The United States filed a lawsuit against James Clark and Leroy Drury under sections of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) seeking reimbursement for response costs in connection with a clean up at a Superfund site. The insureds sought coverage under their general liability policies, but the insurers refused to defend. A motion was filed by the insureds seeking judgment against the insurers. This case is U.S. v. Clark, 2010 WL 3324834 (N.D.Ill.)

Even though this case was presented in the United States District Court for Illinois, the parties all agreed that Illinois law governed the insurance dispute. In fact, the parties acknowledged that Illinois courts frequently considered whether suits for costs incurred in responding to environmental contamination caused by an insured triggers an insurer's duty to defend under a general liability policy.

The relevant law was well established.

The United States District Court noted that it must construe the policy and the allegations of the complaint liberally in favor of the insured. If the court determines that the allegations fall within, or potentially within, the policy's coverage, the insurer has a duty to defend the insured against the underlying complaint.

The insurers raised three main arguments against the applicability of the policy provisions.

The insurers argued that the complaint alleges no property damage as defined in the policy; there were no allegations that any hazardous substance was released, nor that any property was actually contaminated. The court found that the complaint against the insureds stated that the EPA found leaking drums and containers and two large underground pits containing materials of unknown contents. Furthermore, the EPA determined that releases or threats of release into the environment presented an imminent substantial endangerment to the public health and welfare. Since the duty to defend arises where the allegations fall potentially with the policy coverage, the court said that there certainly was the potential of contamination through release of hazardous substances and the first argument of the insurers was rejected.

The insurers then argued that the complaint does not allege that the response costs are damages caused by an occurrence. The insurers said that the costs are the result of the insureds' abandonment of hazardous materials at the site; in other words, the insureds intentionally left the materials at the site and this action is not accidental. The court dismissed this argument over the point that there was a debate as to exactly when the releases of the substances occurred.

The last argument of the insurers was that the policy excluded coverage of property damage to property owned or occupied by the insured. The insurers contended that the complaint alleged only costs associated with cleaning the Superfund site, so the damages must be excluded from coverage. The court found that the EPA report demonstrated the potential of damage to property outside the site; in other words, the allegations do not foreclose the possibility that damage could occur off-premises.

The court ruled that the duty to defend was triggered in this instance. The complaint could be read as describing unintended and unexpected and possible contamination, and comparing the complaint to the policy provisions, the duty to defend exists.

Editor's Note: This decision reinforces the well known point that the duty to defend is broader than the duty to indemnify. In this case, the court saw potential damage occurring and this was enough to force the insurers to defend the insureds. Also, the court noted that the language of the insurance policy is to be compared with the language of the allegations in the complaint against the insured to determine whether the duty to defend is triggered.

Duty to Defend an Additional Insured

The subcontractor brought an action against the insurer for a declaration that the insurer was obligated to defend and indemnify an additional insured in an underlying personal injury action. The Supreme Court, New York County , declared the insurer had no obligation to defend or indemnify the additional insured and this appeal followed. This case is Hunter Roberts Construction Group v. Arch Insurance Company, 904 N.Y.S.2d 52 (N.Y.A.D. 1st Dept., 2010).

Hunter Roberts, as construction manager for the Bear Stearns Fit Out project, subcontracted with Petrocelli Electric Company to perform electrical work. The subcontract required Petrocelli to defend and indemnify Hunter against all claims that “arise out of or are connected with” Petrocelli's work. Moreover, Petrocelli was to have Hunter named as an additional insured on the general liability policy.

A Petrocelli employee was working on the 7th floor of the building when he was allegedly caused to trip and fall into a hole in the floor. The employee filed a lawsuit against Hunter and Hunter sought coverage under the general liability policy of Petrocelli. The insurer, Arch Insurance, denied coverage. The insurer said it had investigated the matter and denied coverage based on the idea that the subcontract was not an insured contract as defined, that Hunter breached the duty to cooperate by failing to provide clarifying statements, that Hunter failed to notify Arch as soon as practicable of the occurrence, and that the employee's injury did not arise out of Petrocelli's work. Hunter filed a suit against Arch.

After the trial court ruled in favor of the insurer, Hunter appealed. The appeals court responded by first addressing the “arising out of” clause. The court said the focus of the clause is not on the precise cause of the accident, but on the general nature of the operation in the course of which the injury was sustained. The clause means originating from, incident to, or having a connection with, and requires only that there be some causal relationship between the injury and the risk for which coverage is provided. Where, as here, the loss involves an employee of the named insured, who is injured while performing the named insured's work under the subcontract, there is a sufficient connection to trigger the additional insured coverage.

As for the insured contract argument, the court said that Hunter had a written contract with Petrocelli that obligated Petrocelli to obtain comprehensive general liability coverage on Hunter's behalf. This was done by making Hunter an additional insured under the terms of the policy.

The court also found that the insurer did not fulfill its burden of demonstrating that Hunter failed to cooperate or that Hunter did not provide notice as soon as practicable. In fact, the investigator's invoices showed that Hunter did indeed cooperate with the investigation of the claim and that the insurer did have sufficient information in its possession to determine that Hunter's notice was timely.

The ruling of the trial court was reversed. Hunter was entitled to defense and indemnification in the underlying action.

Editor's Note: The appeals court's ruling clarified the focus of the “arising out of” clause in New York . The focus is on the general nature of the operation in the course of which the injury occurred, and if there is some causal connection between the injury and the operation, the requirements of the clause are fulfilled. In this case, because the claimant was injured while performing the named insured's work under the subcontract, that causal connection existed and the insurer was obligated to defend and indemnify the additional insured in accordance with the additional insured endorsement language.

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lso note that the court ruled that the insurer seeking to disclaim for noncooperation has a heavy burden of proof and must demonstrate that it acted diligently in seeking to bring about the insured's cooperation. In this instance, the insurer failed to meet its burden.

Kansas Court Sets Out Analysis for Insurers to Undertake to Determine Duty to Defend

In a separate action, Wilson successfully sued Moeller for property damage and personal injuries sustained as a result of Moeller's negligence in remodeling and then repairing a home. Wilson filed this action seeking to enforce the judgment entered in the underlying suit. Wilson alleged that the insurer's decision not to provide a defense to Moeller meant that the insurer was bound by all the findings of fact and conclusions of law with respect to liability and damages. This case is Wilson v. Farmers Insurance Exchange, 233 P.3d 767 (Kan.App., 2010). Note that this opinion is unpublished and according to Kansas Supreme Court rules, unpublished opinions are not precedential; these opinions may be cited for persuasive authority on a material issue not addressed by a published

Kansas appellate court opinion.

Moeller purchased a house, built an expansion and remodeled the house. After the expansion work, the home shifted and water intruded. Moeller hired various contractors to fix the water problems and thought the problems were fixed. He then sold the house to Wilson after representing that all water intrusion problems were resolved. Later on, the Wilsons discovered large amounts of water seeping into the home in several areas. They hired contractors to evaluate the problem and perform any necessary repairs. The contractors determined that water repeatedly had seeped into the home over several months and this caused damage to the house's structure and caused mold to develop. The contractors also determined that the repairs performed on the house by Moeller were deficient due to faulty materials and substandard workmanship.

Wilson sued Moeller for damages and Moeller presented the lawsuit to his insurer, Farmers Insurance. The insurer declined to provide a defense or indemnification. After this declination, Moeller entered into an agreement with Wilson , assigning all rights and causes of actions he might have against Farmers. There was a judgment in Wilson 's favor in the amount of $351,122. Wilson then filed an action against Farmers. The trial court ruled in favor of the insurer and Wilson appealed.

The appeals court noted that the Kansas Supreme Court had set out an analysis that an insurer must undertake to determine whether it has a duty to defend. Based on this analysis, the appeals court considered the following: the facts Farmers knew, or reasonably should have known, at the time it declined to provide a defense to Moeller; whether the facts Farmers knew or should have known were sufficient to state a claim against Moeller for negligent hiring and negligent construction; and, whether a review of the terms of the policy shows the scope of coverage and whether the claims against Moeller rise to a potential for liability, no matter how remote.

Kansas courts utilize the extrinsic evidence approach in evaluating whether the facts in a certain situation give rise to a potential for liability under the terms of an insurance policy, and thus trigger a duty to defend. Under this approach, lawsuit pleadings are merely a starting point; the insurer must look beyond the effect of the pleadings and must consider any facts brought to its attention or any facts that it could reasonably discover in determining whether it has a duty to defend. If these known or reasonably discoverable extrinsic facts give rise to a potential liability on the insured's part, the insurance company must assume defense of the action. In this case, the court found that the extrinsic facts reasonably could have been discovered by Farmers if it had conducted a relatively short interview with Wilson . However, the court found that the insurer intentionally limited its investigation to the petition in making its decision regarding its duty to defend. Such a limitation is contrary to the extrinsic evidence approach used in Kansas . Therefore, the court took it upon itself the task of reviewing the facts set forth in the original petition and the extrinsic facts to which Wilson and

Moeller stipulated to determine whether such facts were sufficient to state a claim against Moeller.

Such a review enabled the appeals court to find that, while the damage caused by the continuous and repeated exposure of the house to moisture is an occurrence as defined in the policy, there was an exclusion that prevented coverage in this instance. The policy clearly excluded damages that result from the sale or transfer of real property. Here, it was only after Moeller sold the house to Wilson that the Wilsons sustained damage; the damages sustained by the Wilsons resulted from the sale of the property to them.

The ruling of the trial court was affirmed. The insurer had no duty to defend Moeller because, no matter what legal theory was alleged under the facts, there simply was no possibility of a viable claim under the policy.

Editor's Note: The court in this decision set out the state's requirements for an insurer to follow in order to deny its duty to defend. All extrinsic reasonably discoverable facts must be analyzed by the insurer. It was true that here, the insurer did not pursue all the facts it should have in order to deny coverage. However, the appeals court did this pursuit and found the clear policy language excluded coverage.

Actions by the States

The following information is presented to show recent actions by various states pertaining to the insurance industry.

A Texas Court of Appeals held, in part, that a contractual limitation on filing suit must provide for at least two years and one day from the date the cause of action accrues.

Rhode Island revised it laws to insert new provisions that constitute unfair claims practices. In particular, the law states that the failure to have an appraisal performed by a licensed appraiser when a vehicle has sustained damage estimated to exceed $2,500 constitutes an unfair claims practice. Also, the failure to perform a supplemental appraisal inspection of a vehicle within four business days of a request for such an appraisal from a repair shop constitutes an unfair claims practice.

Rhode Island also now requires that, if a policy is cancelled using a short-rate table, the insurer will provide a short-rate table within the cancellation provisions of the insurance policy so that an insured can make an informed decision when cancelling a policy midterm.

New York law now declares that appraisal may be enforced by either the insurer or the insured.

Michigan announces that the annual adjustment of the maximum amount payable for work loss and survivor's loss benefits under personal protection insurance for each benefit is $4,929 per month effective October 1, 2010.

Minnesota law provides that an insurer must give 60 days notice in writing to the insured of intent to cancel a policy.

In Maine , insurers attempting to cancel or nonrenew an auto policy must notify the named insured and give the loss payee like notice.

In Louisiana, in the event a commercial lines insurance policy is cancelled by an insured, any unearned portion of premium paid and commission shall be computed on a pro rata basis.