Settlement on Behalf of Named Insured Still Requires Defense for Additional Insured

This case is an insurance contribution action. The cite is Zurich American Insurance Company v. Certain Underwriters at Lloyd's London, 2013 WL 3208566.

Zurich insured Palmer Construction as the general contractor on a bridge construction project. Palmer contracted with A.R.M. Construction which, in turn, subcontracted with K&L Rebar to replace the bridge. The contract between Palmer and A.R.M. provided that A.R.M. would maintain an additional insured endorsement naming Palmer as an additional insured. Underwriters issued a general liability policy to A.R.M. and attached the additional insured endorsement listing Palmer as an additional insured to the extent that the claims arise out of alleged or actual negligent acts or omission of the named insured (A.R.M.).

Wooldridge, an employee of K&L Rebar, fell and suffered injury while employed on the project. Wooldridge sued Palmer and A.R.M. alleging breach of statutory, common law, and contractual duties of care in failing to provide adequate fall protection. Both Palmer and A.R.M. tendered the lawsuit to Underwriters for defense and the insurer accepted the tender under a reservation of rights.

Wooldridge entered into a settlement with A.R.M.; Palmer was not a party to the settlement. After the settlement with Wooldridge, Underwriters sent a letter to Palmer notifying him that any and all liabilities on the part of A.R.M. had settled and so, the insurer had no further obligation to defend or indemnify Palmer. Underwriters then requested that Zurich immediately accept the full defense and indemnification of Palmer in regard to the underlying lawsuit. Zurich took up the defense and settled with Wooldridge and then filed this action seeking equitable contribution from Underwriters.

The United States District Court, Washington, noted that Underwriters did not dispute that the claims in the underlying complaint triggered the duty to defend Palmer. The assertion by Underwriters was that the settlement agreement between it and Wooldridge eliminated/resolved the claimed negligence of A.R.M. and thus, the remaining claims against Palmer cannot arise out of the alleged negligent acts or omissions of A.R.M. The court did not accept this assertion.

The court said that during the course of the negotiations of the settlement, Palmer was an additional insured of Underwriters. Moreover, the additional insured endorsement did not require that A.R.M. be the subject of a lawsuit or otherwise be held liable for its own negligence. Rather, Palmer is covered under the endorsement for claims arising out of alleged or actual negligent acts or omissions of A.R.M. Thus, even if A.R.M. is no longer a party to the underlying action, and even if found not to have been negligent, it remains possible that the claims against Palmer arise out of the alleged negligence of A.R.M.

Regardless of the release and settlement, the court decided that the underlying complaint alleges claims against Palmer that may have a causal connection to the alleged negligence of A.T.M. In fact, the settlement agreement recognized the possibility that Palmer may be subject to liability based upon an allocation of fault arising from an act or omission of A.R.M. Additionally, the court found that Underwriters, through its own acts of negotiating a settlement on behalf of its insured to the detriment of its additional insured, may have placed its own interests ahead of its insured, Palmer.

It was clear to the court that Underwriters was not entitled to the dismissal of the action that it sought.

Editor's Note: The meaning of this ruling is that settling the claim against the named insured does not necessarily mean the insurer can stop defending and refuse indemnification of the additional insured. This ruling was a reaffirmation of the separation of insureds clause.

There was one more point made by the U.S. District Court that is worth mentioning. The court said that the phrase “arising out of” in the additional insured endorsement is unambiguous and has a broader meaning than “caused by” or “resulting from.” “Arising out of” ordinarily means originating from, having its origin in, growing out of, or flowing from; it does not mean proximately caused by, but requires a mere causal connection.

Poorly Drafted Exclusion Results in Coverage

The insurer filed an action seeking a declaratory judgment that it did not have a duty to defend an additional insured in an underlying personal injury lawsuit. This case is Atlantic Casualty Insurance Company v. Paszko Masonry, 718 F.3d 721 (2013).

Atlantic issued an insurance policy to Paszko. Three other companies argue that that policy applied to them as additional insureds. These companies worked on the construction of an apartment building. Rybaltowski was an employee of one of these companies and he was on the premises to demonstrate how he would do the caulking. While he was there, a beam supporting masonry equipment fell on him and seriously injured him.

The insurance policy issued to Paszko contained an exclusion precluding coverage for injury to employees, contractors, and employees of contractors arising out of or in the course of the rendering or performing services of any kind or nature whatsoever by such contractor for which any insured may become liable in any capacity. The exclusion stated that “contractor” shall include but is not limited to any independent contractor or subcontractor of any insured, any general contractor, any independent contractor, and any and all persons working for and or providing services of any kind for these entities. So, when Rybaltowski was injured, if his employer was either a subcontractor or was providing services of any kind to a contractor, within the meaning of the exclusion, Rybaltowski was a contractor as well and his injuries would not be covered under the Atlantic policy.

The United States Court of Appeals, Seventh Circuit, stated that the exclusion was poorly drafted. The court said that the term “contractor” is exemplified rather than clearly defined. The wording of the exclusion leaves uncertain whether Rybaltowski's employer was a contractor simply because companies that engage in construction are called contractors, or whether the employer did not become a contractor until it signed a contract with the general contractor, or until it provided materials or services other than the demonstration of caulking, or whether the demonstration itself was a service provided by a contractor.

The court resolved the ambiguity against the insurer and ruled that Atlantic had a duty to defend the plaintiffs if they are determined to be additional insureds.

Editor's Note: This is another example of poorly worded exclusions being found not applicable to a claim. The Circuit Court found numerous possible interpretations of the exclusionary wording and that was enough to rule against the insurer that wrote the exclusion.

Pleading No-Contest Is Not the Same as Self-Defense

A homeowners insurer brought a declaratory judgment action against the insured seeking a ruling that the policy did not provide coverage in a civil action brought against the insured stemming from a fist fight. This case is Bearden v. State Farm Fire & Casualty Company, 299 P.3d 705 (2013).

Bearden and Rasmussen were involved in a physical altercation at a car rental place where Rasmussen was employed. Rasmussen, standing in the front doorway while Bearden was sitting in his car, told Bearden he “would like to kick his ass”. Bearden got out of the car and walked over to Rasmussen and punched him in the face. Bearden was charged with assault and use of reckless force or violence. He pleaded no contest to a disorderly conduct charge, was sentenced to 90 days in jail and fined $1,000.

Rasmussen filed a lawsuit against Bearden and Bearden sought coverage from State Farm under his homeowners policy. The insurer filed a declaratory judgment action, arguing that the policy did not apply since the altercation was not an accident and therefore, was not an occurrence. The trial court granted summary judgment in favor of the insurer and this appeal followed.

Bearden argued that State Farm was obligated to defend and indemnify him because he was acting in self-defense. Bearden said that his plea of no-contest meant he admitted nothing and so, the issue of self-defense was not necessarily decided. State Farm countered that the issues of self-defense and Bearden's state of mind were decided as part of the no-contest plea; the mens rea (criminal intent) of disorderly conduct is “knowingly” and the definition of the crime specifically provides that the fight was not in self-defense.

The Supreme Court of Alaska said that Bearden could not knowingly challenge another to fight and subsequently claim self-defense in a criminal prosecution. The act of knowingly challenging another to fight cannot be something that begins to be, that happens, or that is a result that is not anticipated and is unforeseen and unexpected. Therefore, Bearden is precluded from arguing that his actions constituted an accident. The court treated a no-contest plea and a subsequent conviction as conclusive proof of the essential elements of a crime and thus, no accident. The homeowners policy did not apply to the claim against Bearden since his conduct was not an accident and not an occurrence as required by the policy.

The ruling of the lower court was affirmed.

Editor's Note: A plea of no-contest means that the pleader will not contest the facts of the situation (in a criminal case, the plea has the same legal effect as pleading guilty). In this case, Bearden's plea of no-contest and subsequent conviction for disorderly conduct contained a “knowingly” element, that is, a criminal intent, and this precluded him from arguing that his actions were an accident. The trial court and the Alaska Supreme Court found that Bearden could not subjectively fail to anticipate, foresee, or expect an injury to either himself or his foe so as to make the resulting injury an accident under the terms of the policy.

Negligent Misrepresentation Did Not Cause Property Damage

Home purchasers who had obtained a judgment against the insured vendors in an action based on negligent misrepresentation brought an action seeking equitable garnishment of the vendors' personal liability insurance policy. This case is Payne v. Grinnell Mutual Reinsurance Company, 716 F.3d 487 (2013).

The Paynes contracted to purchase a home from the Brandows. The Brandows had provided a seller's disclosure statement for the property to the Paynes and this statement made certain representations about the condition of the home. After the Paynes took possession of the home, they discovered pre-existing structural problems not listed in the disclosure statement. The Paynes filed a lawsuit against the Brandows alleging fraudulent concealment. They alleged a diminution of the fair market value of the home plus repair costs. At the time of the sale, the Brandows were covered by a personal liability insurance policy issued by the Farmers & Laborers Co-Op Insurance Association and backed by Grinnell Mutual. Grinnell agreed to defend the Brandows subject to a reservation of rights.

The Brandows settled the underlying lawsuit and then the Paynes filed this equitable garnishment action against Grinnell to collect on the judgment. The district court ruled in favor of the insurer. This appeal followed.

The United States Court of Appeals, Eighth Circuit, said that Missouri law provides for the equitable garnishment of an insurance policy by a judgment creditor upon the recovery of a final judgment against the insured if that judgment is not satisfied within thirty days after the date when it is rendered. The Paynes argued that under Missouri law, the Brandows' misrepresentation qualified under the policy as a covered occurrence and the insurer was obligated to satisfy the judgment against the Brandows. However, the court found that the policy provides coverage only for property damage caused by an occurrence. The court said that the Brandows' misrepresentations, omissions, and concealments did not cause any property damage. The structural flaws in the house constituted tangible property damage but these flaws predated the occurrence of concealments and misrepresentations.

The court ruled that there was no applicable coverage under the Grinnell policy in the absence of property damage caused by the asserted occurrence. The ruling of the district court was affirmed.

Editor's Note: The plaintiffs asserted that the misrepresentations of the insureds caused them to suffer damage. The Circuit Court ruled that the damage covered under the homeowners policy was damage caused by structural flaws, not the misrepresentations of the insured. The misrepresentations may have qualified as a covered occurrence under the policy, but such misrepresentations did not cause the property damage to the house.