Coverage in the Courts

Major events during the past year include a worldwide pandemic, economic devastation, and a long overdue reckoning on race. While not as high profile as those events, in the courts, 2020 saw some key insurance coverage and bad faith decisions in and beyond the construction industry. Here, we examine some of those decisions.

Cover Your Bases

In Travelers v. North American Terrazzo, 2020 WL 6700986 (W.D. Wash. Nov. 13, 2020), a Western District of Washington court ruled an insurer that sued its insured, arguing the “your work” exclusion precluded coverage, was in bad faith as a matter of law because it had not ruled out, before filing suit, that acts other than those precluded by the exclusion may have caused the damage.

The insured coated concrete floors with epoxy supplied by a Terrazzo supply company and the floors failed. The Terrazzo supply company performed a lab-analysis test of sample epoxy flooring and identified five potential causes of damage. Three related to work the insured did (preparing the existing concrete floors, improperly mixing mixture of epoxy and inadequate thickness of application), but two did not (exposure to heat above 140 degrees Fahrenheit and standing water). Moreover, when the insured was pulling up the old flooring to replace it, the insurer was present, but did not inspect the flooring or removal process and did not perform a forensic investigation into why the flooring failed. By the time the insurer retained a flooring expert, the damaged floor had been scrapped so the expert could not test it.

The insurer’s flooring expert was limited to conducting a desk review, after which he concluded either the flooring material was improperly mixed—in which case the “your work” exclusion would apply—or the supplier provided a faulty product, in which case the “your work” exclusion would not apply. The expert also told the insurer he needed a forensic analysis of the flooring sample to properly determine causation.

Nonetheless, the insurer sued the insured and moved on summary judgment that the “your work” exclusion precluded all coverage. In support of its summary judgment motion, it relied upon its expert, who now opined the insured’s faulty epoxy installation was unequivocally the cause of the damage even though this same expert had earlier told the insurer he could not tell whether damage was due to improper epoxy installation (excluded) or faulty product from the supplier (not necessarily excluded) and that he needed a forensic analysis of flooring sample to properly determine causation.

The court denied the insurer’s motion and found the insurer in bad faith as a matter of law because the insurer conducted no forensic analysis of the failed flooring, then sued the insured knowing its investigation into the underlying flooring damage left open the possibility that acts not barred by the “your work” exclusion might have caused the damage.   

Words Matter

Osprey Consulting I, Inc. v. Westport Ins. Corp., 466 F.Supp.3d 532, 537 (D. MD June 10, 2020) is a new twist on the recent trend of decisions directed toward ensuring an insured can understand an insurer’s reservation of rights. In Osprey, while Westport’s reservation of rights letter reserved “the right to file a declaratory relief action for the determination of its duty to defend and/or indemnify, including the right to request reimbursement for any defense costs or indemnity paid for uncovered claims,” it did not reserve its right to withdraw the defense without filing a declaratory judgment action to do so, so the court found Westport waived that right.

If Courts Disagree, There Must be Ambiguity

In Nash St. LLC v. Main Street America Assurance Company, No. SC20389, 2020 WL 5415325 (Conn. Sept. 9, 2020), the state’s highest court failed to determine an unresolved issue of Connecticut law because courts in other jurisdictions (with other rules of interpretation and different public policy considerations) reached different conclusions on how exclusions j5 and j6 apply. The insurer argued these exclusions barred both defense and indemnity under the general contractor’s policy for damages when a house collapsed while the subcontractor was lifting it in preparation for the foundation work. The trial court granted summary judgment in favor of the insurer because “that particular part” of the property upon which the general contractor/subcontractor was working was the entire house that was being lifted. The Connecticut Supreme Court reversed, ruling the insurer owed a duty to defend due to legal uncertainty because of the “split in authority in other jurisdictions as to the meaning of a particular policy provision.”

When the Attorney-Client Privilege Is Not a Privilege

In both Canyon Estates Condo. Ass’n v. Atain Specialty Insurance Co., 2020 WL 363379 (W.D. Wash. Jan. 22, 2020) (Jones) and Travelers Property Cas. Co. of America v. 100 Renaissance, LLC, 308 So.3d 847 (Miss. Oct. 29, 2020), courts found insurers waived the attorney-client privilege by relying on coverage counsel to draft the denial letter for the adjuster’s signature. In Canyon Estates, the court ruled that if outside counsel hired by the insurer ghost writes coverage letters ostensibly from the adjuster to the insured, that attorney’s work is not privileged and the attorney may be deposed. In 100 Renaissance, Travelers’ in-house counsel ghost wrote the denial letter from the adjuster to the insured and the result was the same.

In Canyon Estates, after in camera review of documents the insurer was trying to protect, the court found almost all the documents were discoverable based on the presumption of no privilege between the insured and insurer in the claims adjusting process. The court noted that outside counsel authored draft letters for the adjuster regarding coverage and claims processing—and assisting an adjuster in writing denial letters is not a privileged task. The court stated that where, as here, outside counsel engaged in both claims and coverage matters, the attorney-client privilege is ipso facto waived; and, since outside counsel drafted letters for the insurer, he had discoverable information about those letters for which he could be deposed. Similarly, in 100 Renaissance, LLC, supra, the court found the insurer impliedly waived the attorney-client privilege by relying substantially, if not wholly, on in-house counsel to prepare the denial letter, the reasoning of in-house counsel was discoverable.        

Make Sure You Allocate

QBE Specialty Ins. Co. v. Scrap Inc., 806 Fed. App’x 692, 697 (11th Cir. March 13, 2020) gave the 11th Circuit its first opportunity to address the burden to allocate since deciding the seminal case on this issue as part of the 5th Circuit, Duke v. Hoch, 468 F.2d 973 (5th Cir. 2972).

While defending its insured under a reservation of rights against claims for bodily injury and property damage arising out of the operation of the insured’s metal shredding facility, QBE advised Scrap on at least five separate occasions that Scrap would have to request a special verdict differentiating covered damages from uncovered damages, and that, if it did not, the failure to seek allocation could result in forfeiture of coverage for all damages. QBE also tried, unsuccessfully, to intervene in the underlying action to assist in the preparation of special verdict interrogatories.

“QBE had a duty to inform Scrap of the availability and advisability of a special verdict, lest the burden shift; QBE did so; the burden thus did not shift, but remained on Scrap, which is unable to meet it,” the court found. The failure to allocate prevented Scrap from recovering for the judgment against it. 

Builders Mut. Ins. Co. v. Island Pointe, LLC, 847 S.E.2d 87 (S.C. August 12, 2020) addresses the insurer’s attempts to intervene for the purpose of allocating between covered and uncovered damages. The South Carolina Supreme Court, relying on Duke, supra, previously indicated that the insurer has an obligation to notify its insured of the need to allocate. Here, though, the court denied the intervention but explained that the insurers could seek a declaratory judgment after the verdict to allocate. Dovetailing with the Scrap court’s analysis, the Island Pointe court noted that “the standard is notice, not successful intervention.”

Much Ado About 2021

Fla. Stat. §624.1055, effective since Jan. 1, 2020, still hasn’t been significantly addressed in any litigation. The Southern District of Florida has the opportunity to look at the issue of retroactive application of the statute but doesn’t seem terribly inclined to do so. In Hallmark Specialty Ins. Co. v. Colony Insurance Co., Case No.: 9:20-cv-80603-RKA, Colony is arguing, among other things, that that the statute is not likely to apply to costs incurred between July 1, 2019, when the statute became effective, and Jan, 1, 2020 as described in House Bill 301. Colony’s renewed motion to dismiss for failure to state a claim has been fully briefed since late last fall but the court has not yet addressed the motion.      

The Florida legislature got on a roll after the contribution statute and has since passed Fla. Stat. §627.444 and §626.9202 in 2020, titled, “Loss Run Statements for All Lines of Insurance.” Effective Jan. 1, 2021, this statute requires the disclosure of specific loss run information to an “insured.” The statute is likely subject to a constitutional challenge due to its over-breadth, which seemingly includes the disclosure of privileged and proprietary information and arguably infringes upon the named insured’s privacy rights.

Finally, insurers admitted in Florida should be aware that the legislature is considering S.B. 54 which would amend Florida’s insurance disclosure statute (§627.4137) to include the following penalty for noncompliance: “If an insurer fails to timely comply with this section, the claimant may file an action in a court of competent jurisdiction to enforce this section. If the court determines that the insurer violated this section, the claimant is entitled to an award of reasonable attorney fees and costs to be paid by the insurer.”