Law and Insurance

Perfect Storm Brewing Over Climate Change Disclosures Sought By Regulators From Insurance Industry

Just before hurricane season heats up, the winds are starting to blow from the insurance industry over questions posed by a committee of the National Association of Insurance Commissioners (NAIC) in a white paper outlining the "Potential Impact of Climate Change on Insurance Regulation."  (See Adopted White Paper).  Unless or until insurance regulation is federalized, the NAIC remains the most powerful body overseeing the U.S. Insurance industry, and for the last year or so has fixed its sights on preparing for climate change.  The Climate Change Task Force of the NAIC has promulgated nine questions to insurers (paraphrased as follows):

1. Do you have a plan to mitigate your own emissions?
2. Do you have a policy for handling climate change risk and investment management?
3. Have you considered the impact of global warming on your own investment portfolio?
4. What steps have you taken to encourage policyholders to reduce losses from climate change?
5. Describe your use of computer modeling to assess global warming impact.
6. Do you know of any trends or effects of global warming that may have a material impact on your operations or financial condition?
7. Are there geographic locations (read Gulf coast) where you are reducing business or line of insurance you are reducing or eliminating due to global warming?
8. What analysis have you conducted on the impact of global warming on your business?
9. Describe steps you have taken to engage key constituencies on the topic of climate change.

The industry's response has been, well, mixed.  Immediate comment by spokespersons for the American Council of Life Insurers and the Property Casualty Insurers Association of America was concern over the potential public release of proprietary and competitively sensitive information.  (See NAIC Climate Change Blueprint for Insurers).

Interestingly, recent comment has focused on the political aspects of the NAIC requests.  Robert Detlefesen, vice president of the National Association of Mutual Insurance Companies, stated that the disclosures are "essentially a call-to-action that seeks to enlist insurers in a campaign to promote an agenda informed not by science or evidence, but by the policy predilections of a handful of interests groups."  (See story posted on ClimateWire).  Mr. Detlefesen may have been reacting to the involvement in the NAIC process of such public and consumer interest groups as Center for Economic Justice and Ceres. 

Other industry voices suggest more openness to some kind of disclosure process and dialog with state regulators.  After all, the insurance industry was probably the first from the private business sector to take global warming seriously and begin planning.  What happens in 2009 from the NAIC disclosure-requests may depend on the 2008 hurricane season.  Another Katrina or Rita and the NAIC may issue subpoenas and promulgate interrogatories; or maybe it won't have to.

"Systemic Problems" At Group-Home Facility Held To Prohibit Coverage For Punitive Damages

American Int'l Specialty Lines Ins. Co. v. Res-Care Inc., No. 04-20389 (5th Cir. June 2, 2008) see Res-Care Decision.

In February 2008, the Texas Supreme Court held that punitive damages could be insurable under certain narrow circumstances.  See my discussion of Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008) at Supreme Court Finds No Broad Prohibition of Insurance Covering Punitive Damages - But.  Fairfield found that punitive damages against a grossly negligent employer could be covered under a workers compensation policy because the legislative purpose for allowing those punitive damages was in part to compensate the family of the deceased worker (Texas' workers' compensation law permits a lawsuit against the employer only for wrongful death caused by the employer's gross negligence).  The Court held that public policy did not bar insuring punitive damages when (1) the Legislature expressly allowed such recovery, (2) the purpose was to compensate the plaintiff or deter others, or (3) the insured is a corporation punished for the gross negligence of its employee "[w]here other employees and management are not involved in or aware of an employee's wrongful act."

The Res-Care court addresses the last of the three situations in which punitive damages may be insured.  To appreciate the court's decision to bar insurance from the corporate defendant, we must review the parade of horribles that befell a 37 year old resident at a group-home that provided services for the mentally disabled.  After the resident fell in a hallway and defecated on the floor, an employee poured undiluted bleach on the floor and escorted the other residents outside, leaving the fallen resident in her own feces and bleach for at least an hour before dragging her into a bathroom.  Even then, the resident was not cleaned.  Two other staff members found the resident in the bathroom and put her in clean clothes, treated her with Vaseline, and put her to bed without washing off the bleach.  The resident was not taken to the facility's doctor until 17 hours after the incident.  The doctor diagnosed her with only superficial burns and prescribed pain medication and whirlpool treatments, which were further delayed.  Later, a facility nurse noted the burns but did not follow up until the next day when the resident's skin began peeling off.  She was finally taken to the hospital where she died from complications due to severe burns that covered 40% of her body.

The ensuing lawsuit settled for $9 million, $5 million of which was allocated as punitive damages in a subsequent trial. (Very interesting discussion of the lower court's "Enserch" trial, named after Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485 (5th Cir. 1992) holding that the allocation between covered and uncovered portions of a settlement must be determined by factfinders in an actual trial -- but that is another issue).  The Res-Care Court affirmed the lower court's finding that Res-Care could not tap insurance to pay for the punitives, not only because several employees appeared grossly indifferent to the resident's shockingly obvious distress, but -- here's the killer -- several prior reports from the state described a level of failure of care that "evidenced systemic problems at the facility."

This case presents a closer call on Fairfield's corporate exception to the public policy bar than might appear on a first reading.  The Res-Care Court could have allowed coverage because management was not aware of the specific treatment in this case.  Remember, coverage should not be denied based on how egregious the employee's conduct was or how badly we may want to deter such neglect.  The sole consideration should be whether the corporation should be punished for the wrongful conduct of its employees.  Had the lower court gone the other way, the appellate court would probably have been justified in affirming that decision as well. 

However, we now have a "systemic problem" prohibition against allowing a corporation to insure against the gross negligence of it employees.  Texas thereby takes a step closer to California's total ban on insuring punitive damages.

Pollution Exclusion in D&O Insurance Policy Should Not Completely Bar Shareholder Securities Claim, Says Canadian Court

Boliden Ltd. vs Liberty Mutual Ins. Co., 85 O.R. (3d) 492 (Ontario Superior Court of Justice, April 1, 2008) see Boliden Decision

Several years ago, a federal appeals court sent shivers through many American boardrooms by ruling that a securities lawsuit, brought derivatively by shareholders over alleged misrepresentations in SEC filings, was not covered due to a pollution exclusion in a Directors & Officers (D&O) insurance policy.  It seems that the alleged misrepresentations concerned management's failure to report certain fines and costs for a subsidiary's mishandling of waste (the company was in the waste-hauling business), and the exclusion applied to any claims "arising out of pollution [including waste])."  See National Union Fire Ins.Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004).

U.S. Liquids never expected its D&O insurer to cover pollution lawsuits or clean up costs, but it was shocked to learn that it had no coverage for shareholder securities actions simply because the remote subject of alleged SEC misstatements related to operations that related to pollutants.  Foul!

In a case of first impression in Canada, the Boliden court reached the opposite conclusion, at least in part.  The facts are substantially similar to those in U.S. Liquids.  A Spanish subsidiary owned a mine which flooded large tracts of land with contaminated tailings after a dam failed.  Boliden's shares plummeted, and shareholders sued the company alleging misrepresentations in a Prospectus issued a year before the disaster in an initial public offering.  The D&O insurer refused to cover the claims relying on the pollution exclusion ("[Insurer] shall not be liable under this policy to make any payment for loss respecting a claim . . . for or in respect of pollution loss.")

Boliden argued that the loss in question was the drop in value of its shares, not the damage to land and rivers in Spain.  Insurer said the loss in value of shares was caused by the discharge of pollutants and so fell within the exclusion.  Liberty also pointed to U.S. Liquids and other American cases.  However, the Canadian court noted that the American cases applied very broad "but for" causation, which Canadian courts do not accept.

Finding little helpful guidance from Canadian cases discussing causal language (such as "arising out of," "attributable to," and resulting from"), the Court made its own analysis and determined that some of the allegations did not sufficiently involve pollution, though some did.  For reasons not fully explained, the court held that allegations regarding construction defects and poor maintenance of the dam were not excluded, but other allegations were excluded.  The policy contained an allocation clause requiring Liberty to pay 80% of the defense costs where claims involved both covered and uncovered claims.  Accordingly, the court required Liberty to cover 80% of the loss.

Although the result is a victory for the policyholder, the holding may offer little useful guidance if the issue arises again in Canadian jurisprudence.  The court's analysis is very fact-specific.  The best advice to policyholders is to get enhancements to the pollution exclusion before experiencing a loss.  Most D&O insurers are willing to carve out from the exclusion shareholder derivative actions or claims against individual insureds.  The D&O market is still soft, and underwriters are generally in an accommodating frame of mind.  The best way to fix questionable policy language is before a claim is asserted.

Broad Federal Insurance Regulation To Follow?

Recently introduced, H.R. 5840, the Insurance Information Act of 2008 (see H.R. 5840 Text) will create a new Office of Insurance Information to collect and analyze data on insurance, advise the Secretary of the Treasury on foreign and domestic insurance issues, report to Congress every two years, establish federal policy on international insurance matters, and ensure consistency between state and federal insurance laws as well as coordinate international trade agreements.  The bill will also create an advisory group to inform and advise the head of the Office, which will include state regulators, consumer groups, and others in the insurance industry. 

Over all, the insurance industry appears to welcome the creation of the OII as a rational and necessary precursor to any federal action (or inaction) on future federal regulation.  For example, a senior officer of the Council of Insurance Agents & Brokers (quoted in Business Insurance Magazine, April 21, 2008) said, "There are few creative and bold acts of leadership that transform the dynamics of any insurance regulatory issue and that is precisely what has been done."  Leigh Ann Pusey, COO of the American Insurance Ass'n, observed, "We have a need to have someone at the federal level to develop some insurance knowledge and expertise and to help develop policy." 

However, not all industry voices are supportive.  Some see this measure as a first step to unwanted federal control over insurance business.  Justin Roth, senior federal affairs director for the National Ass'n of Mutual Insurance Companies, noted that the OII is the kind of agency advocated in the March 31 blueprint for financial services regulatory reform proposed by the Treasury Department.  "If you go by the Treasury Blueprint, this is step No. 1 toward an [optional national charter].  It is obvious to us that this is step No. 1, and we strongly oppose federal regulation and we have concerns that this will lead to federal regulation."

The bill does seem to point to inevitable federal regulation of some kind.  But which is worse?  Federal insurance regulation or uninformed federal regulation?

New Mexico Supreme Court Requires Insurers To Defend When They Have Actual Notice of a Suit; Not So in Texas

Garcia v. Underwriters at Lloyd's, London, Op. # 2008-NMSC-018 (N.M. March 13, 2008).  See Garcia Opinion.

Although Texas and New Mexico share a border, they appear to be on opposite poles of the insurance planet, at least on this issue.  The Supreme Court of New Mexico holds in the Garcia opinion that a liability insurer's duty to defend is presumptively triggered when it receives actual notice that a lawsuit has been filed against its insured, not, as under Texas law, when the insured forwards the suit papers and demands a defense.  To overcome the presumption that it must defend, the insurer has to prove that the insured turned down the insurer's offer of defense or was unresponsive or uncooperative.

The rule in Texas, recently reaffirmed by the Texas Supreme Court, is that an insurer is under no obligation to "gratuitously subject itself to liability" by offering to defend an insured who has not asked for a defense or forwarded suit papers to the insurer.  See National Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603, 608 (Tex. 2008) (holding that additional insured was not entitled to a defense absent written demand on the insurer, even though the additional insured was unaware that his employer's policy would cover him as well and so did not request a defense, and the insurer was defending the co-defendant employer in the same lawsuit and knew the employee was covered and paying for his own defense).  See my discussion of the Crocker decision at Liability Insurer Has No Duty to Inform Additional Insured That Coverage Exists. 

The Crocker Court's rationale is that the policy typically states that the insured's actual demand and submission of the suit papers is a condition precedent in the policy, and the condition serves the essential purposes of (1) facilitating timely and effective defense and (2) triggering the duty to defend by notifying the insurer that a defense is expected.  If this rule seems somewhat overly protective of the insurer's interests, you are not alone.

The approach adopted in the Garcia decision is animated by the contrary policy of protecting the reasonable interests of insureds.  The facts in Garcia are a little messy, involving the vagaries of New Mexico probate process (indeed, the reason Lloyd's took no action to defend the insured's estate sued in a dram shop lawsuit was that its New York counsel misread New Mexico probate law and assumed the probate court had no jurisdiction over the tort action).  Moreover, the Court acknowledged that fact issues existed on whether the estate administrator adequately demanded a defense (apparently, the administrator also misunderstood New Mexico probate law and thought that he did not have the authority to demand a defense and instead urged Lloyd's to petition the probate court for the right to defend the estate -- at this point my teenage son would write "LOL").  In other words, the New Mexico Supreme Court did not have to make a new law.  It just wanted to.

The Garcia Court held that the burden of communicating about the defense should fall on the insurer.  The insurer knows, reasoned the Court, that most of the time insureds will want the benefit of a defense.

Why then should the insurer receive the benefit of a rule requiring written tender . . .?  Such a rule requires an insured to jump through meaningless hoops towards an absurd end: telling the insurer something it already knows.  Such a rule injects a degree of gamesmanship into the insurer-insured relationship without providing any valid corresponding benefit.  In fact, the only benefit of such a rule is to create a possibility--where none otherwise exists--for an insurer to escape an obligation it otherwise owes its insured.

(Quoting Federated Mut. Ins. Co. v. State Farm Auto. Ins. Co., 668 N.E.2d 627, 632-33 (Ill. App. Ct. 1996).

Nor does the insurer have to learn of the lawsuit from any particular source.  "We hold that, for the purposes of determining when an insurer's duty to defend arises, 'actual notice means notice from any source sufficient to permit the insurer to locate and defend the insured.'" (quoting Illinois Founders Ins. co. v. Barnett, 710 N.E.2d 28 (Ill. Ct. App. 1999)).  The Garcia Court found that a question of fact existed whether the administrator's letter constituted a rejection of a a defense (that was never offered) and sent the parties back down to the lower court for trial on this issue (at least there weren't sent into the jungle of New Mexico probate jurisdiction).

So which is the better approach?  The Garcia Court did not discuss the possibility that unscrupulous plaintiffs could collude with insureds to give the insurer just enough actual notice of the lawsuit to trigger the duty to defend and then obtain a monster default judgment before the insurer can find the insured and tender a defense.  Although this is possible, many jurisdictions, including Texas, have fairly forgiving procedures for overturning default judgments, particularly when the real party in interest, here, the insurer, has been unfairly excluded from participating. 

On balance, it is easier to picture instances of unfairness to the insured, as in Crocker, than to the insurer, particularly when the insured is unsophisticated and does not know of the available policy benefits.  Absolving the insurer of any obligations whatsoever unless the insured affirmatively demands a defense gives the insurer every incentive to keep mum even when the insurer knows that the insured is ignorant of its rights.  Additional insureds in commercial contexts often do not even know the identity of the insurer.  The rule adopted in Garcia seems less likely to lead to unfair results for either party and, when it does, is probably easier to fix through review procedures.

Louisiana Supreme Court Agrees that "Flood" Exclusion Is Not Ambiguous

Sher v. Lafayette Ins. Co., No. 07-C-2441 (La. April 8, 2008), See Sher Decision.

"Flood" means flood.  In the latest in a string of defeats for Katrina property owners in New Orleans over the interpretation of the standard flood exclusion in property insurance policies, the Louisiana high court agreed with the Federal Fifth Circuit Court of Appeals in rejecting the interpretation that the exclusion does not apply to floods caused by levee failures due to negligent design.  (See In re Katrina Canal Breaches Litigation, 495 F.3d 191, 214 (5th Cir. 2007). 

Joseph Sher, owner and resident of a 5-unit apartment building, sought property and lost income coverage in the excess of $550,000 after Katrina flood waters had inundated the first floor of his building.  The insurer asserted that most of the damage was caused by poor maintenance and flooding that were excluded under the policy.  Specifically, the exclusion bars coverage for loss caused by "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not."

The insurer offered to pay less than $3,000.  A trial court awarded Sher over $300,000, but the insurer appealed.  Insurer lost and appealed again.  The Supreme Court reversed.  On the key issue of the interpretation of the flood exclusion, the Court held that the term was capable of only one reasonable interpretation.

The plain, ordinary and generally prevailing meaning of the word "flood" is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.  This definition does not depend on locality, culture, or even national origin - the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.

This definition, the Court continued, does not distinguish between man-made and natural floods.  Therefore, the term is not ambiguous.  Moreover, the Court observed that even if such a distinction was supportable, no one could reasonably argue that Katrina flooding was not the result of a natural disaster.

For large commercial policyholders, alternative coverage should be available in, say, named-storm coverage.  Private homeowners probably have no alternative to the government-backed flood insurance program which has its own pitfalls. (see, for example, my discussion in Normal Legal Principles May Not Apply with Government Backed Insurance Program).  And here we are again at the beginning of another hurricane season.

"Conditions Precedent" Continue Under Attack in Insurance Policies

Quihong Liu v. Fidelity & Guar. Life Ins. Co., #06-41224 (5th Cir. March 7, 2008), see Quihong Liu Opinion

"Conditions precedent," long a formidable defense against coverage, have slipped a bit lately.  Traditionally, a "condition precedent" in a contract is treated as an absolute requirement, failing which the other party has no obligation to perform.  An example, addressed by the Texas Supreme Court a couple of months ago, is the notice requirement in a general liability policy.  It was once the law in Texas (and still is in New York) that an insured's failure to send notice of a claim "as soon as practicable" doomed any right to coverage because the policy said prompt notice was a "condition precedent."  In the PAJ case, the Texas High Court re-characterized the condition, in substance if not in name, as a covenant rather than a condition precedent, requiring the insurer to prove prejudice from the late notice before it could deny the claim.  See my discussion in PAJ Decision.

The Quihong Liu decision similarly shoots down a so-called "good health" condition in a life insurance policy by finding that it is not a condition precedent, but a representation.  Mr. Chen applied for a life insurance policy on September 4, 2003 and truthfully answered certain questions about his health.  He also agreed:

[N]o insurance will take effect unless and until both of the following conditions are satisfied during [applicant's] lifetime and while [applicant's] health is a stated in this application: (1) this policy is delivered to an accepted by the Owner; and (2) the full initial premium . . . is paid at our Home Office.  [Emphasis Added].

A few days later, Mr. Chen was diagnosed with lung cancer.  Two days after the diagnosis, the policy was delivered to Mr. Chen, who died shortly after that.  The insurer refused to pay the death benefit arguing that the condition precedent of pending good health was not met, even if the application was accurate.

The court observed that "Texas law strongly disfavors warranties and conditions precedent."  Only when the policy contains an unambiguous "good health warranty" demonstrating the parties' clear intent that payment is expressly conditioned on the literal truth of an insurer's certification of good health, will the policy be voided.  The court found that that the phrase, "while health is as stated," either was not a condition precedent (but rather a representation of good health) or the language was ambiguous.  Either way, the court held that the insurer failed to show a misrepresentation and had to pay.

Unlike PAJ in which the Texas Supreme Court simply rode rough shod over a clear condition precedent in order to bring Texas law into line with the majority of other states on the issue, the Fifth Circuit here merely demonstrates customary hostility to conditions precedent and looks for a not impossible reading in favor of coverage.

5th Circuit Rules Out Economic-Loss Doctrine in Failure To Procure Insurance Claim

SMI Owen Steel Co. v. Marsh USA Inc., No. 06-41387 (5th Cir. March 7, 2008) See SMI Opinion.

Last year, the Texas Supreme Court banished the "economic-loss doctrine" from any place in insurance coverage analysis.  See my discussion of the Lamar Homes Opinion.  In the SMI case, the 5th Circuit finds, under Nevada law, that an insured's negligence procurement claim against an insurance broker is not barred under the same doctrine.

In the last decade or so, the economic-loss doctrine has emerged as a powerful defense against any tort claim brought against a defendant in a contractual relationship with the plaintiff.  One court defined the doctrine this way:

Broadly speaking, the economic loss doctrine is designed to maintain a distinction between damage remedies for breach of contract and tort.  The term "economic loss" refers to damages that are solely monetary, as opposed to damages involving physical harm to person or property.  The economic loss doctrine provides that certain economic losses are properly remediable only in contract.  The doctrine has its roots in common law limitations on recovery of damages in negligence actions in the absence of physical harm to person or property.

Giles v. General Motors Accept. Corp., 494 F.3d 865, 873 (9th Cir. 2007).  "The primary purpose of the rule is to shield a defendant from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable."  Local Joint Executive Bd. of Las Vegas v. Stern, 651 P.3d 30, 51 (Nev. 1982).  Pushed to its extreme, however, the rule would eliminate any extracontractual causes of action for legal malpractice or, in this case, a broker's negligent failure to procure insurance.

The facts of this case are complicated.  SMI was a subcontractor on a large construction project.  Marsh was the insurance broker procuring a variety of insurance policies for many of the contractors and subs in the project.  SMI was sued for negligent design and fabrication of its part of the project.  Marsh issued several certificates of insurance reflecting that SMI was covered for professional liability when in fact no such coverage was procured (whether Marsh was supposed to procure the coverage is a disputed point, but a jury found that it was but negligently failed to do so).  SMI settled the underlying lawsuit and sued Marsh on several theories.  A jury awarded SMI over $7 million for Marsh's negligence.

Marsh raised two defenses on appeal.  First, Marsh argued that the professional liability policy it would have procured would have excluded the claims against SMI, so Marsh's negligence did not cause any damage.  The court found that sufficient evidence existed to undermine that defense.  Marsh also argued that SMI could not recover under the negligence theory due to the economic-loss rule.  The court reviewed Nevada law and found that Nevada recognized a cause of action against an insurance agent for negligent failure to procure insurance.  Moreover, the court found that, although the Nevada Supreme Court had applied the economic-loss rule in some cases, none of these cases involved alleged violation of a professional, extracontractual duty imposed by law.

In other words, if the alleged violation constitutes a violation of a duty imposed by law, independent of the express duties undertaken in the parties' contract, then the doctrine will not apply.  The Nevada Supreme Court had held in an earlier case that insurance brokers are not obligated to assume the duty of procuring insurance, but when they do so, the law imposes upon them a duty of care to perform non-negligently.  Therefore, the SMI Court held that the economic-loss rule did not apply to failure-to-procure claims against insurance brokers.

And so the economic-loss doctrine loses a bit more of its swagger.

Did Mid-Continent Overrule Garcia?

Earlier, I reported the Texas Supreme Court's decision in Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W.3d 765 (Tex. 2007) that a defending co-insurer, willing to pay something towards settlement for its insured  but refusing to pay its fair share, breached no duties (and owed no reimbursement) to another co-insurer that had paid more than its pro rata share of the settlement. See my discussion, Primary Co-Insurer Owes No Duty.  I suggested that this decision might impede settlements when co-insurers are defending because neither insurer will pay more than its share to effect settlement when it cannot recoup the overpayment from the low balling carrier.

However, another problem is how to square the decision in Mid-Continent with the High Court's decision in American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 855 (Tex. 1994 written by Justice (now Senator) Cornyn), which states in dictum just the opposite of Mid-Continent that co-insurers "must" contribute their share to a settlement. 

Garcia involved multiple malpractice policies over successive years in a "Stowers" action in which the insured doctor alleged that the carriers had failed to accept a reasonable settlement offer within policy limits.  The Court had to decide what the policy limits were when multiple policies had been triggered, and held that an insured may not "stack" the limits of multiple policies that cover the same occurrence.  So, how does one identify the policy limits in that situation?

The Court sought to clarify this question as follows:

If a single occurrence triggers more than one policy, covering different policy periods, then different limits may have applied at different times. In such a case the insured's indemnity limit should be whatever limit applied at the single point in time during the coverage periods of the triggered policies when the insured's limit was highest.  The insured is generally in the best position to identify the policy or policies that would maximize coverage.  Once the applicable limit is identified, all insurers whose policies are triggered must allocate funding of the indemnity limit among themselves according to their subrogation rights.  [Emphasis added]

The no-stacking holding wouldn't apply in the case of multiple concurrent insurers, as in Mid-Continent, but I do not see why the insurers' rights vis a vis co-insurers would be any different.  For more than a decade, practitioners have relied on the methodology prescribed in Garcia for getting the settlement ball rolling when successive policy years are triggered.  The insured picks the policy year, and the carriers fall in line.  Does Mid-Continent overturn Garcia on this point? 

"Insurance companies are not eleemosynary institutions," observed Justice Willett in his concurrence in Mid-Continent.  The next time the insured picks the line a la Garcia, we can be sure the other insurers will raise Mid-Continent as a defense against paying their share.

Another Global-Warming Lawsuit Brought Against Private Companies

The New York Times reports today that an Alaskan village has filed a nuisance suit against 5 oil companies, 14 electric utilities, and the country's largest coal company, seeking to hold these defendants liable for the impact of global warming forcing the village to relocate because of flooding.  See Flooded Village Files Suit, Citing Corporate Link to Climate Change. 

This is the latest in the ever-growing number of lawsuits brought against private industries under the rubric of "global warming litigation" (perhaps better known to some lawyers as the Klondike).  So far, courts have been shy about entertaining legal theories allowing recovery in these types of actions (e.g., in Connecticut v. American Electric Power, California v. General Motors Corp., and Comer v. Murphy Oil U.S.A., the plaintiffs' cases are being dismissed either as political questions or based on tenuous causation evidence  see Global Warming Litigation Heating Up for discussion of these cases).

I believe, however, that it is too early to tell whether the courts will eventually recognize a workable (or even unworkable) legal basis for allocating liability for damage that can be tied to climate change.  For example, asbestos plaintiffs watched throughout the 1960's while their cases were dismissed before the Fifth Circuit held in Borel v. Fi breboard Paper Prods. Corp., 493 F.2d 1076 (5th Cir. 1973) that asbestos manufacturers could be held more or less strictly liable despite intermediate sellers or product warnings. 

Although Kivalina, the plaintiff Inupiat village may find it difficult to obtain judgment against Exxon Mobil, Corporation, American Electric Power, Conoco Phillips Company and others, it may be a matter of time before a court salutes at one or another aspect of the claims asserted.

What appears new in this case is the allegation of conspiracy, that the defendants sought to mislead the public about the science of global warming "by convincing the public at large and the victims of global warming that the process is not man-made when in fact it is." 

Whatever happens in this suit, we can expect to see more litigation of this kind.

"Loss in Progress" Challenge to Duty to Defend Rejected By Texas Court

Maryland Cas. Co. v. South Texas Medical Clinics, P.A., No. 13-06-089 (Tex. App.--Corpus Christi, January 10, 2008)  See Maryland Cas. Decision.

This decision is notable primarily for the court's rejection of the insurer's fortuity, or "known-injury," defense, which insurers seem to be asserting with increasing frequency these days, particularly after a "known loss" limitation was added to standard CGL policies in 2001.  See Insurers Lose First Challenge to "Known Loss" Exclusion in CGL Policies, for discussion of a similar case.  Maryland Cas.'s assertion of this defense is all the more noteworthy because it was combined with the defense that the underlying pleadings were too vague to trigger a duty to defend.  In other words, the insurer rejected any obligation to defend because (1) the insured knew before it purchased the policy that it was engaging in wrongful conduct, and (2) the plaintiff's allegations of wrongful conduct were too vague to trigger coverage.  Do these two positions seem inconsistent to anyone else?

Texas Medical and its president and chief surgeon were sued by former employees for sexual discrimination, negligence, intentional infliction of emotional distress and invasion of privacy involving alleged "closed door" hypnosis sessions that for a period of 9 years the plaintiffs were "forced" to undergo.  Specifically, the chief surgeon allegedly detained the plaintiffs and prevented them from leaving the sessions by using a "alyce clamp," which allegedly injured one of the plaintiffs.  The defendants sought defense and indemnity from their CGL insurers arguing that lawsuit alleged false imprisonment that was covered by the policy.

Maryland argued that it had issued policies to the medical center for only 6 of the 9 years of alleged abuse, and the insured knew when it first purchased the insurance that it was engaging in the allegedly harmful closed-door sessions.  This, says Maryland, violated the fortuity doctrine that bars purchasing insurance to cover a known existing loss or a loss in progress.  ["A loss in progress occurs when the insured is, or should be aware of an ongoing progressive loss at the time the policy is purchased," observed the court.] 

The court rejected this argument because there was no evidence in the record that the insured had even received any complaints about the sessions, and Maryland could not point to any other basis for arguing that the insureds knew or should have know that an ongoing loss was in progress.

Maryland next argued that the lawsuit never actually alleged false imprisonment.  However, the court compared the factual allegations with the legal elements of a false-imprisonment action and found that the lawsuit at least potentially alleged conduct that could support such a claim, even though the court admitted to having no idea what an alyce clamp was.

Finally, the insurer argued that it should be able to allocate defense costs and pay only two-thirds of the total defense costs for the time it actually covered the insured.  Maryland argued that this allocation issue was one of first impression under Texas law.  Wrong, said the court.  Settled Texas case law has held for a decade that the duty to defend could not be allocated based on "time on the risk" or any other allocation theory.

Congress passes 7-Year Terrorism Risk Insurance Extension

On December 18, 2007, the House passed the more modest Senate-approved version of the bill to extend the federally-backed insurance program called the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA).  A good description of the changes to this legislation can be found at CRS Summary of TRIREA.  The key features of the bill are:

• extends the program for 7 years
• federal participation begins at $100 million per incident loss
• applies to domestic as well as foreign acts of terrorism
• requires ongoing reports to Congress on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events
• caps federal participation at aggregate $100 billion

The White House has opposed federal participation in the program but is expected to sign this compromise extension.

Liberty Mutual Expands CGL Coverages For Specific Industries

Aimed at middle-market general liability (“CGL”) customers, Liberty Mutual Group announced 11 automatic coverages designed to address such common gaps as unintentional failure to disclose, mental anguish, coverage for health care professionals,, and coverage for injuries to co-employees resulting from Good Samaritan acts.  See New Coverages for fuller announcement.

Named Liberty Direct Solutions(TM), Liberty Mutual’s new “expanded” property and casualty products are targeted for select industries, including:

• Contractors

• Manufacturers

• Fabricated Metals Manufacturers

• Wholesale Distributors

• Retailers

• Food Processors

• Restaurant Owners

• Real Estate and Commercial Property Managers

• Professional Service Providers and

• Janitorial Service Providers

As the property/casualty market softens, competition increases for new business.  Whether these expanded products prove worth while to policyholders, of course, remains to be seen.  Still, I take this as a hopeful sign of a healthy market.

Analysts Predict SEC Will Require Corporate Disclosures of Global Warming Risks

In mid September, a number of state pension funds, treasurers, attorneys general, and interested organizations petitioned the US Securities and Exchange Commission (SEC) to issue an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law.  See SEC Petition for Interpretive Guidance.  Earlier this month, the Kiplinger Report stated that the SEC would issue such guidelines under pressure from investor groups, who want to know the companies most at risk for future climate-change lawsuits and what they are doing to reduce carbon emissions.  See Kiplinger Report on SEC Disclosures.  Other analysts have echoed that prediction.

Risk from global warming is, of course, a huge potential insurance nightmare (or opportunity), both from a property/casualty standpoint and that of corporate governance.  Insurance companies themselves may be targeted for failing to disclose foreseeable environmental risks.  SEC action could exacerbate the risk potential.  One of the last times the SEC issued a bombshell interpretive-guidance release was after Enron when the agency announced that disclosure of off-balance-sheet transactions had always been material information under existing law (leaving the plaintiff's bar to infer that corporations that had failed to make such disclosures were potentially liable). 

What will happen to companies that did not disclose climate-impact information in their 2007 disclosures but do so in a big way in 2008?  If 2008 witnesses a recession, then unhappy shareholders may put the blame for sliding stock prices on failures to disclose environmental risk factors, whether this is justified or not.  Either way, the increase in securities lawsuits almost certain to follow will test the softening D&O insurance market.  Interesting times lie ahead.

Property/Casualty Insurance Market Predicted to Remain Soft in 2008

In a press release last week, Watson Wyatt Worldwide, a respected insurance and financial services company, predicted continuation of rate decreases for casualty insurance coverage in 2008. See Watson Wyatt Worldwide Report.  "It's clearly a buyer's market," comments Orin Linden, property and casualty practice leader of Watson Wyatt's consulting group in New York.  Mr. Linden predicts that competition and "healthy capacity" should force insurers to continue lowering premiums by as much as 5 to 10 percent.  The report also indicates that this trend will continue in other segments of the insurance industry, including workers' compensation, directors & officers liability, and reinsurance.

"With the marketplace showing little sign of hardening, it may be an ideal time for buyers to review their risk management program structure and insurance policies," Linden said.  "Buyers clearly get better terms in softening markets.  However, they need to be well-positioned so that when the market firms up, they have a plan to move forward."

House Bill Would Create Federal Guarantees for Disaster Insurance Program

Yesterday, the U.S. House of Representatives passed on a vote of 258 to 155 a bill designed to backstop private property insurance in the event of huge natural catastrophes like Hurricane Katrina or the San Diego fires.  Opponents of HR 335 (known as Homeowners' Defense Act of 2007), including the White House, say the legislation would shift business from the private market to the federal government and would unfairly benefit disaster-prone states like Florida and Louisiana at the expense of other states.

Under the program, individual states would enter pooling arrangements to provide reinsurance for private insurers (reinsurance covers part of the insurers' risk in issuing private insurance).  If a catastrophic event results in damages above a certain threshold (measured by disaster costs that exceed 1.5 times the amount of premiums collected from homeowners and businesses in the previous year), the affected state could apply for loans from the federal government.

The bill's sponsor's, Reps. Ron Klein (D-Fla.) and Tim Mahoney (D.Fla), assert that the measure is necessary to reassure private insurers that affordable reinsurance is available and to absorb the costs of the largest natural disasters without the need for post-hoc government bailouts.  The insurance industry is divided over the legislation.  The Big "I" (Independent Insurance Agents and Brokers of America) support the bill; The AIA (American Insurance Association) believes the Act will not create incentives as advertised for private insurance markets.

Sens. Hillary Clinton (D-NY) and Bill Nelson (D-Fla.) have introduced similar legislation in the Senate.  President Bush has indicated he will veto the measure.

For more information on this bill, see NY Times House Approves Creation of a Federal Disaster Insurance Program.

California Supreme Court Strikes Down Contractual Exculpation of Gross Negligence: Texas Is Still On the Fence

City of Santa Barbara v. Superior Court (Janeway), 161 P.3d 1095 (Cal. 2007).  See case at Janeway Decision.

In July of this year, the California High Court held that contractual releases of future claims for gross negligence in the context of sports and recreational programs were unenforceable as against public policy.  The case is well worth reading not only because of the court's thorough analysis of competing legal principles under California law (the freedom to contract vs. maintaining a reasonable standard of care in community life requiring wrongdoers to recompense injured parties), but also for its wide-ranging examination of the law of other states.  However, the court had little to say about Texas law on this issue because the Texas Supreme Court has never addressed the issue, and Texas state courts are divided. (A good analysis of this issue under Texas law is provided in Ryan S. Holcombe, "The Validity and Effectiveness of PreInjury Releases of Gross Negligence in Texas," 50 Baylor L. Rev. 233 (Winter 1998).

In Texas, as in most other states, a contract involving recreational or sports activities may contain a release or indemnity clause (a release voids liability entirely; an indemnity shifts liability to another) that is enforceable against ordinary negligence if it meets Texas's peculiar "Fair Notice" requirements. (For a discussion of these requirements, see Risk Shifting Agreements).  In effect, the release (indemnity) must expressly state that it releases (indemnifies against) the releasee's own negligence, and the release must be stated in boldface or other conspicuous language.

"Ordinary negligence" is the failure to use that degree of care that a reasonable person would exhibit under the same or similar circumstances.  "Gross negligence," under Texas's (again) peculiar standard is defined in Sec. 41.001 of the Texas Civil Practice and Remedies Code as:

conduct (A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.

California and most other states define gross negligence as either a "want of even scant care" or "an extreme departure from the ordinary standard of conduct."  In the Janeway case, a girl drowned while participating in a county summer camp for developmentally disabled children.  Camp counselors were aware of the girl's propensity to seizures, and the girl's designated mentor was aware that the girl had suffered a mild seizure a short time before the incident, but she was allowed to dive into a pool and drowned when the counselor's attention was diverted for a few seconds.  The Court held that the parents' release was effective to release ordinary negligence but not gross negligence.

Some courts in Texas reason that negligence and gross negligence are not separate torts, and a release that is effective against ordinary negligence should also release gross negligence.  See Newman v. Tropical Visions, Inc., 891 S.W.2d 713 (Tex. App. --San Antonio 1994, write denied).  At least one other court has held that a release from gross negligence is against public policy and should not be enforced.  See, e.g., Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App.--Beaumont 1986, no writ).  The Texas High Court has yet to decide the issue.

My best guess is that Texas will follow California on this issue.  Cases like Newman that put negligence and gross negligence in the same bucket rely on pre-1990's thinking before the Texas Supreme Court decided Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994), which established a brighter line between negligence and gross negligence.  The Moriel court observed that juries were not given a sufficient criterion for deciding when punitive damages for gross negligence were appropriate.  Logically, the reasoning in Moriel suggests that negligence and gross negligence should be considered separate categories.

Will Carbon Emissions Litigation Become the Next Asbestos Deluge for the Construction Industry?

In an article published this week in Business Insurance magazine (republished in IndustryBrief at Buildings' Carbon Emissions), author Stacy Shapiro poses the question whether in a few decades building owners, contractors and architects might face huge liability claims for failing to build green buildings, creating a wave of litigation that could dwarf the tobacco and asbestos litigation of prior years.  If carbon emissions are the largest man-made contribution to climate change, buildings, residential and commercial, account for approximately 38% of such emissions in the United States, more than either the transportation or industrial sectors.

At present, attention largely rests on such entities as power companies and automobile manufacturers and there is no know litigation targeting carbon emissions from buildings.  However, Ms Shapiro observes that legal experts see a real potential for litigation in the commercial construction sector either from the buildings' inhabitants who complain of losses from violations of health and safety laws, or from other potential plaintiffs seeking accountability for failing to keep pace with climate change regulations.

Although it may several decades before this type of litigation emerges, it is not too soon to be watching what one commentator calls the New Carbon Cycle.

Insurers Lose First Challenge to "Known Loss" Exclusion in CGL Policies

Transportation Ins. Co. v. The Regency Roofing Cos., Inc., 2007 U.S. Dist. LEXIS 74364 (S.D. Fla. Oct. 2, 2007)

This is the first test case of the so-called "known loss" exclusion that has been written into most standard commercial general liability  (CGL) policies for about five years.  This exclusion bars coverage for any "bodily injury" or "property damage" that any insured knew had occurred or begun to occur before the inception of the insurance policy.  As the court put it, "In other words, to be covered, the Insured must have been unaware of any property damage prior to the Policy period, and must have first learned of such damage during the term of the Policy."

The rationale behind this exclusion is simple and reasonable: you can't wait until your house burns down to go out and buy fire insurance.  Courts have always refused as a matter of public policy to allow insurance coverage for a "known loss."  However, over the last decade or so, the insurance industry has pressed this doctrine aggressively, as the facts of this case illustrate. 

Regency Roofing was hired in 1999 to re-roof a large residence that included 11 flat roofs.  Over the course of the the following two years or so, Regency was called back several times to fix leaks around skylights and flashing.  On at least one occasion, the contractor reported rust in an air conditioning duct.  In January 2002, the homeowners sued Regency for alleged property damage, including mold damage, arising from faulty repairs.  Regency submitted the claim to its CGL insurer, who challenged coverage under the "known loss" exclusion.  The insurer argued that Regency had sufficient awareness of the roof leaks prior to the inception date of the CGL policies (Transportation issued several consecutive policies) to trigger the exclusion.  The court disagreed.

The court held that even if some of the damage is excluded, either because Regency knew about it before the policy period or because of other exclusions, the homeowners did not complain of mold damage until after the first CGL policy began.  Accordingly, the court denied the insurer's motion for summary judgment. 

The "known loss" exclusion is a potential trap particularly for building contractors who make several attempts to cure a problem hoping to satisfy the customer and so do not report the complaint to their insurer until the customer's patience wears thin and a lawsuit is filed.  By then, the "known loss" exclusion may bar coverage.  An illustration of this dilemma is Blanton v. Vesta Lloyds Ins. Co., 2006 Tex. App. LEXIS 1823 (Tex. App.---Dallas, March 9, 2006), in which a commercial landlord, insured under a standard CGL, leased an older structure to a retail tenant, who experienced problems with the roof.  The Tenant said the roof leaked whenever it rained and complained more than 80 times over a 2 and half year period before filing lawsuit.  Landlord attempted to fix the roof after each complaint.  Suit was filed October 24, 2000, and Landlord submitted the petition on December 6, 2000. 

The insurer in the Blanton case sought to avoid coverage under a late-notice theory rather than known loss, but the problem is similar.  Policyholders usually do not submit claims until there is a lawsuit against them.  In fact, the CGL insurer arguably has no legal duty to take any action until suit has been filed (policies vary on this).  But waiting until the lawsuit is filed may put coverage at risk because of late-notice or known-loss defenses. 

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New Marsh Think Tank Sees Large Companies Unprepared for Future Water Shortages

The recently formed Marsh Center for Risk Insights surveyed over 100 corporate-level executives on their views of eight potential crises and found the following percentages of companies that have prepared for them: (see Marsh research)

• 58%   Natural disaster
• 55%   Steep rise in oil prices
• 44%   International terrorist attacks
• 41%   A pandemic disease
• 25%   Global climate change
• 24%   Housing market collapse
• 17%   Reduced access to water
• 12%   Nanotech related risks

Even though roughly half of the executives report that access to water is critical to their companies' businesses, less than 20% of the companies have taken action to prepare for possible water shortages that could result from global warming.  Also surprising is that that 44% of those surveyed said their companies had not prepared because these crises were not seen as relevant to their business.

Research of this kind is useful as we move into the risky 21st century.

Report Details Fraudulent Claims-Adjustment Practices in Homeowner Insurance Industry

In response to widespread insurance abuses reported in the 1960's and 1970's, many states, including Texas, instituted consumer protection laws to curb sharp practices and punish insurers that delay or refuse to pay meritorious claims.  According to a recent article by David Dietz and Darrell Preston published on Bloomberg.com (Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits), homeowners are facing a current wave of abuses designed to underpay property losses.  The authors provide numerous details of how such large insurers as Allstate and State Farm train adjusters to make low ball offers for damaged or destroyed homes and fight vigorously if the policyholder holds out for full replacement cost.

Perhaps most disturbing is evidence developed through discovery in several lawsuits across the country that insurers have relied on advice of consultants, particularly a New York-based consulting firm called McKinsey & Co., advising insurers on methods to raise profits by paying out less in claims.  For example, one powerpoint slide shown in a Kentucky court room entitled "Good Hands or Boxing Gloves" advises Allstate adjusters to make an initial low offer.  If the policyholder accepts the low offer, McKinsey's slide tells the adjuster to treat the person with good hands.  "If the customer protests or hires a lawyer, Allstate should fight back."

Another reported practice is the use of computer programs, including "Colossus" and "Xactimate," that allegedly calculate insured losses and systematically underpay policyholders without regard to the validity of each individual claim.  This article also reports on insurer practices of rewarding adjusters who underpay claims.

At a time when insurance company profits have increases year to year, despite Katrina-related losses (the article reports property-casualty profits up 49% in 2006), reports like these may well spur another cycle of consumer protection legislation.

Texas Governor Signs Joint Resolution Opposing Federalization of Insurance Regulation

Governor Rick Perry today signed a joint Senate and House resolution of the 80th Legislature affirming support of continued state regulation of the insurance industry and opposing pending congressional legislation that would allow federal chartering of insurance companies.  See Federal Regulation of Insurance Industry.  The Independent Insurance Agents of Texas (IIAT) drafted the resolution sponsored by Texas State Sen. Kip Averitt and State Rep. Craig Eiland.  The resolution emphasizes the advantages of state regulation because it provides stronger consumer-protection laws and more streamlined and  prompt attention to problems.

IIAT President-Elect Frank Swingle announced his support for the resolution saying that, "Independent agents understand the need for efficient and effective regulation of our business, but we don't believe that that can be achieved in Washington, and neither do Texas lawmakers."  The resolution is being distributed to President George Bush, U. S. representatives and senators, as well as selected senior officials.  For a fuller discussion of this resolution see Insurance Journal: "Gov. Signs Texas Agents' Resolution Opposing Federal Regulation"

Indiana Appellate Court Holds That Companies Acquiring a Predecessor May Seek Coverage From the Predecessor's Occurrence-based Liability Policies Even Without the Insurers' Consent

Most commercial general liability (CGL) insurance policies contain anti-assignment clauses stating that the policyholder may not assign the right to receive proceeds and other policy benefits to another without first obtaining the insurer's consent.  Up until a few years ago, the law of most states was that once a covered loss had occurred, the anti-assignment clause would not prevent the transfer of insurance rights to a purchaser.  Take, for example, fire insurance on a house.  If I purchase an insurance policy on my house and sell the house to another, the insurer may refuse to cover a fire loss if the house burns down after the sale.  The reason for this is that the insurance company has the right to decide whether the owner is a worthy risk.  The insurer has the right to decide if I am a careful property owner who will take care to avoid fire risks.  The person buying my house may not be so careful, so the insurer has the right to refuse to transfer the policy benefits to someone else.  But if the fire occurs before the sale, then arguably the insurer should not be able to refuse to pay for the loss, even to the purchaser, because the risk at the time of the loss was the same as the insurer had originally bargained for.  That, at any rate was the majority position.

In 2003, the Supreme Court of California reached a different conclusion in Henkel Corp. v. Hartford Acc. and Indem., 62 P.3d 69 (Cal. 2003), holding that rights to coverage under a CGL policy could not be transferred without the insurer's consent, even though the covered event had occurred before the sale of the policyholder to a successor company.  The Henkel court's reasoning was based on fairly arcane principles of property law that boiled down to a determination that a right to liability insurance proceeds was freely transferable (without the insurer's consent) only after that right was reduced to a fixed monetary sum.  The benefits due under a CGL policy are the right to a defense of a lawsuit and payment of a judgment or settlement of covered liabilities.  Those rights are reduced to a fixed amount only after a lawsuit is brought and resolved.  When one company purchases another, the purchaser usually assumes the seller's existing liabilities that arose out of conduct that may have occurred years before the sale.  Occurrence-based CGL policies cover liability-causing events occurring within the policy period, so the purchaser expects to receive, along with the seller's liabilities, the benefit of the seller's CGL policies in effect at the time of the occurrence.  The purchaser then must face the post-sale lawsuits for those pre-sale liabilities.  The Henkel case denied the purchaser the right to coverage without the consent of the insurer.

Now, the Indiana Court of Appeals has reached an opposite conclusion in Travelers Cas. and Sur. Co. v. United States Filter Corp., 2007 Ind. App. LEXIS 1661 (July 24, 2007).  In this case, U.S. Filter Corp. had purchased a company that had changed hands several times in the past but had continuously manufactured a product known as a "wheelabrator blast," a piece of heavy machinery that throws off silica as a by-product, thereby creating lots of silicosis liability over the years.  The court took note of the California precedent but cited a U.S. Supreme court case, Century Tablet Mfg. Co. v. United States, 94 S. Ct. 2516 (1974) for a distinction between the assignability of rights to insurance proceeds as opposed to other contract rights.  The key distinction is that, once a covered loss has occurred, the casualty is fixed and cannot be rescinded in the same was that an executory contract to sell may be rescinded.  Therefore, the Indiana court held that the purchaser obtained rights to coverage when it received the predecessor's liabilities.  The anti-assignment clauses in those CGL policies did not cut off rights to coverage because the covered occurrence were fixed at the time of sale.

It remains to be seen which way courts in other states will go.  For the record, Texas has long been in the minority holding that an anti-assignment clause prevents a purchaser from obtaining coverage even if the occurrence preceded the sale.  See Insurance Co. of Penn. v. Hutter, 2001 U.S. Dist. LEXIS 5800 (N.D. Tex. 2001).

Subcommittee Sends Terrorism Insurance Extension To Full Committee For Vote

This week, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises moved the federal Terrorism Risk Insurance Revision and Extension Act on to the full House Financial Services Committee for a vote.  First passed in 2002, the Terrorism Risk Insurance Act (TRIA) provides government participation above a certain cap in the event of property and casualty loss caused by an act of foreign terrorism.  First extended in 2005, H.R. 2761 proposes to extend the program for an additional 10 years with significant modifications.

The bill, approved by the subcommittee by a vote of 26 to 17, eliminates the distinction between foreign and domestic terrorism; lowers the program's event triggers for the federal government backstop from $100 million to as little as $5 million; adds group life insurance; creates a blue-ribbon commission to develop long-term recommendations; and improves coverage for nuclear, biological, chemical, and radiological terrorism events.

The insurance industry generally supports this legislation but is cautious about covering nuclear, biological, chemical, and radiological events, which could cause more catastrophic losses than conventional terrorist attacks.  For a fuller discussion of this legislation, see Insurance Journal.

Is Tracking Certificates of Insurance Enough? A New Trap for Additional Insureds

For many companies, particularly in the construction and real estate industries, one of the biggest headaches for risk management is tracking "certificates of insurance" (COI) to make sure that other companies that are required by contract to procure particular types of insurance coverage and name your company as an additional insured have done so.  A COI is a short document that a policyholder can give to its customers or vendors showing not only what insurance policies it has procured with what levels of coverage, but also that the particular customer is a "certificate holder" that has been added as an additional insured to the policy.  A COI is an efficient way for a risk manager to track hundreds of such contractual arrangements without having to review the other party's insurance policy for compliance with the contract.  But this practice has some significant drawbacks, and a recent Texas Supreme Court case just added a new one.

From a legal standpoint, the most significant drawback to a COI is that it does not bind the insurance company.  Usually the insurer does not issue the COI.  The policyholder or its insurance broker issues it to the certificate holder.  If the insurance information is incorrect, or as often happens, the policy is never purchased, the COI does not change the terms of an existing policy or create coverage if no policy was purchased.  In that case, the certificate holder's only remedy may be to sue its contract partner for breach of contract.

However, in Via Net v. TIG Insurance Co., 211 S.W.3d 310 (Tex. 2007), the Texas Supreme Court imposed a significant new barrier against breach of contract actions for failure to procure insurance by holding that the statute of limitations on such actions begins to run at the time of the breach (when the insured failed to procure the insurance or additional insured endorsement) and not at the time the certificate holder first learned of the breach.  This is a set back to the certificate holder because usually a significant amount of time passes, often more than the fours years statute of limitations, before the insura