The Inventory Shortages Exclusion article covers the crime policy provisions and the differing judicial interpretations of the inventory shortages exclusion.

The Meaning of “First Named Insured”

The insureds brought a declaratory judgment action against the auto insurer, requesting a ruling that the insurer was legally obligated to provide uninsured motorist (UM) benefits equal to the liability coverage amounts. The dispute revolved around the fact that a waiver of UM benefits was signed by the second of the two named insureds listed on the policy. This case is Swartzbaugh v. Encompass Insurance Company of America, 2011 WL 3904199 (Md.App.).

In obtaining personal auto insurance for the family, Lynne Swartzbaugh signed a waiver of UM benefits that otherwise would have been in the same amount as the liability coverage under the policy. The named insureds on the policy were Kenneth Swartzbaugh and Lynne Swartzbaugh, in that order. The daughter, Kelly, was involved in an auto accident with an underinsured motorist and was severely injured. After the accident, the Swartzbaughs sought UM coverage under their own policy in an amount equal to their liability coverage ($250,000), but the insurer declined, saying that the UM benefits were only $20,000 due to the waiver signed by Lynne. The insureds sued and the trial court ruled in favor of the insurer. This appeal followed.

The Court of Special Appeals of Maryland noted that the insureds sought to set aside a waiver executed by Lynne based on the grounds that Kenneth was the first named insured on the auto policy, and that under the applicable statute, the first named insured must waive the UM coverage. The insureds argued that the term “first named insured” should be liberally construed in their favor because the term is not defined in the policy or in any state law. The argument was that, by its plain meaning, “the first named insured” means the insured who is named first in the policy, that is, Kenneth. And, since Kenneth did not sign the waiver, the waiver is invalid. The insurer responded that there is no generally accepted definition of “first named insured” that the court should impose upon the parties. Encompass relied on general contract principles to argue that the parties are able to designate one of the named insureds as the first named insured and the parties permissibly identified Lynne as the first named insured.

The court reviewed the legislative history of the UM statute and found no definition of “first named insured”, or that the General Assembly ever set forth a particular meaning to the term. So, the court articulated its own view of the meaning of “first named insured”. The court held that the term means the person designated as such in an auto policy or in a document executed as a part of the issuance or renewal of such a policy. In this case, the court concluded that the parties (the insured and the insurer) designated Lynne as the first named insured by virtue of the language of the waiver and Lynne's execution thereof.

The court noted that the facts in this case showed that Lynne was the only one who signed the auto application even though the application listed the applicants as Kenneth and Lynne Swartzbaugh. Also, the UM waiver that Lynne signed stated that “I am the first named insured/applicant”, and she signed the waiver on a line that read “Signature of First Named Insured”. So, although Kenneth's name was listed first on the auto application and on the auto policy, Lynne represented in writing that she was the first named insured. In other words, it was in her capacity as the first named insured that Lynne agreed to waive uninsured motorist coverage.

The opinion of the trial court was affirmed.

Editor's Note: Since the “first named insured” is not defined in the standard insurance policy, this may have been seen by the insured as a chance to place some ambiguity into the reading of the policy terms, and thus, to attain coverage for the claim. However, the court of appeals in Maryland did not support the insured's interesting interpretation of the phrase. The court also pointed out that, upon reviewing the UM statutes in the other forty-nine states and the District of Columbia, only one jurisdiction (Pennsylvania) utilizes the term “first named insured”. So, perhaps this dispute over the meaning of “first named insured” won't be the last?

What Are the Damages the Insured Is Obligated to Pay?

The insured, a cosmetics manufacturer, brought an action against its insurer for failing to defend and indemnify the insured in an underlying action for violations of the Safe Drinking Water and Toxic Enforcement Act of 1986. The trial court ruled in favor of the insurer and this appeal followed. This case is Ulta Salon v. Travelers Property Casualty Company of America, 127 Cal.Rptr.3d 444 (2011).

Deubler filed the underlying action on behalf of the general public against the insured, Ulta Salon, and other manufacturers, distributors, and sellers of nail products, seeking civil penalties and injunctive relief. The Deubler complaint alleged that the defendants' nail products contain DBP, a reproductive toxin, and that the defendants knew about this and failed to warn consumers. Ulta notified Travelers of the lawsuit and requested a defense. Travelers denied coverage and the insured filed this declaratory judgment action.

The insurer said that it had no duty to defend or indemnify Ulta because the liability policy only afforded coverage for sums that Ulta became legally obligated to pay as damages because of bodily injury or property damage. Travelers pointed out that the lawsuit against Ulta did not allege either bodily injury or property damage, only civil penalties and injunctive relief. These claims are not covered or potentially covered damages under the terms of the policy. Ulta argued that the complaint alleged facts giving rise to the potential for coverage. Ulta said that exposure to DBP could cause cancer and birth defects and so, bodily injury claims could potentially arise in the future. Ulta also claimed that civil penalties constituted covered damages under the policy and that the policy contained no exclusions for civil penalties.

The Court of Appeal, Second District, said that Ulta can state a cause of action against Travelers only if it establishes a potential for coverage under the policy. The underlying complaint did not seek bodily injury damages; there was no allegation that Deubler personally suffered any injury due to Ulta's nail products. The sole cause of action in the Deubler complaint was for violation of a statute based on the allegation that Ulta and the other defendants failed to provide clear and reasonable warnings. And, the civil penalties recoverable for those statutory violations do not grow out of a claim for moneys due and owing or for personal harm or property damages that have resulted from discharge of pollutants or other toxic chemicals. The court ruled that, because the underlying complaint did not allege a claim for damages because of bodily injury, Ulta did not become legally obligated to pay damages for bodily injury and so, the policy was not triggered.

In an attempt to show a potential for coverage, the insured asserted that it was apparent from the pleading that Deubler contemplated bodily harm when bringing her cause of action by repeatedly emphasizing the toxic nature of the products manufactured or sold by Ulta. As such, the facts as found on the face of the complaint give rise to potential bodily injury claims. The court did not accept this argument. The court said that case law recognizes that an insured may not trigger the duty to defend by speculating about extraneous facts regarding potential liability, or ways in which the third party claimant might amend its complaint at some future date. Therefore, Travelers had no duty to defend based on unpled claims by Deubler that might implicate the policy.

The order of dismissal by the trial court was affirmed.

Editor's Note: This case is presented to help clarify what kind of damages the insurance policy will pay. It is true that the word “damages” is not defined in the policy, but in this decision, the California Court of Appeal would not include in the scope of that word, claims for civil penalties or injunctive relief. It is also interesting as an aside that the court in its opinion stated that mere exposure to a chemical that may cause cancer or some other harm in the future is not the same as suffering bodily injury as a consequence of such exposure. Some courts today hold that fear of a future illness is enough to trigger coverage for bodily injury under a liability policy, but that view is not universal.

Another “Damages” Claim

A regional sewer commission brought an action against its insurer seeking a declaratory judgment that the insurer was required to indemnify the commission for the cost of settling an underlying lawsuit. This case is Passaic Valley Sewerage Commissioners v. St. Paul Fire and Marine Insurance Company, 21 A.3d 1151 (2011).

Following years of contentious litigation and after months of mediator-assisted negotiations, the Passaic Valley Sewerage Commission and Spectraserv entered into a settlement agreement. Rather than advance monies to Spectraserv, the commission agreed to provide in-kind services and forbear from pursuing alleged regulatory violations by Spectraserv. The commission sought indemnification for the value of the settlement from its insurer. The insurer declined to indemnify the commission, asserting that it had no obligation to do so under the terms of the policy, which defined a “loss” as “money damages.”

When the issue arrived at the Supreme Court of New Jersey, the Court saw the issue as whether the definition of money damages encompasses the value of services rendered and assets surrendered in lieu of cash payments.

The Court noted that the policy defined a loss as meaning money damages and defined money damages as monetary compensation. The policy also had an exclusion for any demand or proceeding seeking relief or redress in any form other than money damages. The insurer argued that the plain language of the policy is narrowly drafted and clear: loss is defined as money damages, this means the payment of money, and the settlement negotiated between the insured and Spectraserv is not money. The insured suggested a broader interpretation of the same language, claiming that loss is the surrender of assets of value. According to the insured, the term “money damages” does not require a cash payment.

The Supreme Court found that the terms in the policy were not ambiguous. The Court said that the terms “loss”, “money damages”, and “monetary compensation” were not sophisticated terms but plain language reflecting the intentions of the parties when they entered into the insurance contract. Moreover, the Court went on, the exclusion further clarifies that there is no indemnification against any demand or proceeding seeking relief or redress in any form other than money damages.

As another argument, the insured said that the settlement can be valued and as such, the damages can be quantified as money damages. The Court replied that there is a lack of precision in the settlement agreement and this provides further evidence that the agreement was not of a defined value. The settlement failed to involve money damages; it was a business arrangement involving the performance of services designed to benefit the parties and implicated the application of equitable principles which does not equate to a compensable loss under an insurance policy.

In finding for the insurer, the Court concluded that the insurer, through the policy language, intended to preclude indemnification of settlements encompassing anything other than identified, ascertained, and precisely calculated money damages. The Court would not reconstruct the terms of the policy to change that intent.

Editor's Note: This is another case presented to show that damages paid under the terms of an insurance policy will not include non-cash services. Non-cash services and forbearance of regulatory duties will not be accepted as covered damages in place of paying cash money. It is worth noting that the Supreme Court of New Jersey also listed case law from around the country in support of its opinion.

Additional Insured Endorsement's Ambiguity Triggers Duty to Defend

A general contractor brought an action against its subcontractor's commercial general liability insurer based on its status as an additional insured. The trial court found for the insurer and this appeal followed. This case is Tri-Star Theme Builders, Inc. v. OneBeacon Insurance Company, 2011 WL 1361468 (C.A.9). (Note that this case has not as yet been selected for publication in the Federal Reporter.)

Tri-Star was the general contractor for a building project at a resort and casino owned by the Colorado River Indian Tribes. Tri-Star subcontracted the plumbing and HVAC work to Golden West Mechanical and was named as an additional insured on Golden West's general liability policy. The liability policy issued by OneBeacon was amended with a rider that provided that the who is an insured section is changed to include Tri-Star, but only with respect to liability arising out of Golden West's ongoing operations performed for Tri-Star, and only to the extent of liability resulting from occurrences arising out of Golden West's negligence.

After the completion of the project, the Tribes filed a complaint against Tri-Star alleging that the building contained substantial and material defects in its design and construction. It was obvious that some of the damages arose out of the plumbing and HVAC systems. As the general contractor, Tri-Star was responsible and Tri-Star sought coverage as an additional insured under Golden West's policy. The insurer declined coverage and Tri-Star filed its declaratory judgment action. The insurer prevailed in the district court.

In its argument to the U.S. Court of Appeals, the insurer claimed that under its reading of the policy, Tri-Star was only covered for damages suffered while Golden West was performing work on the project. Because the complaint alleged that the damages arose after the completion of Golden West's work, OneBeacon said that it was not obligated to provide either a defense or indemnification. The appeals court did not agree.

The court reasoned that the language of the additional insured endorsement can reasonably be construed in more than one sense. The court said that because the additional insured is a general contractor presumably performing work on its own behalf and through a number of other subcontractors, the language can be read to limit the coverage to liability arising out of Golden West's ongoing operations performed for Tri-Star as opposed to liability arising out of the negligence of Tri-Star and its other subcontractors. Further, the language can reasonably be construed as limiting Tri-Star's coverage only to the extent expressly specified in the contract. The court said that the key phrase, “arising out of the named insured's ongoing operations”, addresses only the type of activity from which the additional insured's liability must arise in order to be covered, not when the injury or damage must occur. In other words, this language does not state that injury must occur, or liability must arise, during the named insured's ongoing operations, but rather requires only that the liability arise out of the ongoing operations, which may require only a minimal causal connection between the liability and the ongoing operations.

The court decided that construing the words “ongoing operations” to exclude damage that arose from conduct performed by Golden West only while its operations were ongoing required a parsing so abstruse as to be inconsistent with what the ordinary person's understanding of the policy would be. The court said that the rider could have been worded so as to limit coverage for damage arising from and occurring during Golden West's ongoing operations. This would have made it clear that once Golden West's work was complete, Tri-Star was no longer covered as an additional insured for damages that occurred after Golden West's operations for Tri-Star were finished. However this, the insurer failed to do.

The opinion of the district court was reversed.

Editor's Note: Insurers have tried to limit coverage for additional insureds by wording the endorsement so as to apply only to ongoing operations of the subcontractor and not to a completed operations claim; the U.S. Court of Appeals, Ninth Circuit, ignored this intent. The court ruled that even though the damage occurred (that is, manifested itself or was discovered) after the work was completed, the trigger of coverage arose while the work was being performed. In other words, the trigger of coverage was at the time of liability (negligent act) and not at the time of damage.

The court in its ruling did suggest that the endorsement could have been worded so that an organization's status as an additional insured ended when the named insured's operations are completed. But, as this endorsement was written, the court saw an ambiguity and that was interpreted in favor of coverage for the additional insured.