Compensation Liability of Principals and Contractors presents a discussion of these questions.

EPLI-Related Laws

The December 6, 2010, edition of the National Underwriter P&C magazine offered an article written by Mr. Gerald L. Maatman, Jr., a partner with Seyfarth Shaw, LLP in Chicago. Mr. Maatman discussed new laws passed by various state legislatures pertaining to employment-related practices liability. Mr. Maatman wrote that “the new laws covered issues such as the expansion of prohibited bases of discrimination, new employment law procedural requirements, leave of absence entitlements, privacy legislation, prohibitions on smoking in the workplace, and new laws creating workers' rights.”

Some examples of the changes Mr. Maatman discussed are as follows. Fifteen states enacted legislation that created or enlarged protected category groups, such as gender identity, sexual orientation, age discrimination, and whistleblower status. Several states enacted legislation that changed or enlarged procedures and substantive rights for litigation of employment discrimination claims, such as Illinois and Maryland establishing new statutes of limitations for wage discrimination complaints. Iowa, New Hampshire, and New York were mentioned as enacting laws to regulate notice procedures for mass layoffs and reductions-in-force. Mr. Maatman said that four states enacted laws regarding worker privacy, and fifteen states enacted or expanded leave of absence entitlements.

To obtain a copy of the 2010 Fifty State Survey, contact Mr. Maatman at [email protected].

Wrongful Repossession of Car Is Not Physical Damage

An auto dealer insured brought an action against its liability insurer seeking a declaration that the insured had a duty to defend in an underlying wrongful repossession action. This case is Landers Auto Group Number One v. Continental Western Insurance Company, 621 F.3d 810 (8th Cir. 2010).

Landers Auto maintained comprehensive liability insurance for its auto dealership with Continental Western. Landers sold a car to Clark and Landers guaranteed the loan as part of a special financing incentive; the car was actually financed by Toyota Motor Corporation (TMC). Clark alleged that TMC failed to credit several of her payments and listed her as delinquent on the loan. When TMC contacted Landers, it paid the loan in full and repossessed the car. Clark sued Landers and TMC, alleging wrongful repossession and conversion and violations of the state deceptive trade practices act. Landers filed a claim with Continental and requested defense and indemnification. After the insurer responded with a reservation of rights, Landers sued for declaratory judgment. The district court ruled in favor of the insurer and this appeal followed.

The court noted that Landers had a garage policy that stated the insurer would pay all sums an insured legally must pay as damages because of bodily injury or property damage. This policy excluded coverage for expected or intended injury, and for loss of use of property not physically injured if caused by a delay or failure by the named insured to perform a contract or agreement. Landers argued that the loss that is covered is Clark's alleged loss of use of her car after it was repossessed (there was no claim for physical damage).

The circuit court decided that the incident was not covered under the garage policy because the loss arose from the allegedly improper repossession which is not an activity associated with the operation of a garage, but of the financing activities of the dealership. The claims also fell under the exclusion for expected or intended loss since Landers certainly expected or intended the Clark would lose the use of her car when it was repossessed. Coverage was held to be further excluded under the provision regarding loss of use for failure to perform a contract since the damages in the Clark complaint arose from alleged breaches of the financing agreement. The insurer was found to not have a duty to defend under the garage policy.

Under the commercial liability policy, Landers argued that the Clark suit arose from an accident, that is, Lander's or TMC's accidental failure to properly credit Clark's payments. The court found this argument incorrect for a number of reasons. First, the plain language of the word “accident” when read in context with the garage policy and with the definition in the commercial liability policy makes it clear the policy refers to physical accidents as opposed to accounting errors. Second, the claims against Landers do not arise from the accounting errors but from intentional acts taken by Landers with respect to its rights and obligations under the financing agreement.

The incident was also excluded from coverage because the loss of use was a loss Landers expected would occur when it took the action of repossessing the car.

The circuit court found no duty to defend or to indemnify. The opinion of the district court was affirmed.

Editor's Note: The fact that the court found an intentional repossession of a vehicle to not be an occurrence or accident is not out of the ordinary; after all, the insured intentionally repossessed the car. However, both the standard garage policy and the standard general liability policy state that property damage includes loss of use of tangible property and there was no question that Clark lost the use of her auto due to the actions taken by the insured. Of course, the policies used in this case may have been worded differently from the standard coverage forms. In any case, the 8th Circuit Court found no duty to defend or indemnify the insured based on a claim for wrongful repossession of an auto.

EPA Letter to Insured Found to Be Equivalent to Lawsuit Seeking Damages

This case was an action for a declaratory judgment between an insured and its insurer. The issue raised was whether a request for information from the EPA constituted a suit as defined in the insurance policies. This case is Ash Grove Cement Company v. Liberty Mutual Insurance Company, 2010 WL 3894119 (D.Or.).

Ash Grove operates cement plants on the east shore of the Willamette River near Portland, Oregon . The Environmental Protection Agency listed the site on the National Priorities List in December 2000 and sent approximately seventy general notice letters informing potentially responsible parties (PRP) that they might be liable for costs incurred by the EPA for actions taken at the site.

In 2006, Ash Grove received a letter from a group of companies participating in a remedial investigation and feasibility study that it had been identified as a PRP with respect to liability for response costs and damages at the site. This letter threatened possible lawsuits against Ash Grove for contribution.. To avoid the threatened action, Ash Grove entered into a tolling agreement with the group of companies in late 2006.

In 2008, the EPA sent a letter to Ash Grove seeking information about activities that may have resulted in releases or potential threats of releases of hazardous substances at the site. This information was to be used for the purposes of determining the need for response action at the site and to identify additional PRPs for performing any cleanup.

Ash Grove asserted that responding to this letter and other demands by the EPA cost over $750,000. So, Ash Grove forwarded a claim to its insurers seeking defense and indemnification if necessary. Liberty Mutual and the other insurers denied coverage and said there was no obligation to defend or reimburse Ash Grove because the letter from the EPA was not a lawsuit. The insured then filed this declaratory judgment action.

The insurers argued that the EPA letter was not a lawsuit because the statute requires either an action by the EPA against the insured, or an agreement between the EPA and the insured in which the EPA requests the insured to take action with respect to contamination. The insurers said that the EPA letter simply asked Ash Grove to voluntarily provide information, a benign request that is not adversarial and imposes no obligation on Ash Grove to investigate, remediate, or clean up contamination.

The court did not agree with the insurers. The court said that, while EPA sought voluntary cooperation, compliance with the request is required by law and that if Ash Grove failed to respond fully within a certain time, EPA could commence an action for civil penalties of up to $32,500 per day for noncompliance. Therefore, the EPA letter contained a threat of legal action and substantial penalties for failure to comply. The subject of the letter is affected from the very start of the administrative process and certainly has obligations imposed upon it.

The court noted that the liability policies involved did not define the words “suit” and “claim”, so it said the intent of the parties at the time the policies were issued is the primary goal in construing the insurance contracts. The court found that the general purpose of the policies was to provide Ash Grove with insurance coverage for liabilities and damages that the insured incurred because of property damage. A reasonable insured could interpret the EPA letter as an effort to impose on it a liability ultimately enforceable by a court, triggering the need for a defense, and the insured was deemed entitled to the advantage of the court's interpreting the policy provisions against the insurer.

The EPA letter was found to be equivalent to a suit seeking damages under the insured's liability policies and the insurers have a duty to defend in this instance.

Editor's Note: Insurers have long maintained that a PRP letter or other notice is not the equivalent of a lawsuit and therefore have

denied insureds the benefit of any defense. The courts around the country are split on this subject. The definition of “suit” in the current version of the CGL form is an attempt to clarify the issue, but in cases such as this where the policies did not contain any definition of “suit”, courts are free to interpret an EPA letter and the wording in a general liability policy so as to favor the insured and force the insurer to provide, at the very least, a defense.

Intentional Conduct Exclusion Applies and Is Not Against Public Policy

An auto insurer sought a declaration that there was no liability coverage for claims asserted against its insureds arising from an auto incident. This case is Government Employees Insurance Company v. Brown, 2010 WL 373185 (D.Colo.).

GEICO issued a family automobile insurance policy to the Browns which included the son, AJ, as an insured. AJ ended a relationship with a young woman but made threats against her and anyone who associated with her. AJ came to her house and demanded to be let in; she refused. She then called Vialpando and friends for help. They came and drove the woman away. AJ gave chase in his car, maneuvered his car alongside the other vehicle and fired a shotgun into the car. Vialpando and others in the car were severely injured. AJ thereafter committed suicide.

Vialpando and the others who were injured in the attack by AJ filed a lawsuit against the Browns based on negligent entrustment. The Browns forwarded the lawsuit to GEICO but the insurer denied coverage, asserting the intentional conduct exclusion precludes any coverage. Vialpando and the others said the exclusion was void as against public policy. The insurer filed for a declaratory judgment.

The court noted that under Colorado law, every owner of a motor vehicle who operates or permits the operation of the vehicle on public roads is required to have liability coverage; however, this coverage may be subject to conditions and exclusions that are not inconsistent with the statute. The insureds argue that the intentional act exclusion is invalid since it denies coverage to a class of injury victims who are entitled to full compensation according to Colorado public policy. The insurer argued that the statute at issue and the legislative intent behind it is designed to ensure that motorists are covered for liability resulting from negligent acts, and so, an exclusion for intentional conduct does not improperly limit or narrow the statutorily mandated coverage.

The court agreed with the insurer. The court saw no real policy conflict with the statute. It was plain to the court that the intent of the General Assembly was to require insurance coverage for negligent acts; nothing in the statute indicated that the legislature mandated coverage of injuries caused by intentional conduct. Although this meant that innocents such as Vialpando may not be adequately compensated, it appeared too the court that Colorado determined this is outweighed by the state's interest in not permitting wrongdoers to insure against their own intentional misconduct.

The court then moved onto the actual applicability of the intentional conduct exclusion. GEICO alleged that the underlying complaints describe intentional conduct by AJ, an insured under the auto policy of the Browns. Therefore, because all injuries allegedly suffered by Vialpando and the others were caused by AJ's intentional conduct, the exclusion applies to all insureds. The court examined AJ's conduct and said that it was plainly intentional. Moreover, the court said that under Colorado law, where an exclusion applies to damage intentionally caused by any insured, coverage is precluded for all insureds under the policy. So, any claims made against the parents of AJ were not covered due to his intentional conduct.

The court granted summary judgment for the insurer.

Editor's Note: The United States District Court in Colorado expounded two principles with this decision in favor of the insurer. First, the intentional acts exclusion in an auto policy does not violate public policy that requires owners and operators of motor vehicles to have liability insurance. As the court indicated, not permitting wrongdoers to insure against their own intentional misconduct is a high state priority. Second, the term “an insured” is going to be interpreted as including “all insureds” when it comes to the applicability of an exclusion.