The Supreme Court of Arkansas accepted certification of a single question of Arkansas law submitted by the United States District Court for the Eastern District of Arkansas. The question was: after the Federal court granted an insurer a declaratory judgment that the insurer owed no duty to defend or pay any judgment, may the insurer rely on its reservation of rights letter to recoup defense fees and costs it had already expended in defense of the lawsuit against the insured? The case is Medical Liability Mutual Insurance Company v. Alan Curtis Enterprises, Inc., 2008 WL 2205868 ( Ark. ).

In this case, Ferrell was a resident of a nursing home before she died in 2004. The administrator of her estate filed a lawsuit against the company that owned the home, seeking damages based on negligence, wrongful death, violation of civil law, and conduct constituting felony neglect of an endangered or impaired adult. The company had two policies, one issued by Fireman's Fund and another issued by Medical Liability Mutual Insurance. Both insurers were notified of the lawsuit. Medical Liability Mutual sent a letter to the insured that it believed that coverage was lacking for various reasons but that it would provide a defense (under protest); moreover, if it was determined that the insurer had not duty to defend or indemnify, the insurer reserved the right to recoup and seek reimbursement for any and all costs and expenses incurred in providing a defense.

Medical Liability Mutual then filed a declaratory judgment action and the court granted the insurer summary judgment. However, that court did not rule on the question of whether Medical Liability Mutual could get its defense costs reimbursed. That led to this question being sent to the Arkansas Supreme Court for a resolution.

That court noted that a majority of jurisdictions had ruled that, in the absence of an express agreement in an insurance contract, an insurer that defends a claim for which coverage did not exist is entitled to reimbursement costs for both the settlement amount and litigation expenses under two conditions: if the insurer timely and explicitly reserved its right to recoup the costs, and if the insurer provided specific and adequate notice of the possibility of reimbursement. The court also noted the minority position: unless there is an express agreement in the policy language authorizing reimbursement, a unilateral reservation of rights letter cannot create rights not contained within the insurance policy, that is, a right to reimbursement of defense costs. Balancing these two positions, the

Arkansas Supreme Court ruled that both are irrelevant; state law will decide the question.

The court ruled that it was a fundamental principle of Arkansas law that attorneys' fees are awarded only when expressly allowed by statute or rule, and the state General Assembly was silent when it came to this subject. Therefore, without statutory or rule authority allowing for such, an insurer may not recoup fees and expenses under a reservation of rights letter. The question was answered in the negative.

Additional Insured Vendor Allowed Coverage under Named Insured Liability Policy?

The case of Robert Weaver v. CCA Industries, Inc., 2008 WL 2170837 (C.A. 5 ( La. )) dealt with the issue of whether an additional insured who was added to the named insured's products/completed operations liability policy due to its status as a vendor, was entitled to defense and indemnity.

Weaver brought a lawsuit to recover for injuries he allegedly sustained from ingesting Permathene, a product marketed and sold by CCA Industries. He sued CCA as the manufacturer and seller of Permathene. CCA admitted it marketed and sold the drug, but said that Phoenix was the actual manufacturer; using a formula provided by CCA, Phoenix combined the components in its factory and then shipped the product in bulk back to CCA to be repackaged and labeled. Based on this arrangement, CCA made demands on the insurer for Phoenix—NY Marine—for defense and indemnification of any damages it might have to pay Weaver. When NY Marine failed to provide a defense, CCA filed a complaint against Phoenix and NY Marine, asserting that under its vendor's endorsement attached to Phoenix's liability policy, it was insured for liability arising out of its sale of the product that was manufactured by Phoenix .

NY Marine filed a motion for summary judgment and this was granted by the district court. That court held that CCA was not an additional insured under the Phoenix policy because the claims were based on CCA's independent negligence, and under Louisiana law, vendor's endorsements only extend coverage for claims involving strict liability. Moreover, there were exclusions that apply to this claim. This ruling was appealed.

The appeals court looked first at whether CCA qualified as an additional insured under the vendor's endorsement. The court found that the critical language in the endorsement was as follows: it is hereby agreed that the definition of insured is amended to include any person or organization designated as a vendor but only with respect to the distribution or sale in the regular course of the vendor's business. This language did make CCA an additional insured as a vendor.

Under state law, a vendor's endorsement provided coverage where the vendor was found to be strictly liable for selling a defective product, and excluded coverage where the vendor was found to be independently negligent. Now, one of Weaver's complaints asserted a strict liability claim under the Louisiana Product Liability Act based on the allegation that the product was unreasonably dangerous in construction or composition. The court said that CCA could be held liable under the law as a manufacturer due to the fact that it labels the product and sells it as its own, and so Weaver's claim could potentially visit liability on CCA. So, with CCA being an additional insured with the potential for liability in this case, were there any applicable exclusions to prevent coverage?

NY Marine argued that an exclusion prevented coverage since CCA labeled the product after Phoenix sold the product in bulk to CCA. CCA did admit that it packaged, labeled, and marketed the product, but it said that this was not enough to trigger the exclusion because no nexus had been shown between the labeling or other alteration of the product and Weaver's injury. The court reviewed Couch on Insurance on the subject and found this: if the exclusion is written to apply once the insured's product has been relabeled, the injury must arise out of the relabeling or out of the use of the insured's product as a part of another product in order for coverage to be excluded; in other words, there does have to be some nexus between the injury and the alteration. The appeal court found no nexus between the injury and the relabeling; the exclusion was not triggered.

NY Marine also argued that the formula provided by CCA to Phoenix was an ingredient for the purposes of another exclusion. The appeals court disagreed and said that the interpretation of “ingredient” espoused by the insurer was not consistent with the common sense meaning of the word. The court said that there was a logical, common sense distinction between the formula, a list of ingredients, and the ingredients themselves. The formula or recipe for a product is different from the ingredients used to create the product.

The decision of the trial court was vacated and remanded.

Kansas Supreme Court Answers Questions about the Term “Occurrence”

The Kansas Supreme Court received some certified questions from the United States District Court for the District of Kansas regarding an auto policy. These questions revolved around the definition of occurrence, the number of occurrences, and what affect the meaning of occurrence has on the limits of liability. The case is American Family Mutual Insurance Company v. Wilkins, 179 P.3d 1104 ( Kan. 2008).

American Family issued an auto policy to Roy which contained a per person limit of $100,000 and a per occurrence limit of $300,000. In 2005, Roy was driving his auto in a southbound direction in the northbound lanes of Interstate 35 in Kansas . Jones was driving in a northbound direction in the northbound lanes. Jones had to swerve to avoid Roy 's auto and in so doing, she overturned her car and was seriously injured. Wolf was also traveling in a northbound direction and he swerved to avoid Roy 's vehicle and rolled his Mercedes, injuring himself. Wilkins too was driving northbound and he struck Roy 's car in a head-on collision. Roy, Wilkins, and a passenger in the Wilkins' vehicle were killed; two other passengers were injured. Finally, Brooks, traveling northbound on Interstate 35, swerved to avoid the collision between Wilkins and Roy and hit a barrier wall.

After this multiple car crack-up, numerous lawsuit were filed. American Family filed an interpleader complaint and paid $300,000 into court. The U.S. District Court handling the cases looked to the Kansas Supreme Court for answers to four certified questions: what test should be applied under Kansas law in determining whether there are multiple occurrences, and if there are, what is the number; when multiple collisions involving several vehicles and injured persons result from the actions of the one insured driver, is each collision an occurrence; if each collision is an occurrence, how many occurrences were there under the facts of this case; and, what is the maximum amount of the insurer's liability under the terms of the auto policy?

The Kansas Supreme Court noted that courts in general consider three tests for defining the word “occurrence”. One test considered is the cause of the injury; another is the effects; and the third test has courts considering the event that triggered liability. Kansas courts have applied two of the three tests as it relates to the limits of an insurer's liability, the first and third. The state Supreme Court decided in this case that the number of occurrences is to be determined by the cause of the injury.

As for a number of collisions being caused by the actions of one driver, is each collision an occurrence? American Family argued that there was only one proximate cause for all of the injuries received by all of the injured persons. The insurer said that the single proximate cause for all of the injuries was Roy 's negligent driving. The injured parties argued that there were multiple occurrences.

The court said that the cause of the collisions was Roy 's negligence in driving in the path of an oncoming vehicle, but that determining the number of occurrences required further analysis. After reviewing several cases from various states (California, Washington, New York, and Illinois ), the court concluded that a decision on the number of occurrences should be based on the time-space continuum between the collisions, and the insured driver's level of control over the vehicle. Under this continuum, collisions with multiple vehicles constitute one occurrence when the collisions are nearly simultaneous or separated by a very short period of time, and the insured does not maintain or regain control over his or her vehicle between collisions. When collisions between multiple vehicles are separated by a period of time or the insured maintains or regains control of the vehicle before a subsequent collision, there are multiple occurrences.

Continuing with this analysis, the court concluded that there were two occurrences in this case. The first occurrence took place when Roy's vehicle encountered Jones' vehicle, forcing Jones to swerve to miss Roy 's truck and resulting in injuries and damages to Jones and her auto. The second occurrence took place when Wolf swerved to avoid Roy 's truck and rolled his car. Roy's encounter with Wolf was separated by approximately one minute in time and one-half mile in space from Roy 's encounter with Jones. Roy continued to have control over his vehicle after his encounter with Jones, and his encounter with Wolf was not related to the encounter with Jones. However, Roy's head-on collision with Wilkins was in such rapid instantaneous succession and occurred so close to the same location as Roy 's encounter with Wolf as to make it a nearly simultaneous event. Under the facts of this case, the court said there were two occurrences.

As for the maximum amount of the insurer's liability under the terms of the auto policy, the court reviewed the stated limits on the policy. The court noted that when the insurance policy unambiguously provides that its per occurrence limit is subject to its per person limit, the maximum bodily injury damages claimed by any one person are subject to the per person limit even if more than one person is injured. In this instance, the American Family policy language clearly subjects the per occurrence limit to the per person limit and so, the per person limit applies in this case regardless of whether more than one person was injured by the occurrence.

Based on this, the court found that for the first occurrence with Jones, one person suffered bodily injury. American Family is subject to a maximum liability of $100,000 for bodily injury for this occurrence. For the second occurrence with Wolf and the Wilkins, the facts indicated that one person was injured in the Wolf vehicle and four persons were injured or killed in the Wilkins vehicle. Applying only the $100,000 per person limit, this would result in $500,000 as the maximum. But, the American Family policy limits the coverage to $300,000 per occurrence. Because all five individuals were injured in the same occurrence, the $300,000 per occurrence limit would apply.

The court concluded that, adding together the liability for personal injury for both occurrences, the maximum amount of American Family's liability for bodily injury only under its policy with Roy is $400,000.