposed to legal, advice.

Accordingly, any communications with brokers should be undertaken with an understanding that they may not be protected from disclosure. And, in order to maximize whatever protection that may be available, any sensitive communications with insurance brokers should be made pursuant to a confidentiality agreement and clearly marked as “Privileged and Confidential.”

Questions? Contact  Lee Epstein at Weisbrod Matteis & Copley PLLC.

Insuring Success: The Transfer of Insurance Assets in Corporate Mergers and Acquisitions

On By coveragelawIn Corporate M&A, Insurance Coverage, Insurance policies, Insurers, Transfer of Insurance Assets, TransfersLeave a comment

Corporate America is in a constant state of flux. Mergers, acquisitions and spin-offs continue unabated. As a consequence, virtually every major insurance coverage case involves an examination of the corporate policyholder’s history and its rights to insurance for liabilities caused by predecessors and after-acquired entities.

While great care is devoted to documenting and perfecting these sophisticated corporate transactions, all too often, not enough attention is paid to the transfer of insurance assets.  For example, to the extent that insurance assets are addressed, transferring documents often deal only with the disposition of currently in force insurance policies and are silent with respect historic insurance policies.  As we now know, however, long tail liabilities arising out of asbestos, environmental and other exposures often trigger coverage under insurance policies dating back decades.

Equally troublesome is the virtually universal inclusion of so-called “anti-assignment” clauses in insurance policies that purport to require the insurer’s consent before rights under an insurance policy are transferred.  A typical “anti-assignment” clause provides as follows: “Assignment of the interest under this policy shall not bind the company until its consent is endorsed thereon.”  Insurers argue that these clauses are designed to prevent policyholders from saddling insurers with risks they never anticipated nor underwrote.

Courts throughout the country have been grappling with these and other issues.  Although holdings vary from jurisdiction to jurisdiction, some general legal principles have emerged:

  • After a merger, the insurance assets of the predecessor entity typically transfer, along with any liabilities, to the successor entity.
  • The transfer of insurance assets pursuant to other corporate transactions, such as asset purchase agreements, is largely dependent on the wording of the agreement.
  • “Anti-assignment” clauses typically do not bar the transfer of insurance assets and rights after a merger or for losses that occur before the transfer.
  • A successor entity is generally not entitled to insurance coverage under its own insurance policies for liabilities of after-acquired subsidiaries that are based on events that occurred prior to the transfer.

All of this suggests that great care should be devoted to the treatment of insurance assets in any corporate transaction.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

New York High Court Refuses to Enforce Policy Provision That Would Nullify Coverage

On By coveragelawIn Insurance policies, New York High CourtLeave a comment

Property insurance policies typically include a clause limiting the time (one to two years) after a loss within which the insured may sue the insurer. Generally, those clauses are enforced by the courts, and lawsuits commenced by insureds after the limitations period expires are dismissed. New York’s highest court, however, recently refused to enforce a contractual statute of limitations where the insured was unable to commence suit before the two-year limitation period expired. See Executive Plaza, LLC v. Pierless Insurance Company, (Feb. 13, 2014).

In addition to the two-year limitation period, the insurance policy in Executive Plaza also contained a clause that allowed for the recovery of “replacement cost,” but only after the damaged property is actually repaired or replaced. A fire destroyed the insured’s building, and it could not be reasonably replaced within two years. The insurer denied coverage based on the two-year limitation period.

Although New York courts had previously enforced even shorter limitations periods, the Executive Plaza Court refused to enforce the two-year limitations period because the insured was not able to commence suit before the limitations period expired. “A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.”

This case serves as an important reminder that insurance policies (and, indeed, all contracts) must be interpreted and applied in a reasonable manner. Insurance policy provisions, even if clear and unambiguous, should not be enforced if it will render coverage valueless.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

Before and After the Storm: Minimizing Loss and Maximizing Insurance Recoveries in Response to Your Next Business Interruption

On By coveragelawIn Business Interruption, Maximizing Insurance Recoveries, Minimizing Loss, Speaking EngagementLeave a comment

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Recent events remind us that natural disasters or catastrophes can disrupt normal business operations for weeks, months and even longer. Catastrophic events may even force relocation in order to continue operations.

Preparation is the key to effectively responding to any business interruption. An essential component of any disaster recovery plan is Business Interruption Insurance that provides protection when income is lost as the result of a business interruption. Flaster/Greenberg and The Safegard Group invite you to an interactive seminar that will discuss minimizing the impact of business interruptions and maximizing your insurance coverage. Topics include:

  • How to minimize a business interruption loss through risk management
  • Steps to take so you don’t need to rely on business interruption insurance
  • Smart disaster recovery planning
  • Industry-specific interruption coverage
  • What to do if you suffer a loss despite the efforts you made prior to an interruption
  • How to present your claim effectively and achieve the best resolution
  • Potential legal and coverage issues

Real life case studies and examples will be presented.

Professional Credits:

Accountants: 1.5 CPE credits

Speakers:

Lee M. Epstein, Esq., Weisbrod Matteis & Copley PLLC.

Brian Courtney, RPLU AAI, Healthcare Practice Leader/Professional Lines Division, The Safegard Group, Inc.

Time:

8:00 a.m. Breakfast and Networking 8:30 – 10:00 a.m. Program and Q&A

Location:

The Safegard Group, Inc. 100 Granite Drive Suite 205 Media, PA 19063

Looking for Coverage in All the Right Places

On By coveragelawIn Homeowner Policy, Insurance Coverage, Umbrella Policies, Will Contest LawsuitLeave a comment

Insurance is everywhere; it is intertwined with every facet of our working and personal lives. Yet, all too often when a loss occurs or a liability is sustained, we fail to obtain the full protection that insurance promises to provide. Many times this failure is simply the result of not looking in the right place or not looking at all.

In an extreme example, coverage was found under a client’s umbrella homeowner’s policy for the costs of defending a lawsuit involving a will contest. In that case, our client was sued by his brother who claimed that he was wrongly cut out of their mother’s will. After being told he had no insurance for the substantial costs incurred in defending the will contest lawsuit, our client contacted us for a second opinion.  As it turned out, our client’s umbrella homeowner’s policy provided coverage for “personal injury,” defined to include certain intentional torts, including “misrepresentation.” The will contest complaint alleged, in part, that our client had failed to disclose that their mother had cut his brother out of her will. That single allegation was enough to cause the court to conclude that there was the potential for coverage and, thus, a duty on the part of the insurer to reimburse the costs incurred in defending the will contest lawsuit.

Had our client simply accepted the initial opinion of no coverage, he would have forfeited over a half million dollar recovery. By seeking a second opinion and allowing us to look for coverage under the umbrella policy, a potentially crippling loss was averted.

It would be easy to dismiss this insurance success story as novel; it is not. Everyday, individuals and businesses confront similar claims. All too frequently these claims go uninsured, not because of the lack of insurance coverage, but because insureds fail to look in all the right places for that coverage.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

Senate Acts to Delay National Flood Insurance Rate Hikes

On By coveragelawIn Biggert-Waters Flood Insurance Reform Act, FEMA, Flood Insurance, Homeowner Flood Insurance Affordability Act, National Flood Insurance ProgramLeave a comment

Homeowners in coastal and flood-prone areas may receive much needed financial relief after the Senate voted 67-32 last week to pass the Homeowner Flood Insurance Affordability Act. Due to large insurance payouts made after recent hurricanes Katrina, Isaac and Sandy, the National Flood Insurance Program, the government-run flood insurance program, has suffered serious fiscal problems and incurred upwards of $24 billion dollars in debt. The step taken by the Senate, if signed into law, would delay certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012, which resulted in elevated insurance rates for many properties that had been previously “grandfathered” and premium rate increases for recently purchased homes. Many homeowners who are required to purchase flood insurance as a condition of their mortgage fear that the required flood insurance will be unaffordable once insurance premiums increase ten-fold or more.

The Senate’s bill would  delay the insurance premium increases for up to four years and preserve federal subsidies for older homes built before the newer risk maps were developed for the setting of premiums. In addition, the bill would modify sections of the Biggert-Waters Flood Insurance Reform Act by requiring the Federal Emergency Management Agency (FEMA) to conduct an affordability study and report within two years of the date of enactment, removing a $750,000 cap on the affordability study, requiring reimbursement to homeowners for successful map appeals, certifying the accuracy of flood-risk maps, submitting a homeowner affordability framework based on its findings, and designating a Flood Insurance Advocate to advocate for the fair treatment of policyholders and property owners, all of which will take several years. With the Senate’s approval, the bill will now be considered by the House of Representatives.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

Three’s a Crowd: Adventures in the Tripartite Relationship

On By coveragelawIn Defense Counsel, Insurers, Policy HoldersLeave a comment

An insurance company’s duty to defend its policyholder is at least as important as its duty to indemnify — if not more so. Indeed, it has been estimated that 55 cents out of every claim dollar is paid for defense.

The not insignificant expense associated with defending claims has caused insurers to seek greater control over the defense of claims asserted against policyholders. With increasing frequency, insurers are insisting on the use of panel defense counsel, the adherence to strict billing guidelines and the pre-approval of even the most basic costs. The resulting tensions have led defense counsel to seek guidance from their bar associations and policyholders to seek relief from the courts. Those tensions are exacerbated even further when conflicts of interest between insurers and policyholders arise.

This article discusses the nuances of the tripartite relationship involving insurers, policyholders and defense counsel and examines the current state of the law governing that relationship.

I. The Policyholder Is Always The Client

Even when an insurer is defending an action without reservation, the policyholder remains the client of the defense counsel retained and paid by the insurer. In certain jurisdictions, however, the insurer is also considered the client when a tripartite relationship is formed. Notwithstanding whether the insurer is also considered the client, insurers will invariably insist that they are entitled to control that defense, especially when they are defending without reservation.

According to insurers, the right to control will include the right to select defense counsel, approve all tactical decisions and settle any claim within policy limits. At times, however, the policyholder and insurer may have divergent views on how to defend a case or the policyholder may have business reasons for not wanting to settle a case within policy limits. In those situations, the Model Rules of Professional Conduct for attorneys provide necessary guidance for defense counsel and their clients.

Rule 1.2(a) of the Model Rules dictates that the lawyer must consult with and abide by a client’s decisions concerning the representation. Moreover, Model Rule 5.4(c) provides that a lawyer “shall not permit a person who recommends, employs or pays a lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering . . . legal services.” Thus, irrespective of whether the insurer is also deemed the client, defense counsel must consult with the policyholder, and not permit the insurer to interfere with counsel’s judgment in defending the interests of the policyholder.

II. An Insurer May Not Insist On Unfettered Compliance With Its Billing Guidelines   

In an effort to reduce litigation costs, insurers are increasingly insisting that defense counsel comply with stringent billing guidelines. Those guidelines typically impose strict reporting requirements and require defense counsel to seek prior insurer approval of any significant costs to be incurred. The insurer’s interest in reducing costs will, in many instances, diverge from the policyholder’s interests in obtaining the best possible defense.
When compliance with insurer-imposed billing guidelines will compromise the defense, defense counsel must protect the policyholder’s interests. In those circumstances, defense counsel must first consult with both the insurer and the policyholder. If the insurer is unwilling to modify or withdraw the limitation a billing guideline places on the defense, and the policyholder is unwilling to accept that limitation, Rule 1.7(b) requires that defense counsel withdraw from representation of both the policyholder and the insurer. Rule 1.7(b) provides, in pertinent part, that “[a] lawyer shall not represent a client if the representation of that client will be materially limited by the lawyer’s responsibilities to another client or to a third person . . . .”

A specific cost-reduction mechanism employed by insurers, which has come under fire recently, is the use of third-party auditors to review defense counsel bills. Such “legal bill audits,” typically involve an examination of hourly rates charged, time spent and defense counsel’s work product to determine the reasonableness of the amounts charged. In the usual case, defense counsel may share this type of information with the insurer because such sharing is either required by the insurance policy or it is permissible in those jurisdictions in which the insurer is also considered the client of defense counsel. When the disclosure would affect a material interest of the policyholder, however, defense counsel may not share such information with the insurer, absent informed consent from the policyholder. For example, defense counsel are usually prohibited from disclosing information to the insurer that could adversely affect the policyholder’s coverage under the insurance policy at issue. An apt example was provided by the Pennsylvania Bar Association:

Generally, an attorney representing an insured need only inform the Insurer of the information necessary to evaluate a claim. For example, assume an attorney represents an Insured in a premise liability slip and fall. During the course of the representation, the attorney discovers that the subject property is a rental property, not a residential property as set forth in the policy.
Although this information may radically affect coverage, the attorney is prohibited from releasing this information to the Insurer or any other third parties. In the foregoing hypothetical, the attorney would simply inform the Insurer of the nature of the injuries claimed by plaintiff and the circumstances surrounding the incident. The insurer would have all of the information necessary to evaluate the value and basis for the claim and the Insured’s confidentiality would be protected.

Pa. Bar Assoc. Comm. On Legal Ethics and Prof. Resp. Informal Op., No. 97-119, 1997 WL 816708 at *2 (Oct. 7, 1997).

Moreover, the majority of jurisdictions have concluded that defense counsel may not disclose confidential information to a third-party auditor, absent the policyholder’s informed consent. Unlike the case with insurers, disclosure of such information to third-party auditors, with whom defense counsel have no employment or contractual relationship, may result in a waiver of any applicable privilege. In order to secure informed consent from the policyholder, defense counsel must discuss the nature of the disclosures sought by the third-party auditor as well as the consequences of disclosure (i.e., potential waiver of privilege) and non-disclosure (i.e., insurer may view non-disclosure as a breach of the duty to cooperate under the insurance policy).

III. When Conflicts Arise, The Insurer Must Relinquish Control Over The Defense 

When a conflict of interest between the insurer and policyholder arises, an insurer must typically relinquish any right to control the defense, including the right to select defense counsel. “It is settled law that where conflicts of interest between an insurer and policyholder arise, such that a question as to the loyalty of the insurer’s counsel to that policyholder is raised, the policyholder is entitled to select its counsel, whose reasonable fee is to be paid by the insurer.” St. Peter’s Church v. American Nat. Fire Ins. Co., No. 00-2806, 2002 WL 59333 at *10 (E.D. Pa. Jan 14, 2002).

A classic example of a conflict necessitating the retention of independent counsel may arise where the insurer reserves the right to deny coverage for certain of the underlying claims, but not others. In that situation, an insurer “would be tempted to construct a defense which would place any damage award outside policy coverage.” Public Serv. Mut. Ins. Co. v. Goldfarb, 442 N.Y.S.2d 422, 427 (N.Y. 1981).

Another prime example of a conflict sufficient to cause an insurer to relinquish the control over the defense is where the insurer lacks the economic motive for mounting a vigorous defense. This situation may arise where the underlying claimant prays for damages that are well in excess of the insurer’s policy limits. See, e.g., Emons Indus., Inc. v. Liberty Mut. Ins. Co., 749 F. Supp. 1289, 1297 (S.D.N.Y. 1990).

IV. Conclusion

The tripartite relationship between the insurer, policyholder and defense counsel provides fertile ground for confusion and abuse. Even when an insurer defends a matter without reservation, the policyholder remains the client and can properly object to any limitations placed on the defense by the insurer. If defense counsel reasonably believes that an insurer-imposed limitation will materially impair the defense, defense counsel must withdraw from representing both the insurer and the policyholder.

When a conflict of interest between the insurer and policyholder arises, the insurer must relinquish control over the defense and the policyholder is entitled to select defense counsel. Such a conflict may arise where an insurer reserves the right to deny coverage for only certain of the underlying claims, or where the insurer does not have an economic incentive to defend vigorously, or where the insurer could construct a defense placing any damage award outside of coverage.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

On the Defensive: Excess Insurers and the Duty to Defend

On By coveragelawIn Insurance policies, Insurers, Umbrella Insurance PoliciesLeave a comment

When one thinks of excess insurance (and who doesn’t) the duty to defend is probably not the first thing that crosses the mind.  The duty to defend is typically associated with primary insurance, not excess insurance that provides coverage above underlying layers of primary or other excess insurance.  Not all excess insurance is the same, however, and certain excess insurance policies, especially excess umbrella insurance policies, expressly impose a duty to defend on the excess insurer.

Umbrella insurance policies have been referred to as “hybrid” policies because an umbrella policy “combines the characteristics of both a primary and a following form excess policy.”   An umbrella insurance policy typically promises to defend occurrences covered by the terms of the umbrella policy, but not the underlying primary policy.  That duty to defend is set forth in the Defense Settlement provision of certain umbrella policies.

Beyond defense coverage for occurrences not covered by underlying insurance, some umbrella insurance policies also promise to defend the policyholder upon the exhaustion of underlying insurance.  Courts have focused on three policy provisions in determining that umbrella excess insurers have such a duty to defend:  (1) Underlying Insurance; (2) Retained Limit-Limit of Liability; and (3) Assistance and Cooperation.

Starting with the last provision first, an Assistance and Cooperation provision in an excess insurance policy with no duty to defend will typically provide that the insurer “shall not be called upon to assume charge of the settlement or defense of any claim, suit or proceeding….”  Assistance and Cooperation clauses in umbrella policies that include a duty to defend provide differently, as follows:

Except as provided in Insuring Agreement II (Defense, Settlement) or in Insurance Agreement VI (Retained Limit-Limit of Liability) with respect to the exhaustion of the aggregate limits of underlying policies listed in Schedule A, or in Condition J [Underlying Insurance] the company shall not be called upon to assume charge of the settlement or defense of any claim made or proceeding instituted against the insured; but the company shall have the right and opportunity to associate with the insured in the defense and control of any claim or proceeding reasonably likely to involve the company.  In such event the insured and the company shall cooperate fully.

Thus, pursuant to this form of the Assistance and Cooperation clause, the insurer is obliged to defend pursuant to the three provisions identified in the clause.  As discussed above, the Defense Settlement provision requires the umbrella insurer to defend claims covered by the umbrella policy, but not the underlying insurance policy.  Pursuant to the remaining two provisions, the umbrella insurer is obliged to defend upon the exhaustion of underlying insurance.

As for the effect of the Underlying Insurance provision, one court concluded that the plain terms of the provision imposed defense obligations:
“All three policies contain a clause imposing an obligation to assume charge of and pay for [the policyholder’s] defense under certain circumstances.  Specifically, [the Underlying Insurance provision of] the policies provide:

If underlying insurance is exhausted by any occurrence, [the Excess Insurer] shall be obligated to assume charge of the settlement or defense of any claim or proceedings against the insured resulting from the same occurrence, but only where this policy applies immediately in excess of such underlying insurance without the intervention of excess insurance of another carrier.

Accordingly, by its plain terms, the policies impose defense obligations upon the insurers where the immediately underlying insurance has been exhausted by a single occurrence.”
The Eighth Circuit Court of Appeals also relied on the Underlying Insurance provision in concluding that the insurance policy expressly imposed defense obligations on the insurer.

The Retained Limit-Limit of Liability provision provides, in pertinent part, that the excess policy “shall continue in force as underlying insurance,” in the event of “exhaustion” of the aggregate limits of liability of the underlying policies.  In accordance with this language, an excess insurer must function as a primary insurer upon exhaustion of the underlying primary policy.   Of course, functioning as a primary insurer includes the assumption of the duty to defend that was previously shouldered by the primary insurance before the exhaustion of the primary policy.

Accordingly, it would be a mistake to blindly assume that an excess insurance policy contains only a duty to indemnify, and no duty to defend.  As always, the policy language controls, and policyholders should not hesitate to take advantage of all of the benefits the duty to defend offers.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.