So, if an insured wants to acquire or merge with another business, important questions should be asked: what is the liability exposure of the insured? Can insurance coverage be transferred to successor corporations? Does the insurance contract language prevail or has the state made its own rules and regulations on the subject that are to be followed? For information (on a state-by-state basis) about successor liability, see “Successor Liability”, Personal Lines volume, General section; the article is on the General Sl- pages.

Junk Faxes and the CGL Advertising Injury Coverage

A case from the Seventh Circuit Court of Appeals offers some guidance as to how the CGL form would respond to claims involving unsolicited facsimile advertisements. The case is American States Insurance Company v. Capital Associates of Jackson County, Inc. 2004 WL 2964160 (C.A.7 2004).

Here, the insurer sought a declaratory judgment of no duty to defend or indemnify the insured against allegations that the insured had violated federal statutory prohibitions against unsolicited fax ads—also known as junk faxes. Capital Associates sent an unsolicited advertisement to the fax machine of JC Hauling Company. The hauling company launched a class action on behalf of all recipients of the junk faxes. Capital Associates tendered the defense to its insurer, American States, and the insurer filed a federal lawsuit seeking a declaratory judgment. The insurer contended that sending unsolicited advertising by fax does not cause advertising injury and that, even if it does, the loss is expected or intended by the insured and so, the exclusion would prevent coverage. The district judge held that an unsolicited fax invaded the recipient's privacy and that the insurer had to defend the insured. The decision was appealed.

The appeals court noted that, in the CGL policy issued by American States, advertising injury was defined to include “oral or written publication of material that violates a person's right to privacy”. To the court, this meant that an advertising injury dealt with informational content and not with a particular means of communicating an advertisement. In this case, JC Hauling did not allege that Capital Associates published any information about it. Therefore, the situation was one of communication between two business entities and that is not covered by the advertising injury language in the policy.

The appeals court also addressed the expected or intended exclusion. The court said that junk faxes use up the recipient's ink and paper and that senders of the faxes know this. This meant that Capital Associates knew the consequences of its act and JC Hauling's loss was expected. The exclusion was applicable in this situation.

The decision of the district court was reversed and American States did not have to provide a defense for the insured.

In reversing the opinion of the district court, the appeals court highlighted the fact that Illinois has not issued any pertinent decision at any level on the subject matter of this case. The court also said that almost all litigation of this kind had proceeded in federal district courts, with most of those decisions agreeing with this district court. So, this was the first federal appellate decision on the subject, and it came down in opposition to the opinions of the lower federal courts.

Additional Insured Coverage under the CGL Form

Coverage for additional insureds under another's CGL form can be the source for many questions. What coverage does the additional insured have? Is the coverage for vicarious liability or does it extend to the sole negligence of the additional insured? Does the duty to defend extend to the additional insured? The Insurance Services Office (ISO) recently revised some additional insured endorsements to try and clarify the situation. However, the fact is that questions over the status of additional insureds will continue to be answered in courtrooms. The following case is an example.

In Shaffer v. Stewart Construction Company, 865 So. 2d 213 (La. App. 2004), an appeal was made to the court to reverse judgments against Pacific Insurance Company pertaining to coverage for an additional insured. Stewart was contracted to construct a mooring facility for a new casino barge on a river in Louisiana. Stewart rented a vibro-hammer from International Construction Equipment (ICE), and the rental agreement required Pacific Insurance to name ICE as an additional insured under the CGL policy it had issued to Stewart. Shaffer, an employee of Stewart, while repairing a leak from the vibro-hammer, slipped and fell due to oil that had leaked from the hammer. Shaffer sued ICE over his injuries, claiming negligence and strict liability on the part of ICE. ICE made a demand upon Stewart and its insurer for defense and indemnity.

Pacific refused to defend ICE, arguing that the rental agreement only required that ICE be named an additional insured on an all risk equipment policy, not on the CGL policy. The trial court found for ICE and Pacific appealed.

The appeals court read the rental agreement and found that the language was clear and explicit that ICE was to be named an additional insured on both the CGL policy and the equipment policy. The issue was whether the additional insured coverage was for liability arising out of the named insured's work or out of acts of the additional insured in connection with its general supervision of the named insured's work. The facts of the case showed that Shaffer was injured while he performed repair work on the vibro-hammer, and that he was doing this repair work pursuant to instructions from ICE; this constituted the named insured's work for ICE.

The court noted that there was an exclusion on the policy pertaining to injury arising out of the sole negligence of the lessor (ICE). The court said that the evidence clearly supports the finding that some fault was on other parties here, including other employees of Stewart and Shaffer himself. So, the exclusion did not apply.

The decision of the trial court was affirmed. The lessor was an additional insured under the lessee's policy and was entitled to defense and indemnity.

What are the States Doing?

California has passed a law effective in January, 2005 that requires that insurance coverage must be provided to a registered domestic partner that is equal to, and subject to the same terms and conditions as, the coverage provided to a spouse. California thus makes a point pertaining to insurance coverage for same-sex partners that other states may consider following, and that insurers should be planning to address in the future.

Colorado no longer requires that insurance companies offer collision coverage for damage to insured motor vehicles if the accident occurs in Mexico. Of course, since auto accidents in Mexico are subject to the laws of Mexico which consider accidents to be a criminal offense as well as a civil matter, it is probably better anyway for an insured driving in Mexico to purchase insurance through a licensed Mexican insurance company.

Florida has passed several regulations as a result of the hurricane damage done last year. One of these provisions pertains to the method of applying a deductible to a policy that provides residential property insurance. Effective May 1, 2005, the hurricane deductible of any residential property insurance policy will apply on an annual basis to all covered losses that occur during the calendar year. And, the new law provides instructions for the application of a hurricane deductible when multiple structures are insured under the policy and when more than one hurricane occurs during the calendar year.

Oklahoma has increased the minimum financial responsibility limits for autos effective April 1, 2005. The new limits are $25,000/50,000/25,000 for liability and uninsured motorists coverages.

The state of Texas has revised its code pertaining to the regulation of personal auto insurance. The Insurance Services Office (ISO) plans to file its personal auto program in Texas in response to this change.

“Wireless Mischief”

This article in the “Marketplace” section of the December 7, 2004 issue of the Wall Street Journal is a “must read” for all corporate risk managers, or even those personal risk managers among us.

William M. Bulkeley asks if “your wireless computer network [is] dangerously promiscuous” and goes on to answer that it probably is. He uses two examples to demonstrate. In the first instance, three men did not even need to enter a Lowe's store to link to a wireless network of bar-code readers and thence to the corporate computer system. They installed a program designed to capture customers' credit card numbers at checkout. In the second example, a computer technician was trying out security software in a hospital when he picked up signs of someone using the hospital's wireless network. A salesman was in the cafeteria tapping into the network from his laptop and scanning hospital purchasing e-mails.

The article notes the incredible growth of wireless computing. Virtually all new laptops are equipped with wireless capability. Other mobile devices in an organization are going wireless so they can link to the organization's central computer system. These networks can be protected with passwords and encrypted transmissions, but often purchasers do not change the passwords from the default configuration. And, the most popular encryption standard can be cracked.

Some corporations have forbidden use of wireless networks inside the company walls, or at least use special software to monitor wireless access. But a hidden danger is that a company employee who uses a wireless network at home might forget to turn off the feature when he or she takes the laptop on the road. The employee plugs into a hotel's connection, but his computer is still looking for a wireless access point—which might be in the next room. Any corporate data on the employee's computers is thus accessible to the room's occupant. Another danger point for “road warriors” is the ever more ubiquitous airport wireless hotspot. Travelers use these at their peril—new technology allows a hacker to access the traveler's e-mails, credit card and password information, or anything else the unwary think is safely stored.

Homeowners Cases of Note:

A twist on the homeowners liability exclusion for bodily injury that is expected or intended is found in Allstate Insurance company v. Grimes, et al., 2004 WL 2533826 (Tenn. Ct. app. 2004). The insureds' adult son, who owned a gun, shot his girlfriend outside his parents' home. The girlfriend sued the son, and sued the parents, alleging they had neglected to render her aid after the shooting.

The insurer denied coverage, and filed a declaratory judgment action seeking a ruling that it had no duty to defend the suit because the parents were seeking coverage for bodily injury resulting from an intentional and criminal act. The trial court held that the policy excluded coverage for intentional and criminal acts by an insured based on the Allstate policy language. In the policy, the insuring agreement states “The terms of this policy impose joint obligations on persons defined as an insured person. This means that the responsibilities, acts and failures to act of a person defined as an insured person will be binding upon another person defined as an insured person.“

The exclusion in question says “We do not cover any bodily injury or property damage intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, any insured person.” (Compare with the ISO homeowners 2000 exclusions; for a discussion, see Homeowners Section II Exclusions.)

The insurer argued that the joint obligations clause acted in the same manner as the ISO wording, which precludes coverage for bodily injury expected by an insured. Under the definition of “insured,” ISO HO 00 03 10 00 declares that “when the word an immediately precedes the word 'insured', the words an 'insured' together mean one or more insureds.” This wording has been used to exclude coverage for any liability arising out of any intentional and criminal act.

And, in Grimes, Allstate argued that since the intentional act of shooting the girlfriend was excluded, then any subsequent acts were also excluded—or, as the court stated, “the intentional and criminal act of Wesley Grimes constitutes a line of demarcation after which any and all subsequent acts and omissions are also excluded. We find this argument to be without merit because the policy exclusion does not automatically exclude coverage for other insured persons who are alleged to have subsequently and separately acted in a negligent manner or negligently failed to act.”

The court looked to two earlier cases that dealt with liability for bodily injury, and said that there were two opposing theories, the “concurrent cause doctrine” which held that injury could result from two independent causes, and the “but-for” (or chain of events) doctrine. However, in one of the cases, Allstate v. Watts, 811 S.W. 2d 883 (Tenn. 1991), the Tennessee Supreme Court had rejected the “chain of events” theory in construing “arising out of” language, saying that the language was so broad that “cause and effect extend to near infinity. It is for this reason that we reject the 'chain of events' theory of application which appears to hinge on a 'but-for' theory of causation…”

The court in Grimes looked at the reasoning in Watts, and said the Allstate “joint obligations clause” was similar to the “but-for” doctrine that the supreme court had earlier rejected. There was, said the court, “no justification to extend the joint obligations clause to subsequent, separate and independent acts of negligence of other insureds.” The insurer was obligated, therefore, to tender a defense.

Car News

The annual North American International Auto Show in Detroit has its usual share of vehicles ranging from “wow!” to “what were they thinking?” We will leave it to our readers to insert their own comments. We may well see some on the streets in the near future (the Honda Ridgeline, for example, is a pickup offering some unique features such as a trunk under the truck's bed), but we can only hope that some of the “concepts” will remain only that—concepts. The Ford SynUS looks like a Hummer crossed with an armored car. It has bullet-proof glass and protective shutters. Really.

GM has a concept called the Sequel that looks like the answer to an environmentalist's prayers. It is powered by an ultra-clean hydrogen fuel cell. The only problem, according to GM chairman and chief executive Rick Wagoner, is that while “doable,” the car is not affordable. The estimated cost of building an infrastructure for hydrogen-powered vehicles in California alone is $20 billion.

Also at the Auto Show, DaimlerChrysler “Smart Cars” are being introduced to America. European travelers have in recent years noticed the Smart “ForTwo” model zipping around cities and quite possibly wondered when they'd be seen in this country. The cars get up to 60 miles per gallon, and measure just eight feet in length. Heretofore, these cars did not meet EPA standards because no anti-pollution filter was attached to the gas tank. Now, a California company says it has a way to re-engineer the car so as to meet with EPA approval. However, DaimlerChrysler says because of the reengineering there is a possibility the cars will not be able to be serviced at a DaimlerChrysler dealer. In the meantime, DaimlerChrysler is focusing efforts on the “ForTwo” big brother, the ForMore, which is an SUV.