Western Heritage filed a petition for writ of mandate and the court of appeals granted the requested writ relief and held that Western Heritage had “the right to assert, on its own behalf, all defenses that otherwise would be available to the insured parties whether as to liability or damages.”  The appellate court explained its reasoning for allowing an insurer to fully defend its own interests:

Indeed, there would be no purpose in allowing an insurer to intervene in order to protect its own interests but then limit the scope of the insurer’s defense to those issues to which its insured, because of the default, is limited to pursuing…. The entire purpose of the intervention is to permit the insurer to pursue its own interests, which necessarily include the litigation of defenses its insured is procedurally barred from pursuing.  

Thus, an insurer has the right to intervene in a case when an insured elects to abandon his own defense of claims asserted against the insured, and may assert the same defenses to liability and damages as the insured.  With this holding, the court seems to indicate that an insurer retains the right to defend its own interests equal to its insured’s interests when defending its insured.  This may serve as a cautionary tale when an insured seeks to assert defenses that are not aligned with the interests of the insurer.

In 2006 the Villa Los Alamos Homeowners Association (HOA) contracted to have spray-applied acoustical (“popcorn”) ceiling texture in common area ceilings and stairways scraped and removed.  During the removal, asbestos fibers were released into the air, common areas, individual units and public areas outside the building.  The Bay Area Air Quality Management District (District) cited the contractor and ordered the HOA to clean up the asbestos fibers.  The HOA submitted a first party claim to State Farm, its insurance carrier, for approximately $650,000 in cleanup costs.  The HOA also sued the contractor.  The contractor then cross-complained against the HOA and its management company.  The HOA tendered its defense to State Farm.

A pollution exclusion in the first party coverage section of the policy excluded coverage for any loss caused by the “presence, release, discharge or dispersal of pollutants,” while the exclusion pertinent to third party claims removes coverage for injuries arising out of “discharge, seepage, migration, dispersal, spill, release or escape of pollutants.”  State Farm denied coverage for both the first party and third party claims, citing the pollution exclusion and faulty workmanship exclusions in the policy. 

The HOA sued State Farm for breach of contract, bad faith and declaratory relief.  The trial court granted summary adjudication in favor of State Farm on the first party claims based on the pollution exclusion.  The HOA dismissed its third party claims, and appealed.

Discussion

In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the California Supreme Court found that the standard pollution exclusion clause in a comprehensive general liability policy was intended to exclude coverage for injuries resulting from events commonly regarded as “environmental pollution.”  The Court rejected a broader, literal interpretation of the clause that would foreclose coverage for any and all injuries arising from harmful substances.  So, the Court held that it was unlikely that a reasonable policyholder would think that the activity in question there—namely, the ordinary but negligent spraying of pesticides around an apartment building in order to kill yellow jackets—was an act of pollution.  

The HOA argued that MacKinnon applied here, and that the pollution exclusion in the State Farm policy did not cover a single, negligent, localized asbestos release.  After reviewing MacKinnon and its progeny, the Villa Los Alamos court agreed that the general principles announced in MacKinnon concerning the pollution exclusion also pertain in the context of a coverage dispute over first party property insurance claims based on analogous pollution exclusion—despite the well-recognized analytical differences between first party property and third party liability policies.  But the Villa Los Alamos court otherwise rejected the HOA’s application of MacKinnon to the facts at hand. 

Reading the State Farm pollution exclusion in accord with MacKinnon as pertaining to environmental pollution, the Villa Los Alamos court asked this question:  Did the accidental release and airborne dissemination of asbestos fibers in this case amount to what is commonly regarded as “environmental” pollution?  The court concluded that asbestos is a pollutant as a matter of law, and that it was “released” into the air and areas around the popcorn ceiling texture during the contractor’s scraping and removal.  Emphasizing factual differences between a homeowner being able to buy and apply pesticides in a residential setting, and the removal of asbestos containing building materials being highly regulated by a myriad county, state and federal laws, the court rejected the HOA’s analogy of the asbestos removal to a single, ordinary act of negligence.  In short, the Villa Los Alamos court concluded that the ordinary layperson would understand the release of asbestos fibers under these circumstances to be “environmental pollution.”  Citing American Casualty Co. of Reading, PA. v. Miller, 159 Cal. App. 4th 501, 515-516 (2008), the court explained that

the key point under a MacKinnon analysis is whether the act in question is commonly thought of as environmental pollution. Thus, even if the accident consisted of a one-time negligent release of methylene chloride [as in Miller], the pollution exclusion would preclude coverage because permitting the chemical to be released into a public sewer was an act of environmental pollution. (Ibid.) Miller is persuasive. To establish bright-line rules as to what constitutes “environmental pollution” makes no sense: A one-time event can be a polluting event if it creates “‘impurity, something objectionable and unwanted.’” (MacKinnon, supra, 31 Cal. 4th at p. 654.) To reiterate: The release of asbestos from a product into the air people breathe constitutes a health hazard for which no level of exposure is safe. The work here apparently occurred over several days and resulted in the sufficient release of asbestos fibers into the air to contaminate the building complex and the adjacent outside areas, constituting environmental pollution.

Lesson Learned

There is no “bright-line” rule for when an ordinary layperson will consider a “release” of harmful substances in or around a residential structure to be “environmental pollution” rather than an “ordinary act of negligence.”  One can imagine the Villa Los Alamos court just as easily analogizing the release of asbestos fibers from asbestos-containing building materials in a residential building to be an “ordinary act of negligence” on par with pesticide contamination a la MacKinnon rather than “environmental pollution” a la Miller.  The clever insurance coverage attorney will start framing and controlling the analogy early on.

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others.  In June 2008 some of the cattle die suddenly.  By September and October 2008 cattle begin dying at an alarming rate.  Gaylord suspects feed poisoning.  Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed.  There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners. 

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008.  One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims.  Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed.  But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care.  Gaylord tenders his defense to Nationwide in October 2009.  Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010.  Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims.  Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose.  Judge  Ishii articulates the standards in clean, non-legalese prose.  Cut and paste this.  Not that.

Insurance Contract Interpretation

Ditto.  Cut and paste this.  Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim.  The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim.  The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.” 

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling.  Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim.  The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.”  Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous.  Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord.  But… 

Gaylord says the agent told him that poisoned cattle were covered.  The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it.  The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy.  If Gaylord is believed, he wins.  If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages.  The district court point out, however, that "bad faith" implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a "genuine issue" or "genuine dispute" as to the "insurer's liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute." McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994).  In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, "Because [the insurer] investigated the insureds' claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim." Id. at 656. 

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period.   The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable.  So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.

In Advanced Network, Inc. v. Peerless Ins. Co., 2010 Cal. App. LEXIS 2078 (Dec. 10, 2010) the California Fourth Appellate District concluded that the theft of $2 million in cash from an insured’s client did not trigger a commercial general liability (CGL) insurer’s duty to defend or indemnify the insured against the client’s lawsuit to recover damages caused by the theft.  The Court relied on a long line of cases dating back to Collin v. American Empire Ins. Co., 21 Cal.App.4th 787 (1994) (Collin).

The Fourth Appellate District reversed.  The Court explained that the theft of cash was not “loss of use” of property within the meaning of the CGL policy form:

'Loss of use' of property is different from 'loss' of property. To take a simple example, assume that an automobile is stolen from its owner. The value of the 'loss of use' of the car is the rental value of a substitute vehicle; the value of the 'loss' of the car is its replacement cost.”

Id. at *11 (quoting Collin). The insured’s client sued to replace the stolen cash—not to recover the loss of use of the cash.  So, the Court concluded that Peerless had no duty to defend or indemnify the insured against its client’s lawsuit.  Along the way, the Court provides a helpful explanation of basic principles of California CGL insurance law.

 In Ameron the U.S. Department of the Interior discovered defects in concrete siphons manufactured by Ameron for use in one of Arizona’s aqueducts.  The Interior Department sought $40 million in damages against Ameron in a proceeding before the Department of Interior Board of Contract Appeals (IBCA).  The proceeding took place before an administrative law judge over the course of 22 days.  Ameron’s CGL insurer, Insurance Company of the State of Pennsylvania (ICSP), refused to pay for the cost of defending or indemnifying Ameron. 

Ameron drew a distinction between the environmental cleanup orders discussed in Foster-Gardner and the IBCA proceeding.  In a unanimous decision the Court ruled that the IBCA proceeding was a “quasi-judicial” action.  Since the proceeding took place in front of an administrative law judge, the Court reasoned, it was significantly different from the environmental cleanup orders discussed in Foster-Gardner. The proceedings before the IBCA involved witnesses under oath, cross examination, and the admission of evidence subject to generally accepted federal rules of admissibility.  Since Congress enacted the IBCA as an alternative means to resolve contractual disputes, Ameron had a choice of forums for appealing the liability decision, which arguably included litigation in federal court.  Accordingly, the Court found a duty to defend the IBCA proceeding.

Ameron effectively limits the applicability of the Foster-Gardner rule, and gives CGL policyholders a leg up on securing a defense in adjudicative-type administrative proceedings.  

 “Here, in contrast, the facts alleged in the NFL complaint state that All Authentic sold a “Steel Curtain Limited Edition Steelers Jersey” on its website, which “reads ‘Steel Curtain’ across the back and bears the numbers of four Pittsburgh Steelers players.”  As the district court noted, “A fair reading of the [NFL complaint] reveals that ‘Steel Curtain’ is used to promote fan loyalty to the Steelers (an NFL Member Club) in general, and a subset of Steeler players in particular.” The district court concluded that this potentially stated a claim for slogan infringement because a “slogan” is a “brief attention-getting phrase used in advertising or promotion.”

In addition, because the complaint “potentially” stated a cause of action for infringement, the insurance carrier still had a duty to defend.  The Ninth Circuit gave easily rejected Colony’s argument that the attorneys for NFL Properties consciously chose not to include a slogan infringement claim and therefore no duty to defend existed. The Ninth Circuit concluded that there was no basis under California law for such an argument.

Ultimately, this opinion offers an additional avenue for asserting coverage under a CGL policy and emphasizes an insurer’s broad duty to defend their insureds.  

WSM Transportation doing business as Sam Hill & Sons, Inc. (Sam Hill), was a subcontractor on the Westwood Ranch development.  StarNet Insurance Company (StarNet) issued two successive policies of CGL insurance (the StarNet CGL policies) to Sam Hill effective from June 12, 2002 to June 12, 2004. The StarNet CGL policies’ insuring agreement provides:  “[StarNet] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”  The StarNet CGL policies’ defense agreement provides:  “We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.  However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.  We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”

The StarNet CGL policies define the word “suit” as follows:  “‘Suit’ means a civil proceeding in which damages because of ‘bodily injury[,’] ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.  ‘Suit’ includes:  [¶]  a.  An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or [¶] b.  Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.” 

Centex filed a cross-complaint against Clarendon America Insurance Co. (“Clarendon”) in 2007 seeking payment for defending against the proceeding initiated by WRHA.  Clarendon in turn cross-complained against StarNet Insurance Co. (“StarNet”) claiming StarNet was obligated to provide a defense for Centex.  StarNet moved for a summary judgment asserting the Calderon Action was not a suit within the meaning of the defense agreement in StarNet’s commercial general liability (“CGL”) policy.

The trial court denied StarNet’s motion for summary judgment and found for Clarendon for which StarNet appealed.  StarNet argued the Calderon Process is not a suit within the meaning of their insurance policy. 

The Court of Appeal held “The Calderon Process is mandatory: The Calderon Act prohibits an association from filing a complaint for construction or design defects until it satisfies all of the requirements of the Calderon Process.”  Further, the court explained:

“The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.” 

This decision reached the correct conclusion. One has to wonder why an insurer would even challenge whether a defense was owed in these circumstances. 

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com
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In Hyundai Motor America v. National Union etc. et al., No. 08056527(April 5, 2010) Hyundai Motor America was sued for patent infringement after placing certain “build your own vehicle” features on its website. As a result, Hyundai sought a defense from its liability insurers under a comprehensive general liability policies (“CGL”) issued by National Union Fire Insurance Co. of Pittsburgh and American Home Assurance Co. Hyundai (“Defendants”)  claimed that the alleged patent infringement concerned an advertising method and thus, the lawsuit alleged an "advertising injury" as defined in the insurance policy. The insurers disagreed and declined to defend Hyundai. Consequently, Hyundai represented itself in the underlying patent infringement action.

In relying on Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004), the court distinguished its case with those cases dealing with more traditional types of patent infringement claims that are not covered as follows:

We find support for our conclusion in the persuasive authority, Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004) (applying Washington law).³ In that case, Ama zon.com used music-preview technology on its website; a company named Intouch sued Amazon.com for patent infringement; and Amazon.com's insurers declined to defend it. Id. at 975-76. In addressing Amazon.com's claim against the insurers, the court held:

The misappropriation [of advertising ideas] must occur "in the elements of the advertisement itself-- in its text, form, logo, or pictures--rather than in the product being advertised." [Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1506 (9th Cir. 1994).]

Patent infringement arising from the manufacture of an infringing product is not an advertising injury even if the infringing product is used in advertising. [Id.] But patent infringement may constitute an advertising injury "where an entity uses an advertising technique that is itself patented." [Id. at 1507 n.5.] That was the essence of Intouch's allegation against Amazon. . . . Intouch alleged that its patented music preview technology was an element of Amazon's advertisement. The Intouch complaint thus conceivably alleged misappropriation of an [advertising] idea . . . .

Amazon.com, 85 P.3d at 977 (footnotes omitted; footnote citations in brackets). The same analysis applies here: Hyundai "use[d] an advertising technique that is itself patented," and "[t]hat was the essence of [Orion's] allegation against [Hyundai]." Id.

This is the first time that a court, interpreting California law, has specifically held that patent infringement can constitute an advertising injury that may be covered under a liability policy, where the patent is on an advertising process as opposed to a patent on the product being advertised.