In Howard v. American National Fire Ins. Co., Cal.App.4th; 10 C.D.O.S. 10399, the California Court of Appeal, First District, recently affirmed a judgment entered in the San Francisco Superior Court against an insurer after a bench trial finding bad faith and punitive damages.  In a wide ranging decision, one of the central coverage issues was the timing of injury.  The insurer claimed there was no evidence of injury during the policy period introduced in the underlying case, but the Court of Appeal found that evidence of timing could be introduced in the coverage action because timing was not adjudicated in the underlying action.  The Court of Appeal also held that the genuine dispute doctrine is inapplicable in third party, refusal to settle contexts.

James Howard (“James”) and his brother Joh Howard sued Father Oliver O'Grady (“O’Grady”) for damages suffered from molestation. The named defendants included the head of the diocese, the Roman Catholic Bishop of Stockton (“Bishop”).  In his complaint, James alleged that O'Grady repeatedly molested him "[b]eginning in approximately 1979.”

American Fire National Insurance Company (“American”) insured the Bishop from November 1, 1978 to November 1, 1979, under a comprehensive general liability policy for sums he became legally obligated to pay as damages up to a limit of $500,000 per occurrence.  When the Bishop was sued for negligent retention, the Bishop sought a defense from American. American denied the tender, maintaining that the molestation was not covered because it occurred after the expiration of American's policy in November 1979. 

The Howards made several pretrial settlement demands.  Their final pretrial settlement offer was $1.85 million.  American did not contribute to any settlement offer made by the Bishop.  The case did not settle.  The final judgment awarded compensatory damages of $2.5 million to James Howard and $2.75 million to Joh Howard. The Howards' punitive damages were $3 million each.  Subsequently, the Bishop settled the underlying litigation with assistance from its other insurers. 

The Howards filed a complaint against American as judgment creditors seeking to collect on their judgment.  The Bishop filed a separate complaint against American for breach of contract and bad faith breach in failing to defend, settle, and indemnify the Howards' claims against him. The complaints were consolidated in the trial court.  The trial court found that coverage under the policy was triggered, and that American acted in bad faith. 

During the coverage action, evidence was introduced that O’Grady had stayed in the Howard home during the American policy period.  American argued that this evidence was inadmissible because it was not introduced in the underlying litigation.  The Court of Appeal rejected that argument, explaining that the underlying litigation only addressed whether molestation occurred – not the timing of any alleged molestation.  Accordingly, the evidence in the underlying litigation did not dictate the scope of evidence in the coverage action. 

American also cited to deposition testimony in which James stated that his “first memories” of molestation were at age five.  This testimony did not impact the coverage issues because it concerned James’ “memories” of the molestation and not the actual dates of molestations.  Accordingly, the Court of Appeal held that American did have a duty to indemnify the Bishop in the underlying litigation. 

The Court of Appeal likewise held that American breached its duty to defend by relying on James’ deposition testimony to deny a defense to the Bishop.

The trial court found that American breached its duty to settle the underlying litigation supporting a finding of bad faith.  American argued that its failure to settle the underlying litigation was not unreasonable because it was never presented a settlement offer within its policy limits.  The Court of Appeal held that in actions involving a single insurer, a settlement offer within policy limits is necessary to support a finding of bad faith.  However, where multiple insurers are on the risk, an insurer can be held liable for failure to settle if the settlement offer is less than the total limits of the policies insuring the risk.  Here, although American’s policy limit was $500,000, there was a settlement demand for $1.85 million that was well within the primary insurance policy limits of the multiple insurers which totaled $4.3 million. 

In addition, American argued that its refusal to settle was prompted by a genuine dispute concerning coverage which precludes a finding of bad faith.  The Court of Appeal held that the genuine dispute doctrine does not apply in all bad faith insurance contexts.  Pertinently, an insurer in a third party case may not rely on a genuine dispute over coverage to refuse settlement.  Moreover, even if the genuine dispute standard was applied, the Court of Appeal found that American’s no-coverage position was based on an unreasonable interpretation of James’ deposition testimony.

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In State Farm General Insurance Company v. JT’s Frames, Inc., (January 27, 2010) __Cal.App.4th___; 10 C.D.O.S. 1162, the California Court of Appeal, Second Appellate District, joined those jurisidictions finding that an insured’s transmission of thousands of unsolicited faxes was not “advertising injury” or “property damage” under the terms of the insured’s policy. Because “fax blasting” did not impinge on the “secrecy” component of the right to privacy and was not an “accident,” the policy did not cover claims against the insured by facsimile recipients.

From 2002 to 2007, State Farm issued insurance policies to the Friedman Group (“Friedman”). The policies covered “advertising injury caused by an occurrence committed in the coverage territory during the policy period.” “Advertising injury” was defined to include: “a. oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; b. oral or written publication of material that violates a person’s right of privacy; c. misappropriation of advertising ideas or style of doing business; or d. infringement of copyright, title or slogan.” More...

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In the 1990s, plaintiffs started filing asbestos actions against Travelers in various state courts. As relevant, many of these claims alleged that Travelers conspired with other insurers and asbestos manufacturers to hide the dangers of asbestos and to raise fraudulent defenses to personal injury claims or that Travelers had violated common law duties by failing to warn the public about the dangers of asbestos. Such claims sought to recover from Travelers, not derivatively for Manville’s wrongdoing, but for Travelers’ own alleged misconduct.

In 2002, Travelers relied on the 1986 Order in moving the Bankruptcy Court to enjoin the pending state court actions. The Bankruptcy Court eventually entered an order dated August 17, 2004 (the “Clarifying Order”) finding that the 1986 Order barred the pending actions and “[t]he commencement or prosecution of all actions and proceedings against Travelers that directly or indirectly are based upon, arise out of or relate to Travelers[’] insurance relationship with Manville or Travelers[’] knowledge or alleged knowledge concerning the hazards of asbestos,” including claims for contribution or indemnification.

Some individual claimants and Chubb Indemnity Insurance Company (“Chubb”) objected to the Clarifying Order and subsequently appealed. They argued that the state court actions fell outside the 1986 Order and that the Clarifying Order improperly expanded the 1986 Order to bar actions beyond the Bankruptcy Court’s jurisdiction (because the Clarifying Order purported to bar actions premised on Travelers’ own alleged misconduct, not just its derivative liability for Manville’s wrongdoing). The District Court affirmed, but the Court of Appeals for the Second Circuit reversed. Travelers appealed the Second Circuit’s decision to the United States Supreme Court.

The Supreme Court, in an opinion delivered by Justice Souter, initially found that the time to appeal from the 1986 Order had expired almost two decades ago. Thus, the Court could not reach the argument of whether that 1986 Order exceeded the Bankruptcy Court’s jurisdiction. The 1986 Order was final and not subject to attack. Therefore, the Supreme Court determined that the only issue properly before it was whether the 1986 Order barred the state court actions.

The Supreme Court held that the state court actions fell within the scope of and were barred by the 1986 Order. In so ruling, the Court found that even though the subject actions were premised on Travelers’ own alleged misconduct (as opposed to Travelers’ derivative liability for Manville’s wrongdoing), they still fell within the broad language used by the 1986 order, e.g., arising out of or relating to. The Court refused to consider extrinsic evidence of what the parties understood about the scope of the 1986 Order concluding that “it is black-letter law that the terms of an unambiguous private contract must be enforced irrespective of the parties’ subjective intent.” The Court went on to find that the Bankruptcy Court had subject matter jurisdiction to issue the Clarifying Order which, in it view, embodied a correct reading of the 1986 Order.

Significantly, the Supreme Court did “not resolve whether a bankruptcy court, in 1986 or today, could properly enjoin claims against nondebtor insurers that are not derivative of the [insured] debtor’s wrongdoing.” Rather, its holding was based solely on the face of the 1986 Order, which could not be challenged almost twenty years later.

Justice Stevens, joined by Justice Ginsburg, issued a dissenting opinion which concluded that the 1986 Order only barred claims against Manville’s insurers seeking to recover from the bankruptcy estate for Manville’s own misconduct, not claims seeking to recover from insurers for their own misconduct. In support of this view, the dissenting opinion cited to the record in the prior bankruptcy action which contained evidence that even the parties to the 1986 Order did not believe it would bar claims premised on the insurers’ alleged misconduct. According to the record, the settling parties did not believe that the Bankruptcy Court had the power to enjoin third-party claims against nondebtors that did not affect the debtor’s estate. Additionally, the dissenting opinion disagreed that the current appeal was seeking to rewrite the 1986 Order. Rather, the current appeal was objecting to the Clarifying Order. As such, the dissenting opinion found that the appeal was timely and that the 1986 Order did not bar the claims pending against Travelers.

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The California Court of Appeal, Second Appellate District, affirmed the trial court’s finding that water damage caused by third party negligence was subject to the policy’s water damage and third party negligence exclusions.

In Freedman, contractor remodeling the Freedmans’ bathroom drove a nail through a pipe in the bathroom wall. Five years later, extensive water damage and mold were discovered.

The Freedmans were insured under a homeowners insurance policy. The policy provided “all-risk” coverage for the dwelling subject to exclusions for losses resulting from “deterioration, . . . corrosion . . . or rust,” and water damage, defined as “continuous or repeated . . . leakage of water . . . from a . . . plumbing system . . . .” The exclusions applied regardless of whether the loss or event “occurs suddenly or gradually, . . . arises from natural or external forces,” or is caused or aggravated by negligence or defective workmanship, among others. The policy also contained a mold endorsement which provided coverage for losses caused by mold, if the mold was caused by a specified peril or not otherwise excluded.

State Farm denied the Freedmans’ claim contending that the water damage and corrosion exclusions barred coverage. The Freedmans sued, arguing the exclusions did not bar coverage because the contractor’s negligence in puncturing the pipe was the efficient proximate cause of the ensuing damage, not the excluded water leakage or corrosion. State Farm countered that the identity of the efficient proximate cause did not matter because all of the possible causes were excluded. On cross motions for summary judgment, the trial court found for State Farm and entered judgment in its favor. The Freedmans appealed.

The Court of Appeal affirmed. It rejected the Freedmans’ efficient proximate cause analysis as having been superseded by the Supreme Court’s opinion in Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747. The efficient proximate cause doctrine states that, where a loss is caused by a combination of covered and uncovered risks, the loss is covered under the policy if the covered risk was the predominate or most important cause of the loss.

In Julian, the Supreme Court ruled that (1) “an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril[,]” and (2) a manifestation of a particular peril can be defined “in terms of a relationship between two otherwise distinct perils.” (Id. at p. 759.)

The Freedmans’ policy excluded third parties’ negligence and defective workmanship when they interacted with an excluded risk. Corrosion and continuous or repeated water leakage were excluded risks under the policy. Thus, the policy excluded any losses caused by corrosion or water leakage that was induced by the contractor’s negligence. Moreover, the Freedmans had not presented any evidence that contractor negligence caused their loss in any way other than from the nail’s role in triggering corrosion and a water leak. Therefore, the Court held the loss was not covered.

The Court also ruled that the third-party negligence provisions in the policy were not “insufficiently clear” as defined in De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213. The language of the provisions clearly excluded the perils of contractor-negligence-induced corrosion and water leaks, such that “‘[a] reasonable insured would readily understand from the policy language which perils are covered and which are not.’” (De Bruyn, supra, 158 Cal.App.4th at 1223, quoting Julian, supra, 35 Cal.4th at 759.)

The Court similarly rejected the Freedmans’ contention that the water leakage exclusion was ambiguous. The Freedmans argued the exclusion was ambiguous because the policy did not specify how long a leak had to exist to be deemed “continuous,” or how many times it had to start and stop to be considered “repeated.” The Court ruled that, as applied in this case, the terms were not ambiguous. Given the small size of the hole in the pipe and the extent of water damage, the leak had lasted long enough to be deemed “continuous,” or had stopped and started enough times to count as “repeated” under any reasonable construction of those terms.

The Court also rejected the Freedmans’ argument that the exclusion only applied to “normal deterioration of the plumbing system,” and not leaks caused by anything other than normal deterioration. The Court found the Freedmans’ interpretation at odds with the policy language because the exclusion barred coverage for losses arising from “natural or external forces.” (Emphasis added.)

Finally, the Court held that the loss was not covered under the Freedmans’ mold endorsement. The endorsement provided coverage for mold damage where the mold was caused by a covered risk, or a risk that was not otherwise excluded. As with the water damage, the damage from mold was similarly excluded because the mold in the Freedmans’ bathroom was caused by third party negligence in connection with corrosion and continuous water leakage, all of which were excluded risks.

Therefore, the Court affirmed the trial court’s judgment, and awarded appeal costs to State Farm.

Freedman v. State Farm.pdf (27.62 kb)

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