Insurer Permitted to Intervene in Insured’s Appeal
The Texas Supreme Court held that an insurance company is entitled to intervene in its insured’s appeal if the insured has abandoned a potentially dispositive issue.
In the underlying case of In Re Lumbermens Mutual Casualty Company, 2006 Tex. Lexis 96 (February 3, 2006), Sonat Exploration Company and Cudd Pressure Control, Inc. conducted gas well operations pursuant to a Master Service Agreement (MSA). When Sonat was sued following an explosion occurring during operations, it sought indemnification from Cudd pursuant to the terms of the MSA. Cudd refused to indemnify Sonat. Lumbermens, Cudd’s excess liability insurer, denied coverage to Sonat. Sonat subsequently filed a cross-claim for indemnity against Cudd, which was eventually severed from the personal injury lawsuits.
Choice of law was the primary issue in the indemnity suit, as the indemnity provision is void under Louisiana law, but valid under Texas law. The trial court found that Texas law applied and granted partial summary judgment in Sonat’s favor. The jury awarded Sonat damages in the amount of $20.7 million. Cudd filed a notice of appeal and Lumbermens posted the $29 million bond.
Afterwards, Cudd and Sonat entered into a settlement agreement in which Cudd agreed to forgo any challenge to the trial court’s choice of law ruling. Lumbermens sought leave to preserve the issue in Cudd’s appellate brief. The court of appeals denied the motion, and Lumbermens filed a writ of mandamus with the Texas Supreme Court.
Lumbermens contended the doctrine of virtual representation entitles it to appeal the trial court’s choice of law ruling. Virtual representation provides that a person or entity is deemed a litigant if it will be bound by the judgment and if an identity of interest exists between the litigant and a named party. Sonat contended that since Cudd no longer wished to contest the law ruling, the companies had diverging interests, thereby precluding Lumbermens from invoking the doctrine. The court found, however, that their ultimate interest in reversing the underlying judgment remained the same. Sonat further argued that Lumbermens could avoid coverage for the judgment by invoking the non-cooperation clause in Cudd’s policy. However, as the court noted, even if Lumbermens could eventually recoup its payment through a coverage suit, its obligation to pay the underlying judgment was immediate and binding in the event the appeal was unsuccessful. As a result, the court found that Lumbermens was entitled to invoke the virtual representation doctrine in order to raise the choice of law issue in the appeal.
By Lisa Henderson, Sedgwick Dallas
Insurer May Avoid Coverage if Prejudiced by Insured’s Breach of Consent to Settle Clause
In Motiva Enterprises, LLC v. St. Paul Fire and Marine Insurance Company, et al., 2006 WL 270191 (5th Cir., February 6, 2006), the Fifth Circuit Court of Appeals held that under Texas law an insurer that tenders a defense under a reservation of rights may enforce a consent to settle clause, but must demonstrate prejudice by the insured’s breach of the clause to avoid coverage.
The case arises out of several personal injury lawsuits filed against Motiva Enterprises, LLC following an explosion at its refinery. Upon exhaustion of the underlying limits for costs associated with these lawsuits, Motiva sought coverage under an umbrella policy issued by National Union, which contained a clause requiring Motiva to obtain consent prior to any settlement which would implicate its limits. National Union offered to defend the lawsuits subject to a reservation of rights to deny coverage.
Upon Motiva’s request, National Union sent a representative with settlement authority to a mediation. However, the representative was asked to leave during mediation, at which time Motiva agreed to settle the lawsuit without National Union’s consent. Consequently, National Union denied Motiva’s request to fund the settlement and its subsequent request for reimbursement.
The Fifth Circuit vacated the judgment in favor of National Union and remanded the case to the district court to determine whether National Union suffered "actual, concrete prejudice" from Motiva’s breach of the consent to settle clause.
By Allison Calkins, Sedgwick New York
Coverage for Discharge of Dry Cleaning Chemicals Excluded Under Pollution Exclusion
California’s Northern District held in Lewis v. Hartford Cas. Ins. Co., 2006 U.S. Dist. LEXIS 3754 (N.D. Cal. Jan. 30, 2006), that the pollution exclusion clause barred coverage for soil and groundwater contamination caused when the insured’s dry cleaning business discharged perchloroethylene.
The underlying action involved the County of San Mateo’s administrative claim against Peninsula Cleaners. Hartford Casualty Insurance Company declined the tender based on the pollution exclusion, which bars coverage for the discharge of pollutants at, or from, premises occupied by the insured, and for loss arising out of governmental order requiring clean-up.
The court found that pollution need not be intentional, an inherent byproduct of an industrial process, or rise to the level of catastrophe, to be "commonly thought of as environmental pollution." The court noted that four out of the five cases cited in the California Supreme Court decision MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635 (2003), involved a pollution exclusion resulting from groundwater contamination. While there is not a published California case specifically covering dry cleaning chemicals, an Illinois court found in Kim v. State Farm Fire & Cas. Co., 312 Ill.App.3d 770 (2000), that the pollution exclusion applied for damages caused when the dry cleaning chemical tetrachloroethane was discharged into the soil.
By Helen Chen, Sedgwick San Francisco
Failure to Use COLOSSUS May Indicate Bad Faith
An adjuster’s failure to use COLOSSUS, software that assesses and recommends a "value" for bodily injury claims, may be indicative of inadequate claim handling. Reagan Wilson v. 21st Century Insurance Company (2006) 38 Cal.Rptr.3d 514.
In Wilson, plaintiff suffered a back injury from a car accident. After recovering the adverse driver’s limits, plaintiff demanded uninsured motorist limits from 21st Century. After two years of conflicting views as to plaintiff’s injury, 21st Century retained a neurosurgeon who concluded that plaintiff would likely benefit from surgery. 21st Century then immediately tendered the uninsured motorist benefits.
Plaintiff filed suit claiming failure to conduct a reasonable and prompt investigation. During discovery, plaintiff learned that COLOSSUS was available, but not used. The claims adjuster was instructed not to answer deposition questions regarding whether COLOSSUS was used in other claims, when it became available, and its possible impact. Plaintiff’s motion to compel the answers was denied.
Reversing that decision, the California Court of Appeal held that because the bad faith case turns on whether the insurer reasonably investigated and evaluated plaintiff’s claim, 21st Century’s claims handling practices are discoverable. Most notably, the appellate court recognized, in dicta, that when used properly, COLOSSUS may ensure that adjusters diligently evaluated their claims, thus reducing the carrier’s exposure to bad faith liability.
In an unprecedented move, the Wilson court also held that when proper claims adjustment "turns on a medical evaluation of the insured" an insurer breaches its duty to thoroughly investigate the claim "if it fails to have the insured examined by a doctor of its choice or at least to consult with the insured's treating physician." While the court stated this was a "well established" principle, it cited only two cases -- Egan v Mutual of Omaha and Mariscal v Old Republic -- neither of which provides that specific holding.
An appeal to the California Supreme Court and a request for depublication is anticipated.
By Paul Song, Sedgwick Los Angeles
Illinois Appellate Court Defines Proper Action When Faced With Conflict of Interest
In Thomas Williams v. American Country Insurance Co., 833 N.E.2d 971 (Ill. App. Ct. 2005), the Illinois Appellate Court held that where an insurer has an ethical conflict of interest because it insures two defendants with contradictory defenses, the insurer is required to provide independent counsel to each insured. Alternatively, the conflict may be resolved by complete disclosure and consent from all of the parties.
In Williams, Thomas Williams, one of Yellow Cab’s taxicab drivers, was convicted of misdemeanor battery after an altercation with a police officer. The officer sued Williams and Yellow Cab, alleging negligence. American Country undertook the defense of both under a reservation of rights.
Williams filed a declaratory action against American Country seeking independent counsel, which in turn filed a counterclaim seeking a declaration that the intentional acts exclusion barred coverage. The trial court granted Williams’ summary judgment, finding that a conflict of interest existed and prejudiced Williams.
The Appellate Court affirmed, noting that the interests of the two insureds were "diametrically opposed and presented American Country with an ethical conflict where it could not choose a defense strategy … without harming either Williams or Yellow Cab." Specifically, the court held that Williams was prejudiced because the attorney retained by American Country to defend Williams filed papers asserting that Williams was not an agent of Yellow Cab, but an independent contractor, which left Williams vulnerable to a judgment without coverage. Thus, the court held that American Country was obligated to pay for Williams’ independent counsel.
By Ian Rothenberg, Sedgwick Chicago
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