Five Key 2022 Coverage Decisions (not Reported in the Leading Insurance Blogs)

MasonADR, LLC: Report (December 8, 2022)

This is the second annual edition of an update I’ll be sharing each December. The article summarizes five noteworthy decisions that weren't reported in the highest-profile insurance blogs. These decisions fall “below the radar” sometimes through inadvertence, but sometimes because it doesn’t concern a high-profile substantive issue (such as COVID-19, for example), even though the decision does announce an interpretational or procedural rule that may alter the outcome of numerous future coverage cases. These cases are important to know about, so I employ searches tailored to capture “under the radar” cases, because knowing about a decision that, for example, required an insurer to defend an insured in an action where the insured hadn’t been sued, can be as important to a coverage lawyer’s success as knowing in whose favor a COVID-19 (but otherwise generic) decision was resolved.

Here are my top five for 2022:

◙ McMillin Homes Constr. v. Lexington Ins. Co., 3:20-CV-00006 (S.D. Cal. 2022)

► Held: A liability insurer can have a duty to defend an insured even though that insured has not been sued, if the insured can show that a lawsuit’s allegations raise the potential of a covered liability on the part of that insured. The court noted that the nature of the insured’s relationship with named defendants in the subject action was described in the lawsuit and that plaintiffs in that action had expressly reserved several of the “Doe defendants” for persons who, as the insurer was aware, allegedly had roles similar to the insured’s. Quote: The insured was not “speculat[ing] about unpled third-party claims; rather, [it] argues that it is one of the unnamed Doe defendants implicated by the claims actually pled in the underlying action. … [T]he facts in the complaint, when taken together with the extrinsic information available to [the insurer], raises at least the potential for coverage, which in turn triggers [the insurer’s] duty to defend.”

► Significance: Under California law, where the duty to defend may arise if the insurer has knowledge of extrinsic facts that implicate the potential for coverage, an insurer must defend if the insurer knows that its insured, though not yet named as a party, is clearly implicated by the allegations in a complaint.

◙ Truck Ins. Exch. v. Kaiser Cement, 2022 WL 71771 (Cal. App. 2022)

► Held: Insurer cannot avoid “all sums” liability in a long-term exposure case by arguing it can obtain contribution from itself via allocation of losses triggering one year to other policy years. Rather, insurers can only apportion a loss among themselves when as at least one of them makes good on all sums owed to the insured for that policy year. Quote: “Truck’s proposal could expose Kaiser to detrimental exhaustion of Truck's policies having an aggregate limit, resulting in Kaiser losing coverage for what could have been covered claims. Similarly, it could deplete or exhaust layers of excess insurance above the other Truck policies. Truck does not seek contribution from another insurer on the same loss, but rather seeks to shift responsibility for payment of future claims from itself to excess carriers or its insured.”

► Significance: An insurer cannot avoid “all sums” coverage under a single policy year by agreeing to pay under policies it issued in other policy years if doing so would result in a net reduction in coverage available or shift liability to excess insurers.

◙ Endurance Am. Ins. Co. v. Rockwood Holdings, Inc., ___ N.Y.S.3d ___, 2022 WL 16640689 (N.Y. App. Div. 2022)

► Held: Coverage dispute does not fall within insurance policy's narrow arbitration clause, which was limited to arbitration of disputes over the “allocation of defense costs.” Quote: “Since plaintiff contends that it is not required to pay for any defense costs because all liabilities are excluded from coverage under the fraud exclusion of the policy, there is no issue of allocation.”

► Significance: Arbitration clauses that narrowly identify by subject matter which disputes are arbitrable will not compel arbitration even of related disputes.

◙ Mountain Lakes Abstract Co. v. Certain Underwriters at Lloyd’s, London, __ F. Supp. 3d __, 2022 WL 1785482 (M.D. Pa. 2022)

► Held: Though insurer who reserved rights upon notice of a complaint against its insured never specifically reserved its rights concerning new allegations added to subsequent complaints, the insurer did not waive the right to deny coverage on the basis that the underlying claimant’s amended and second amended complaints constituted the same “claim” as the initial complaint. Quote: “Adding new causes of action in the amended and second amended complaint did not create a new claim per the express terms of the policy. Hence, First American's lawsuit constitutes a single ‘claim’ against Mountain Lakes” (the insured).

► Significance: An insurer’s reservation of rights as to the initial complaint may also serve to reserve rights as to ensuing amendments of that complaint.

◙ Bethany Boardwalk Grp. v. Everest Sec. Ins. Co., 20-CV-2319 (4th Cir. 2022)

► Held: Even though a first-party property insurance policy didn’t cover the costs of repairing the insured’s roof given that the damage resulted from defective installation, it did cover the costs of repairing the interior water damage and for the resulting lost business income. Quote: “Because water damage is not a risk implicated by the faulty workmanship on the North Building roof, and the windstorm - an independent and fortuitous intervening cause - is a covered cause of loss, there is coverage under the Policy for all other damages caused by the windstorm …”

► Significance: Damage ensuing from faulty workmanship may be covered if: (i) a covered cause of loss, such as windstorm, is a proximate cause, and (ii) the damage is to property other than the defectively constructed property.

Disclaimer: This report is intended for educational purposes only and does not constitute legal advice.